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Epic Vs Apple & Google: The fight for the future of the app ecosystem?

If you have been keeping up with the news lately, one of the biggest stories to emerge in the tech world is the high-profile clash between developer Epic Games—the makers of the popular game Fortnite—against not one, but two tech giants: Apple and Google. 

The reasons behind this fight is incredibly complicated, but at the core, it all stems from growing developer dissatisfaction over Apple and Google’s unlawful maintenance of a monopoly in their respective app distribution markets. 

There has been mud-slinging from both sides of the fence with Epic suing both Apple and Google the day Fortnite was banned. This was followed up with a counter suit from Apple who sought damages from Epic for breaching its contract as well as tarnishing the company’s reputation.

So, why has this fight blown up to such epic (pardon the pun) proportions? Well, the main focal point of Epic’s argument is that the 30% cut that Apple and Google take for all digital sales made on the platform is too much and it should be reduced. In addition, they make the argument that Apple should allow for competing app stores to operate in iOS to give users and developers greater choice.

It is crucial to point out that Epic isn’t asking for any money or favourable treatment by Apple. Instead, they are asking the U.S. justice system to get Apple to stop imposing its anti-competitive restrictions on the iOS ecosystem. 

Should Epic emerge victorious in its court battle against Apple and Google, that could mean the death of the ‘walled garden’ ecosystem and mean a future where iPhones and iPads would have multiple app stores to choose from, the ability to side load apps or run custom operating systems without jailbreaking. Hence, it is not hard to see why Apple is currently fighting tooth and nail to prevent this from becoming a reality. 

How did all of this start?

The fight erupted in mid-August when Epic introduced a new payment option on Fortnite that circumvented the App Store and Play Store’s built-in payment processes. This act of defiance broke the two app store’s rules and resulted in Fortnite being removed from the App Store and Play Store.

Little did Apple and Google suspect, this was exactly what Epic was hoping for. The company responded by firing off two lawsuits at Apple and Google on the same day their game was banned. The Fortnite makers also released a video parodying Apple’s famous 1984 commercial, only this time Apple was painted as the “bad guy”.

Since then, things have been very heated between the two companies. Apple has counter sued Epic alleging that the latter breached a contract that it willingly entered. The Cupertino company also makes the point that all developers are treated equally on the App Store.

However, this is not true as certain developers, particularly large ones, can negotiate their way to paying a lower fee to Apple. Examples include companies like Amazon Prime Video that only pays Apple 15%. Meanwhile, apps like Uber Eats and Airbnb, that provide real-world services are allowed to include their own direct payment options in their iOS apps.

This has resulted in certain apps like Spotify that look for workarounds to avoid paying the “Apple Tax” including redirecting users to their website to sign up and pay for the service. So yes, it is evident that not everyone is onboard to allowing Apple take a such a huge portion of their profits.

Although much of Epic’s ire is directed at Apple, Google is also in Epic’s crosshairs. The Fortnite maker is concerned about Google Play Store’s role as a distributor of Android apps, and its requirement that all hosted apps must use Play Store billing for all in-app purchases.

Google has been doing everything it can to differentiate its policies and practices from Apple’s. Epic’s case against Google is weaker than its argument against Apple as Google allows for apps to be installed from other app stores and apps can even be side loaded via direct links.

Even so, Epic maintains that the search giant employs anticompetitive policies. In particular, Epic is unhappy that Google makes it difficult for Android users to side load non-Play Store apps. Epic initially operated Fortnite outside of Google Play Store but ultimately begrudgingly listed on Google’s platform in April 2020.

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“After 18 months of operating Fortnite on Android outside of the Google Play Store, we’ve come to a basic realization,” Epic said at the time, “Google puts software downloadable outside of Google Play at a disadvantage.”

A time before app stores

Things were not always this way. When Apple launched the App Store back in 2008, it was a pivotal moment that paved the way for third-party apps to be downloaded to smartphones directly. It defined the way digital storefronts would forever change our app experience. Also, it altered the way we think about software distribution and valuation.

Before the app store, software was distributed like regular physical goods. It needed to be shipped, stored, would occupy shelf space and sold over the counter. Most retailers would charge a markup of around 50%. 

