Not gold, nor power or privilege, did it cost Epic to convince consumers to work against their better interest. All it cost them was offering a 20% discount when giving them money, and people were hailing them as the conquering hero. Here at long last to vanquish the evil multi-billion dollar conglomerate who had the audacity to charge the industry standard 30% rate.
There’s a shocker, a multi-billion dollar company doesn’t want to pay taxes, and attempts to convince everyone else it is in their best interest to help them avoid doing so. Worse is, without thinking, many hopped on Epic’s bandwagon, not understanding what they were attempting to do. Apple didn’t make doing so hard. After all, they are the company that got exposed intentionally making their older models run worse to encourage people to upgrade to a newer model, as reported by The Guardian. One that they overcharge for because they know the Apple name is a status symbol and worth paying more for fewer features.
Yet it is what Epic intends that is as brilliant as it is nefarious.
Their goal is to abolish the industry’s ability to regulate their own ecosystem and, in the process, be able to charge a 30% tax on all transactions done through said platform. Now, most people will scoff and say “who cares what happens to those greedy mega-companies?” but at the same time, if Epic is successful it will end anyone’s ability to control their ecosystem.
People might ask what the big deal is? Well, for starters, it would mean innovation would die in the United States. No one is going to want to develop in a country that will deny them the right to profit off their creation. More relevant to the average consumer is how corporations impacted by the ruling will have to discover other means of extracting revenue from customers. Same as any government that needs to make up a deficit when corporations dodge paying taxes.
Before continuing to discuss the ramifications of these actions, let’s first establish this isn’t merely hot air. From Apple’s recent rebuttal, several passages directly reference Epic’s intention. (Bold Emphasis added except for “Second,”)
Second, Epic has not and cannot show that it is likely to succeed on the merits of its novel antitrust claims. The App Store has exponentially increased output, reduced prices, and dramatically improved consumer choice. As the Ninth Circuit declared just last week, novel business practices—especially in technology markets—should not be “conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.” United States v. Microsoft Corp., 253 F.3d 34, 91 (D.C. Cir. 2001) (quoted in Federal Trade Comm’n v. Qualcomm Inc., 2020 WL 4591476, at *9, __ F.3d at __ (9th Cir. Aug. 11, 2020)). Epic, however, does not undertake any “elaborate inquiry” in its motion. For example, it fails to enlist any economist to support its contrived market definitions and “tying” theories. It conveniently ignores that Fortnite can be played on numerous platforms with or without support from Apple, even as Epic touts that fact in its advertising and communications to users. See https://www.epicgames.com/fortnite/en-US/news/freefortnite-cupon-august-23-2020 (“Just because you can’t play on iOS doesn’t mean there aren’t other awesome places to play Fortnite.”). And it fails to contend with the fact that its logic would make monopolies of Microsoft, Sony and Nintendo, just to name a few. The lack of factual, economic, and legal support is unsurprising because Epic’s antitrust theories, like its orchestrated campaign, are a transparent veneer for its effort to co-opt for itself the benefits of the App Store without paying or complying with important requirements that are critical to protect user safety, security, and privacy.
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Removing Epic from the App Store and, absent a cure of its breach, the Developer Program due to the breach of its agreements with Apple is legal conduct: “businesses are free to choose the parties with whom they will deal, as well as the prices, terms, and conditions of that dealing.” Pac. Bell Tel. Co. v. Linkline Commc’ns, Inc., 555 U.S. 438, 448 (2009) (citation omitted); see also Qualcomm, 2020 WL 4591476, at *11 (same) If the App Store were a brick-and-mortar store, it
would be obvious that Apple could choose which products to distribute, which customers to sell to, and on what terms. The antitrust laws cannot condemn Apple for following the terms and conditions in place since 2008 upon which it made its App Store available to Epic and other developers. Cyber Promotions, Inc. v. Am. Online, Inc., 948 F. Supp. 456, 461-62 (E.D. Pa. 1996) (denying TRO; “the federal antitrust laws simply do not forbid AOL from excluding from its system advertisers like Cyber who refuse to pay AOL any fee”).
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At the outset, equity does not favor Epic because it has unclean hands. Epic has undeniably breached its agreement with Apple, and a party breaching a contract, as Epic here, has no standing to seek equitable relief. See, e.g., Silvas v. G.E. Money Bank, 2011 WL 3916073, at *2 (9th Cir. 2011) (affirming denial of preliminary injunction based on unclean hands); see also G. Neil Corp. v. Cameron, 2003 U.S. Dist. LEXIS 19509, at *4 (E.D. Pa. 2003) (doctrine of unclean hands “provides that a party breaching a contract has no standing in equity”).
