Epic Games judgment, and the clampdown on the tech sector - Ollie Burgess

Following Ethan Teo’s article regarding the Epic Games v Apple judgment earlier this year, it is interesting look at the consequences of this judgment on the companies involved, and on the tech sector more widely. Whilst Apple claims victory in the lawsuit, the future looks uncertain for the market and the tech industry as a whole; they have won the battle, but not the war. Nonetheless, government must proceed carefully as the effects on all firms involved and on consumers is still uncertain.

Just to restate the case, Apple removed Epic’s game, Fortnite, from the App Store for offering an alternative method of payment for ‘In App Purchases’ (IAPs). This allowed Epic to avoid paying Apple’s 30 percent commission. Epic sued Apple, claiming they had abused their monopoly on the iOS app ecosystem. Accordingly, this meant Apple was in violation of federal and state antitrust law.

Rogers J ruled against the majority of Epic’s claims, as they failed to prove Apple’s hold over the market (of ‘digital mobile games transactions’) was monopolistic. Although Her Honour did imply that the 30 percent commission was unjustifiably high, she also stated that ‘success is not illegal’. Naturally, the market would not be competitive anyway, as it is a virtual duopoly between Google and Apple. (99.2 percent of mobile operating systems were Android or iOS in the first half of this year.)

Rogers J did not, however, find that Apple was in violation of California’s Unfair Competition Act. This is because of the anti-steering policies they used, which prevent app developers from offering third party IAPs. Apps were not allowed to include ‘buttons, external links, or other calls to action that direct customers to purchasing mechanisms other than in-app purchase’. By hiding alternative methods of payment (which may be cheaper for consumers), Apple hid ‘critical information’ and subsequently ‘stifled consumer choice’. An injunction now prevents Apple from stopping developers signposting other methods of purchase.

This could be a substantial hit for Apple, as mobile games make up to 70 percent of Apple’s App Store revenue. The wider implications of this judgment are potentially more significant.

Firstly, the court did not find Apple to have monopolistic control over the market in this instance. This was potentially a failure of Epic Games’ part: Gonzales Rogers did not say that Apple’s control was not monopolistic, just that this wasn’t proven. She did, however, reference several monopolistic tendencies, such as ‘Apple’s slow innovation’ and ‘low investment in the App Store’, as well as the profit margins being ‘extraordinarily high.’ For Apple, and competitors like Google, these observations could be worrying. This case may not have succeeded, but it’s possible that a more damning verdict could be reached by a different judge in the future. Rogers J notes this in her judgment, as she says that ‘Apple is only saved by the fact that its [market] share is not higher […] and, perhaps, because [Epic] did not focus on this topic’. Apple and Google’s services could be in trouble as a result.

This may be worrying for the companies, but for developers and consumers alike, the judgment seems to be good news. The effects of such a ruling are potentially wide ranging, but it could involve both higher profits for app developers and lower prices for consumers. Of course, it’s Apple and Google who would feel the squeeze on their profits, but this does not mean the App or Play stores would be in jeopardy: the profit they already make off them is substantial, and the ability to download games is a core component of a smart phone, so neither company would want to abandon it. It is important to note, though, that Apple are still allowed to charge the “Apple-tax” on the income that developers make directly through their own methods of sale. This would require Apple to audit developers, but they would still be able to extract their 30 percent commission (albeit at a higher cost to them). This suggests that the judgment could be disadvantageous to all parties, as Apple would have to pay more to get their commission, and both firms and consumers may still be subjected to the costs of a levy.

Nonetheless, it’s clear that governments and courts around the globe are toughening up on tech giants. In comparison to the relatively lax few years that Silicon Valley firms have had, it marks a change that critics have been long been calling for. For example, in South Korea, the passage of a ‘world-first’ law allows users to bypass App and Play Stores and pay directly. This intervention by the legislature suggests that they’re willing to take a more active role in regulating these multinational companies. In the UK, too, the Competition and Markets Authority (CMA) has recently launched an investigation into Apple’s conduct ‘in relation to the distribution of apps’ and ‘the terms and conditions governing app developers’ access’ to the App Store. The ferocity with which governments act does need to be limited, though. To reiterate Gonzales Rogers’ words, ‘success is not illegal’. It is surely right that Apple collect a fee from developers. Her Honour supports the idea that Apple is entitled to a fee for the use of its intellectual property. Epic’s argument in the case above would require that ‘Apple receive nothing from in app purchases made on its platform’. Rogers J says that ‘such a remedy is inconsistent with prevailing intellectual property law’. On this basis, the assertive direction of the South Korean government is potentially concerning for Big Tech.

Furthermore, with the combined profits of Apple, Alphabet, and Microsoft being $57 billion in Q2 of this year alone, governments are increasingly set on clamping down. Recently, a new OECD agreement brought 136 countries together (which represent more than 90 percent of global GDP) to agree to ‘reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate’. This is particularly targeted at ‘Big Tech’, and represents the further duties (arguably long-overdue ones) that tech companies find themselves under, often for the first time.

Therefore, whilst Apple claims victory in the earlier case, the opposite is perhaps true overall. Not only were Apple disadvantaged in the judgment (though obviously not to the extent that Epic wanted), but the tech sector, especially Apple and Google, are now under increasing pressure from governments and courts. The effect of such action on all firms involved, and on consumers, is still unclear. Governments must proceed carefully.

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