Apple’s App Store made it remarkably easy to sell digital downloads of apps to people who weren’t tech-savvy and broadened the market considerably. It also acted as a centralised, easy-to-find portal where developers could place and promote their apps. No more advertising or courting press to grab consumer attention and direct them to your website or another third-party downloading site.

“Software distribution was primitive before the App Store,” app developer Phill Ryu told Wired in an article back in 2013. “It (Apple) deserves just as much credit as the original iPhone hardware and iOS in defining our modern smartphone experience.” 

According to Statista, as of the first quarter of 2020, Android users could choose between 2.56 million apps, making Google Play the app store with the highest number of available apps. Meanwhile, Apple’s App Store was the second-largest app store with almost 1.85 million available apps for iOS. 

Making the case for Apple

Source: Malay Mail

Back in June, an independent study by economic consulting firm Analysis Group, found the App Store ecosystem helped facilitate USD 519 billion in estimated billings and sales worldwide last year. Out of that total, a staggering USD 61 billion came from digital goods and services. That goes to show the sheer size of the app market and what is at stake for developers.

Since Apple created the ecosystem out of nothing, it argues that the 30% cut it takes is still less than what retailers charged back in the day. 

But what do developers think about this? Why Creative is a small independent game studio that released its first game Iteno on iOS and Android in August. Its founder and chief executive officer Lim Shan Fei believed that Apple’s 30% commission is not a small amount and remains a sunk cost that developers have to factor in when developing a game. “Honestly, as a developer, that high commission rate is a pain for us. But I view it as a sort of revenue share with Apple and Google,” he said.

When apps get listed on Apple or Google’s marketplaces, it more than just listing and selling it. Behind-the-scenes, the App Store handles all the digital infrastructure and financial backend that app makers (both big and small) don’t have to deal with when they sell their apps. 

Apart from the two biggest app stores, there are no other alternatives save for Huawei’s App Gallery. However, the audience size is significantly smaller than the big two. So, it is given that if a developer wants to maximize the exposure their game to the largest set of users on the planet, they must list on Google’s Play Store and Apple’s App Store.

Having a game featured on the front page will be a major boon for its publicity and boost to its user base. Lim explained though there is no guarantee that a game will be featured, he believes that high-quality games would naturally rise to the top. In this respect, he views the 30% commission as a sort of marketing cost as the platforms help highlight quality game to their millions of users. 

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“Of course we still have to do our marketing to promote our game, but at the very least if our game is featured on the store it helps draw in more users. Plus it is within these app store’s interest that they provide users with fresh and attractive content to keep them engaged,” he said.

But the biggest benefit developers get from listing on the App Store is that it provides them access to a massive customer base with credits and other payment methods on file. This comes with the trust consumers have with using Apple’s platform after a decade of use.

You could say that Apple deserves some form of compensation for building and maintaining the ecosystem, which is unlike anything that came before it. Surely, as Apple would point out, the App Store was created out of nothing and thanks to it a whole industry of developers can easily access a big user base without having to spend so much on marketing their app.

Epic’s side of the story

Source: Malay Mail

So, what does Epic stand to gain from ruffling Apple and Google’s feathers? Quite simply, Epic is trying to change the current conditions in the app store business to benefit more developers. By disrupting the current model, it hopes to direct more revenue to developers by lowering the 30% cut for digital sales down to 15%.

Meanwhile, Epic isn’t what we would call your typical developer. As of August 2020, the company had a valuation of USD17.3 billion. Fortnite raked in USD1.8 billion in 2019 alone and has a massive following of over 350 million players.

To an extent, Epic does indeed practice what they preach. The Epic Games Store, which competes with Steam, charges only a 12% cut of developer’s revenue and gives more to developers if they used Unreal Engine to develop their games. 

Epic Games’ founder and chief Tim Sweeney, 49, views the app store’s “walled gardens” total control over what users can do on their phones to be unacceptable. “If we don’t fight for our rights where we stand, we’ll eventually run out of places to retreat to, and by then we’ll be too weak and divided to win. This is why developers need to fight the store monopolies HERE and NOW!,” reads one of his tweets.

This endeavour is an incredibly ambitious undertaking but ultimately, it may be a foolhardy one. Most legal analysts say that the law, as it stands now anyway, is not on Epic’s side. 