Epic also does not seek a return to the status quo. As its own correspondence with Apple makes clear, it seeks an exception to Apple’s policies, and a brand-new contractual relationship that Apple did not negotiate for and that no developer has ever had. As the Supreme Court has noted, “Courts are ill suited ‘to act as central planners, identifying the proper price, quantity, and other terms of dealing.’” Linkline, 555 U.S. at 452 (citation omitted).
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If Epic’s scheme succeeds, 1.7 million other developers will be eligible to make the same argument and the user experience in the App Store will evaporate. A “Court-imposed injunction would also encourage a flood of similar applications by other companies” who wish to evade the policies of Apple and others and prevent them from recovering any revenue in exchange for its significant investments. Zango, Inc. v. PC Tools Pty Ltd., 494 F. Supp. 2d 1189, 1196 (W.D. Wash. 2007). If Epic’s conduct is successful, it would demonstrate to all developers that they can simply disregard their legal agreements with Apple. Schiller Decl. ¶ 25
Apple’s final line about the user experience evaporating isn’t hyperbole and heralds back to what lead to the golden age of video games. Back during the Atari age, companies were not allowed to control their ecosystems, or rather no company had yet attempted to do so. As a result, the market became flooded with cheap, generic, often buggy products that obliterated consumer confidence. This lead to the Video Game Crash of 1983, also known as the Atari Shock in Japan.
Even with curation, the app store is flooded with hundreds of generic knock offs, thousands of unfinished buggy messes, and a few games that are nothing more than glorified slot machines (see FIFA). It isn’t difficult to propose or even imagine removing Apple’s ability to curate their market would result in a similar status that led up to the great gaming crash.
After several years of the industry being a wasteland, Nintendo emerged and brought life back to the market. What allowed them to do this was a simple innovation where they had the right to control who was able to develop for their platform through licensing. Atari ended up taking Nintendo to court over the issue in an Anti-Trust Lawsuit that came down in Nintendo’s favor. Establishing that a company can legally control their ecosystem and profit from their creation.
This precedent extends into the current age, granting Apple and Google, along with Sony, Microsoft and Nintendo, the right to restrict what can and cannot be put on their storefront and in the latter three, their platform.
Epic is attempting to abolish this precedent by having it declared a violation of anti-trust laws. If they are successful, this ruling wouldn’t just apply to Apple. It would apply to Google, Sony, Microsoft, Nintendo, and likely several digital storefronts. None of whom would be permitted to charge the industry standard 30% rate because it would be viewed as a violation of anti-trust laws.
Without the revenue from these commissions, these companies would lose investors and have to seek the revenue from somewhere else. I’m not creatively greedy enough, but if you think Xbox Live and PSN are expensive now, wait until those commissions aren’t subsidizing these companies.
Now Epic has made a severe blunder in all this. One that thus far, no one has realized. If, and that is a huge if, Epic is successful, then no company would have to pay the 30% commission rate anymore. No platform would be able to remove games from circumventing their payment services. That much is all true, but each platform would retain the right to still curate their platform.
Meaning the very moment Sony, Microsoft, Nintendo, Google, and Apple can no longer make money on micro-transactions and various in-app fees they’ll declare them off-limits. If your game has them, then it will be removed from the platform. After all, from their perspective, why should these companies have to deal with the PR nightmare from scams, credit card theft, and fraud? Why should they have to deal with consumers complaining about being ripped off and trying to get their money back? These platforms did distribute the app or game; there would be some liability for them.
What other course of action would they take other than just ruling the practice a violation of their terms of service? None of these companies are reliant on those transactions to stay in business. It pads its financial statements nicely, but Sony, Microsoft, and Nintendo are very much in a position where they can make money just selling games.
Epic, on the other hand, survives based on those micro-transactions. As does EA, Activision, Take-Two, and nearly every other AAA publisher. Overnight they would see GaaS banned by the platforms. Some will claim there will be special exceptions made for those that continue to utilize the platform manufacturers for transactions, but legally they would be unable to do that. It would have to be an outright ban or pay to deal with the aforementioned problems.
Given how this would effectively end loot boxes and micro-transactions as practices, it almost seems worth it. Yet, in principle, it is never a wise idea to give up rights and to drive innovation from your shores. There is also the issue of how we will not know how extensively manufacturer controls will be rolled back. Above I made the best case scenario argument, where all the companies lose the ability to deny apps and games for using alternative processing capabilities. It is possible that Epic’s victory could remove all policing capacities from these companies. As denying someone access to the public market, which the ruling would render these platforms, would be a violation of anti-trust laws.
Regardless of how this turns out, there is no scenario where Epic is the good guy. 20% discount is hardly worth destroying the markets and in the process harming the good developers that you actually support.
