Apple v. Epic

Tweet by Scott Kupor

Managing Partner at Andreessen Horowitz; Author of Secrets of Sand Hill Road; father of three amazing/crazy/beautiful girls

Everything you need to know – or at least I what I thought was interesting – in <100 tweets about the Apple/Epic lawsuit verdict today.

Fun facts – 64% of Fortnite users have only ever played the game on IOS devices, but 93% of Fortnite revenue is generated on non-IOS platforms; 87% of paying users never transacted via the AppStore.

In discussing the metaverse (this is the strategic reason why the Court says Epic brought this lawsuit), the Court hints at its feelings about the metaverse: “The Court generally finds Mr. Sweeney’s personal beliefs about the future of the metaverse are sincerely held.”

A nod from the court re pivots/new product releases: “The 2007 iPhone pales in comparison to today’s version. With 20-20 hindsight, we can conclude that Apple’s gamble to save a languishing company paid off. The lens with which to evaluate those early seminal years matters...

Apple was not the monolith it is today. It is easy, but not fair, to twist words today for self-serving reasons and forget the landscape in which they were made.”

The Court was NOT a big fan of the expert witnesses, particularly those offered by Epic:

On Dr. Athey: “While the Court finds Dr. Athey well-intentioned, the lack of data upon which she bases her opinion leaves the Court with little objective reason to accept her theory.”

On Dr. Rossi: “Dr. Rossi’s trial testimony revealed that he was more interested in a result which would assist his client’s case than in providing any objective group to assist the Court in its decision making.”

On Dr. Hanssen: “While Dr. Hanssen is more considerably more credible and independent than Dr. Rossi, Dr. Hanssen’s survey is also severely flawed and ultimately unreliable.”

This one was fun – the Court was pointing out that Dr. Hanssen testified that 30-43% of respondents in a survey he did “regularly” use Windows phones, even though MSFT has 0% market share in 2018 and no longer sell phones!

Now, to the legal stuff.

Key in any antitrust case is the question of “What is the market”?

Here the Court ultimately concludes that the market is Mobile Gaming, substantially narrower than Apple was suggesting. Apple argued that it should also include PC gaming, console gaming and cloud-based gaming.

Now, the Court has to look at market share in the relevant market (Mobile gaming) to determine how much Apple has and ultimately whether that share is anti-competitive.

Under Section 2 of the Sherman Act, the general threshold for a prima facie case of monopoly power is 65% market share; the Court finds that Apple has 53-57%, so it needs to look at other evidence (outside of market share) to determine if Apple is a monopoly.

Direct evidence – does Apple “act” like a monopoly by limiting the “output” (developers, customers, etc.) of mobile gaming transactions. Simply put, Epic failed to produce any evidence that output was constricted; to the contrary the market continues to grow at very high rates.

Indirect evidence – here the question is are new rivals barred from entering the market and/or are existing competitors unable to expand their own output? The Court struggles more with this question, although ultimately concludes that there is not enough evidence.

It relies heavily on the changing nature of the ecosystem – players like Nintendo Switch, MSFT in streaming – and argues that these players seem to be able to use their positions in those markets to enter the mobile gaming market.

Here’s the key line: “[T]he evidence does suggest that Apple is near the precipice of substantial market power, or monopoly power, with its considerable market shares...

Apple is only saved by the fact that its share is not higher, that competitors from related submarkets are making inroad into the mobile gaming submarket, and, perhaps, because plaintiff did not focus on this topic.”

Next, the Court looks to see if Epic has made a case for a Section 1 violation – effectively, restraint of trade.

To do so, Epic needs to show that customers/developers suffer from higher costs, lower transactions or other harms that ultimately stifle competition in mobile gaming.

Here, the Court is a bit more sympathetic to Epic – there is “some evidence” of anticompetitive effects: after all, Apple has been able to maintain its 30% fee despite lots of complaints from the developer community.

And the Court does say that it’s reasonable to believe that a lower fee from Apple would reduce the costs for developers and those savings could ultimately be passed along to consumers in the form of lower prices.

But, the Court ultimately finds no violation because it accepts Apple’s defense to these claims – that its need to protect security of the apps and to protect its intellectual property are valid reasons for the fee.

“Here, Apple’s business choice of ensuring security and protecting its intellectual property rights though centralized app distribution is reasonable, and the Court declines to second-guess that judgment on an underdeveloped record.”

For fans of Epic, though, all is not lost, as the Court does ultimately side in its favor under the California Unfair Competition Law.

Here, the Court focuses on “anti-steering” – Apple’s control of push notifications and email outreach to customers. Developers/publishers are prohibited from telling customers that they could in fact download games and make purchases outside of the App Store.

“In the context of technology markets, the open flow of information becomes even more critical…[I]nformation costs may create ‘lock-in’ for platforms as users lack information about the lifetime costs of an ecosystem.”

“[T]he anti-steering provisions ‘threaten an incipient violation of an antitrust law’ by preventing informed choice among users of the iOS platform… Moreover, the anti-steering provisions violate the ‘policy [and] spirit’ of these laws because anti-steering has the effect of preventing substitution among platforms for transactions.”

So, after all that, what happened?

Epic wins on the CA anti-steering provision and the Court issue a nationwide injunction prohibiting Apple from dis-allowing publishers/developers from telling customers that they can effectively get the app and make purchases outside of the App Store.

But, Epic loses on all of the key antitrust provisions and is ordered to pay back commissions to Apple for the time where it un-locked its app to permit payments to not go through the App Store

Where do we go from here?

First, there were almost certainly be all kinds of appeals on this case. An interesting part of the appeal will be the Court’s application of a CA state law to all other states – likely to be challenged further on constitutionality (although the Court today said it’s OK).

Second, none of this impacts the ongoing federal investigations that are underway from the FTC and the DOJ.

Lots more to come on those likely.

Here’s the Court’s summary of the situation: “Ultimately Epic Games overreached. As a consequence, the trial record was not as fulsome with respect to antitrust conduct in the relevant market as it could have been.”

“However, [the Court] does find that Apple’s conduct in enforcing anti-steering restrictions is anticompetitive. A remedy to eliminate those provisions is appropriate...

[The] remedy will increase competition, increase transparency, increase consumer choice and information while preserving Apple’s iOS ecosystem which has procompetitive justifications.”