OEpic CEO Tim Sweeney arrives at federal court on May 03, 2021 in Oakland, California. (Justin Sullivan/Getty Images)
A federal judge fundamentally altered Apple’s App Store business model on Friday in a landmark ruling that accused the iPhone maker of illegal anticompetitive behavior and is likely to have ripple effects across the U.S. antitrust landscape. In a decision on an antitrust lawsuit brought by Fortnite maker Epic Games, U.S. District Judge Yvonne Gonzalez Rogers ruled that Apple must allow app developers to ”steer” customers to alternatives to the tech giant’s payment processing service, which collects a 30 percent fee on most digital transactions. That was previously not allowed by the company and marks a major victory for developers who have long complained of the tight grip the tech giant holds over its App Store on the roughly one billion iPhones currently in use.
The blockbuster trial between Apple and the maker of ‘Fortnite’ goes out with a ‘hot tub’ session Gonzalez Rogers also found that Apple was in violation of California state competition laws because of the way it forces developers into using Apple’s payment processing service without allowing them to tell customers there are alternatives, which are often cheaper. She stopped short of ruling for Epic Games' claims that Apple is a monopolist, although left the door open that with the possibility that more evidence could have changed her decision. “The court does not find that it is impossible; only that Epic Games failed in its burden to demonstrate Apple is an illegal monopolist,” she wrote.
The decisions are likely to face appeal. Apple did not immediately respond to a request for comment. Tim Sweeney, chief executive of Epic, said in a tweet, “Today’s ruling isn’t a win for developers or for consumers.”
The ruling, one of the first major legal actions taken against a tech giant In a new era of antitrust scrutiny, is sure to echo loudly both in Washington, where a legislative effort to rein in the power of Big Tech is underway and in the courts, which are facing the biggest test of existing antitrust laws in decades. Tech giants have come under the microscope in recent years as it became clear that current antitrust law does not properly limit their power, and regulators and lawmakers have been pushing to change that. Some developers spoke out in support of the decision. Spotify’s head of global affairs and chief legal officer Horacio Gutierrez said in an emailed statement that it was pleased with the anti-competitive findings, as well as the move to allow app developers to steer customers to other ways to pay.
”This and other developments around the world show that there is strong need and momentum for legislation to address these and many other unfair practices, which are designed to hurt competition and consumers,” he added. “This task has never been more urgent."
Others said it didn’t go far enough. Evan Greer, director of digital rights group Fight for the Future, said the decision didn’t do enough to address the harm caused by Apple’s policies. “As long as Apple maintains an authoritarian stranglehold over what software millions of people can and can’t run on their phones, the company will be actively helping repressive governments undermine human rights and censor apps used by journalists, dissidents, and vulnerable communities,” Greer added.
In Epic v. Apple’s final day, a glimpse of what comes next The victory for App Store developers could allow them to circumvent some of the fees Apple charges. Developers can collect money for digital goods outside of the App Store, but Apple’s current App Store policies prohibit developers from telling customers inside their apps about alternative payment options or providing links to outside websites where customers can sign up for subscriptions or purchase digital goods and circumvent Apple’s fees.
Netflix, for instance, does not allow customers to subscribe within its mobile app. Customers must find their way to Netflix’s website and subscribe there. Gonzalez Rogers said the way Apple treats developers resulted in the company violating California competition laws. The App Store is the only way software developers can distribute apps, and Apple’s payment processing service is the only way they can collect money for digital goods sold within apps.
“The Court concludes that Apple’s anti-steering provisions hide critical information from consumers and illegally stifle consumer choice,” Gonzalez Rogers wrote.
Epic lost, though, on the foundational allegation of its lawsuit. Epic tried to convince Gonzalez Rogers that Apple’s App Store was in itself a “market,” over which Apple is a monopolist, and wanted the judge to force Apple to allow alternative app stores and payment processing systems on its phones. Apple argued that it has competition, not just from Google’s Android Play Store, but from video game consoles and other forms of media and entertainment. Gonzalez Rogers partially sided with Apple on that argument, defining the relevant market in the lawsuit as “mobile gaming transactions.” She pointed out that the majority of Apple’s App Store revenue comes from games and not all apps. And in that market, Apple is not a monopolist either, she ruled.
“Given the trial record, the Court cannot ultimately conclude that Apple is a monopolist under either federal or state antitrust laws,” according to the 185-page decision. “While the Court finds that Apple enjoys a considerable market share of over 55% and extraordinarily high-profit margins, these factors alone do not show antitrust conduct. Success is not illegal.” In losing that key argument, Epic also was unable to get the court to order the changes it really wanted: A way to install software on iPhones outside the App Store and alternative payment options built into apps. Apple is going to court with ‘Fortnite,’ and it could forever change how apps work In recent weeks, Apple had already begun to make changes to its App Stor policies. In a settlement in another lawsuit with app developers, Apple agreed to relax it policies slightly, allowing developers to provide alternative payment information to customers, but not in the apps themselves. In another legal settlement in Japan, Apple agreed to allow “reader” apps, which includes services like Netflix, to provide some information within their apps, but that ruling only applied to Japan. The App Store has increased in importance for Apple in recent years as the tech giant focuses more heavily on “services,” transitioning from a pure hardware company to one that earns revenue from things like online streaming and other subscriptions.
The legal battle between the two companies is not over, experts said.
“There is almost certainly going to be a cross-appeal — Apple will likely appeal the judgment, and the findings on California competition law, while Epic might want to appeal the holding that Apple’s conduct did not violate federal law,” said John Bergmayer, legal director for the nonprofit Public Knowledge.
Epic’s lawsuit began in August 2020, when it gave iOS users of its “Fortnite” game an alternative payment option without Apple’s permission. By using Epic’s payment processing service, customers got a discount. When Apple discovered this, it kicked “Fortnite” off the App Store and Epic immediately sued.
The move by Epic was premeditated. Epic was ready with a media campaign, including an ad titled “Nineteen Eighty-Fortnite,” comparing Apple to Big Brother in George Orwell’s “1984.”
During the three-week trial earlier this year, Gonzalez Rogers offered few clues about which way she would rule. But when Apple CEO Tim Cook took the stand, Gonzalez Rogers zeroed in on the company’s business model for the App Store, grilling Cook on the fact that a disproportionate amount of that revenue comes from the gaming industry.
“You’re charging the gamers to subsidize Wells Fargo,” she said at the time.