Apple’s doing it and so is everyone else

But is Apple truly to be blamed for this mess? The company has been charging developers 30% commission for every digital sale since the beginning. Well, according to a study from Analysis Group, which was supported by Apple, studied the commission rates used by 38 other digital marketplaces covering apps, software, videos and ebooks and video game platforms.

The study points out that commission rates on e-commerce marketplaces like Amazon and even Uber sometimes exceed 30%. Though this study is skewed towards helping defend Apple’s rate, there is some validity to the argument.

Magnus Games Studio’s co-founder Gan Dong Chee speaks from experience when says that it is common practice for platforms to take a 20 – 30% commission from digital sales. Though Gan’s studio makes games for consoles and PCs, Magnus Games Studio started out making mobile games three years ago, so he can speak on both accounts.

“No matter which platform you list on, be it on mobile or console, the 30% charge is the price of entry game developers have to pay to leverage on the user base,” he said.

Gan, who also mentors in his spare time, observed that many new entrants in the games industry make don’t factor this 30% commission by the platforms into their revenue projections. For small independent studios, this is not a small sum of money and could make or break them.

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“Smaller studios are used to complying with regulations set by platforms to reach a broader global audience. To stand a chance they need to get their games listed on the big stores, i.e. Steam, PS Store, Xbox Games Store and Nintendo eShop,” he added.

Unlike app developers, game studios that focus on console and PC games have other avenues to distribute their games. Steam is the primary online storefront many PC gamers flock to, Gan points out it is not the only avenue gamers can get their hands on the latest titles.  

To some extent it is true that many prominent app stores and software distribution platforms all have policies that require developers to pay commission fees and use the platform’s in-app payment system to purchase in-app digital products. They all require developers not direct app users to make purchases outside the store.

One could make the argument that the market simply followed Apple’s lead. Since they had set the standard, there was no reason for companies to engage in the different practice of setting different policies for their app store. They were tempted by the “lucrative” earnings Apple was making. 

But there are pockets of the internet where developers are not charged a 30% commission. 

Those searching for a bargain often visit Humble Bundle, which “bundles” and sells games, charges a lower rate of 15-20% commission. There are other alternatives like the Epic Games Store also charges developers a much lower rate at just 12%.

How will this end?

Epic is putting pressure on Apple that U.S. regulators can’t. It is highlighting a systemic problem, not known by many outside of the developer community, and is making it known to gamers through Fortnite. 

However, despite their good intentions, a U.S. judge criticised the game developer’s decision to breach its contract with Apple during a hearing on 28 September 2020. Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California took aim at Epic’s claim that it did not pose a security threat to Apple because it is a well-established company and partner.

“You did something, you lied about it by omission, by not being forthcoming. That’s the security issue. That’s the security issue!” Rogers told Epic during a three-hour hearing that took place over Zoom. “There are many people in the public who consider you guys heroes for what you guys did, but it’s still not honest.”

The latest so far is the federal judge has denied a request from Epic Games that would have ordered Apple to reinstate Fortnite to the App Store while the two companies await the outcome of the lawsuit. The ruling does however allow products related to Epic’s Unreal Engine to stay on the App Store, as Gonzales argues that its removal may do significant damage to the developer ecosystem and marketplace on iOS.

The judge also did not agree with Epic’s view that Apple harmed its ability to distribute Fortnite through its control of the App Store. The way she sees things, walled gardens have existed for decades. Rogers cited examples like Nintendo, Sony and Microsoft all having walled garden ecosystems, equating what Apple is doing as not that different.

Those hoping for a quick resolution came away disappointed as Rogers recommended that the antitrust case be taken to a jury trial in July next year to settle the issue permanently. But both Epic and Apple decided they didn’t want a jury trial and rather have the case proceed to a bench trial on a schedule determined by the Court.

Though Epic’s rallying call for developers to rise against Apple and Google may not be a complete success, but they have gained some friends along the way. At least 12 other companies including Spotify, Tile, Deezer and Match Group have formed the Coalition for App Fairness (CAF), that share Epic’s view that things need to change.

So while, things are at a stalemate at the moment, the war between Epic and Apple is far from over. In fact, you could say that this is just the beginning with the court trial set to begin on 3 May 2021. At this point, it is unknown whether it will be conducted in person or virtually.