Special Edition: Understanding Antitrust - Part 1 - Apple v. Epic Games, The Breakdown

A gaming juggernaut, the most valuable company in history, & a cheeky 1984 ad with livestream in a video game - all the makings of an Epic tech lawsuit. Part 1 of multi-part series on Antitrust.

Hi all, Aadil here -

Big tech has had a rough 2020 when it comes to dealing with world governments especially United States. Antitrust is the buzzword of the year (along with many others). With DOJ planning a lawsuit against Google, and Tech CEOs go to Washington (remotely), and Facebook still struggling with its role in society, antitrust has dominated the tech headlines in the past few months. I will admit that I am completely ignorant about this legal space.

So, I am going to educate myself over the coming weeks on the subject and share what I have learned in this multi-part essay series. I will use the most recent epic face off in the tech world - Apple v. Epic Games - to ground my learning.

Happy learning and glad to have you along for the ride.

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Part 1 - Apple v. Epic Games - The Breakdown

By now, you have already read or heard about Epic Games suing Apple for monopolistic behavior on the App Store. They took a note from the Apple’s Playbook and had their own cheeky Macintosh 1984 ad ala Fortnite, and merchandise to boot.

Of course, it wouldn’t be Epic without a launch live stream event for the ad within Fortnite. So, what exactly is Epic complaining about?

Tech publications have written great articles covering the jist of things. I wanted to take a deeper look into the details of Epic’s lawsuit. So, I did what anyone does, I read the legal brief Epic’s lawyers filed in the United States District Court of Northern District of California.

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Let’s cover the basics

Epic’s claim is that Apple’s $2 trillion market-cap makes it a giant monopoly unlike anything seen before let alone in the history of the tech industry’s. The two key complaints by Epic against Apple are :

  1. The complete control of distribution of app’s on smartphones and tablets via iOS App Store is monopolistic and anti-competitive.

  2. Requirement that all in-app purchases must use Apple’s In-App Payment APIs or IAP and be subject to a 30% fee to Apple for each transaction.

As expected, the language used by Epic is meant to invoke a dystopian environment in which innovation is being stifled because of Apple’s App Store distribution business model and policies. Words like “oppressive 30% tax”, “unreasonable and unlawful restraints”, “anti-competitive”, “bans innovation” are peppered throughout the legal brief.

What makes this lawsuit fascinating is that Epic is not seeking a monetary outcome or damages. They want the court system to force Apple to allow:

  1. 3rd party App stores on iOS

  2. Reduction in App Store fees from 30% to something more “reasonable”

  3. Allow developers to use 3rd party payment processing APIs.

Epic maintains that even market competition isn’t strong enough to force Apple to change these policies. Apple controls such a commanding position within the mobile smartphone and tablets industry that users are either not aware or not able to comprehend what these policies mean for them. They just want to buy an iPhone. The network effect and lack of ease to switch platforms (photos, documents, iMessage, FaceTime, iCloud), Epic claims, further embolden’s Apple to carry out these anticompetitive practices.

Epic claims they attempted to negotiate but were forced to pull the act they did on Aug 13, 2020 which resulted in Fortnite being kicked off the App Store for violating IAP policies. Epic used their own APIs to manage in-app purchases in direct violation of Apple requirements and policies.

The last salvo from Epic in the document is that these policies and the consequence of Fortnite being removed from the App Store is a huge financial loss to Epic (a multi-billion dollar privately held gaming juggernaut) and iOS gamers who have lost access to one of the most popular games on iOS, arguable on any platform.

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How is Epic backing up the claims?

They have given a few evidentiary examples:

  • Apple is the sole distributor of apps on iOS and actively suppresses 3rd party stores via policy, technical, and contractual constraints.

  • Epic counter’s Apple’s claim that the goal for controling app distribution on iOS is for Privacy and security safeguards by giving the example of how no such controls exist on Apple’s own laptop and desktop devices where users can download apps outside of the Mac App Store.

  • Although it stands upon lofty grounds, the lawsuit gives Microsoft xCloud, OnLive and Stadia removal from iOS App Store as innovation killing monopolistic examples by Apple. (Apple claims that these Apps do not allow for curation and proper review of video games running on iOS via these platform apps).

  • On the in-app payment processing API and 30% tax on such transactions, Epic claims that other payment processors such as PayPal, Stripe, Square, Braintree provide much more economical Base Rates. This restriction to use the IAP from Apple prevents developers from using services with better rates. Since the 30% tax is too prohibitive on developers, there exists no choice but to pass on this extra fee to the consumer who are not aware of this consequence.

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What exact laws is Apple violating?

Epic claims that Apple’s practices around control of iOS App distribution, and IAP API requirements for in-app transactions directly violate the following US antitrust laws:

  • Sherman Act Section 2 which prohibits the “monopolization of any part of the trade or commerce among several States, or with foreign nations.”

  • Sherman Act Section 1 which prohibits every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states or with foreign nations.

  • California Cartwright Act which prohibits, inter alia, the combination of resources by two or persons to restrain trade or commerce to prevent market competition. A combination, Epic claims, is formed when a dominant player’s presence forces the other players in the market to adopt their anti-competitive practices. (Meaning Google App Store also charging 30% on paid apps)

  • California Unfair Competition Law which prohibits any unlawful, unfair, or fraudulent business act or practice.

Reference: Lawsuit Document by Epic Games

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In the next essay, I dig into the history of Antitrust laws in the United States and how woefully outdated they are to deal with modern tech companies and industry. Also, the most commonly used case law in this lawsuit that I have read in the media is the infamous 2001 United States v. Microsoft Corp Anti-trust case; I argue that is the wrong case to look at and we should instead look to a different case from much earlier in the previous century from 1940s to understand this lawsuit better.

I will cap off the series with what future tech startups and company leaders can learn from the big tech antitrust experience.


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