Legal and payment solutions experts Michel Reznik (Head of Banking & Payments, 4H Agency) and Miguel Bernal (Partner, Estudio Legal Bernal), spoke to SBC Americas as they analysed the ongoing dispute between the gaming developer, Epic Games, and the technology company Apple, with its App Store apps being able to use their own payment methods for in-app purchases.
Epic Games, the developers of Fortnite, found their prized app delisted from the Apple App Store on 13 August 2020. Their crime? Epic Games offered its own payment system within the Fortnite app, which allowed its users to make in-app purchases outside of the App Store.
These in-app purchases formed part of the ‘submarket for mobile gaming transactions’ which the decision found was worth $100bn and of which Apple had a 57.1% market share. On this share, Apple levied a 15-30% commission for in-app purchases.
As users made use of the offer to make in-app purchases through Epic Games’ internal payment systems, the App Store was unable to collect its commission on these payments. Accordingly, the App Store terms and conditions prohibited the apps from directing its users to any outside systems.
In the wake of the delisting, Epic Games accused Apple of anti-competitive practices, and, took the company to court. Apple didn’t pull their punches either and counterclaimed against Epic Games on several counts including breach of contract.
The Result (for now)
The court, in the decision that was published on September 10, 2021, found that “Apple is engaging in anticompetitive conduct under California’s competition laws …. Apple’s anti-steering provisions hide critical information from consumers and illegally stifle consumer choice.”
This is a significant victory for Epic Games and other app developers as this judgment allows the apps in the App Store, for the first time, to have “buttons, external links, or other calls to action that direct customers to purchasing mechanisms”. The judgment takes effect on December 9, 2021.
On the other hand, the judgment ruled in favor of Apple on nine other counts.
Notably this included that Apple:
– Is not a monopolist under either USA federal or state antitrust laws;
– Does not have to allow users to sideload apps;
– Does not have to accept other app stores on its platform; and
– Does not have to lower its fees below 30%.
The Apple shareholders have taken note of the judgment and the Apple share price has taken a tumble, going down 5.91% in five days from when the judgment was made public.
The opportunity (developers)
The opportunity for the app developers is twofold. Firstly, they can choose to diversify their payment service operators in order to be able to accept payments in as many different ways as possible including through different cards or fiat currencies or through different mediums like wallets, vouchers and even cryptocurrency.
Secondly, as the commission levied by the alternative payment service operators is likely to be lower than the 15-30% levied by the App Store, it will be up to the developers, like Epic Games, to either retain the difference or to pass the savings on to the users.
The opportunity (payment operators)
The opportunity for the payment services operators is to absorb as much as they can of the $100bn “submarket for mobile gaming transactions”. In order to effectively compete for the submarket they have to focus on:
– User Experience: the App Store is an intuitive platform and in order to capitalise on the opportunity of taking the user outside of the App Store, which in it-self is a form of obstacle, both the app operators and the payments services operators need to ensure seamless user experience.
– Pricing: while there already is a price-competition between operators, the
market has registered a price volatility in the past year and this is an opportunity to stabilize the price offering in order to attract traffic from the submarket.
– Security: one of the key selling points of the App Store is its security that translates into user protection. Accordingly, to be an attractive alternative, the payment service operators’ security arrangements need to be maintained in accordance with the highest standards.
– Customer Service: the developers and payment operators have to ensure attentive and meticulous customer service experience. Security of the payment is definitely something that a provider like Credorax can ensure but it’s the responsibility of the merchants to ensure that they have a resourced support department available for complaints, disputes and refunds stated Geert Van Maarsseveen, Vice President at Credorax Group.
What about the App Store?
If the app developers and payment services operators capitalize on this opportunity, the App Store will be in open competition with other payment services operators. This will stimulate supply-side pressures including on the App Store’s own commission.
The decision does not prevent the App Store from levying its commission as it always has. But if it chooses to continue, it risks losing a part of this revenue stream to the other payment service operators as a number of users will inevitably make use of the option presented to them.
To retain this revenue stream, one option the App Store may consider is to reduce the commission it levies which may incentivize app developers to keep in-app purchases in-house on the App Store platform. The App Store has not yet indicated the action, if any, that it will take as a result of this decision but in November 2020 it did cut the fees to 15% from 30% for developers whose net annual sales on the platform were less than $1m. This shows that price adjustments is something they have done in the past.
Admittedly the App Store could go the other way – presently developers don’t pay any fees to have an app on the App Store and Apple can change this and levy up-front fees for uploading apps to the App Store.
While Apple claimed a “resounding victory” following the judgment, Tim Sweeney, the CEO of Epic Games, said on Twitter that the “ruling isn’t a win for developers or for consumers” and vowed to “fight on” for what he describes as “fair competition among in-app payment methods and app stores for a billion consumers”.
So next is the next level of the monopoly games: Epic Games have filed a notice to appeal the judgment on September 13, 2021. The grounds of appeal are yet to be announced. Apple also has an opportunity to appeal the count in the event a ruling favours Epic Games and it remains to be seen if they will.
“Regardless of the answers, the App Store will never be the same again and the opportunity for payment methods around the world, such as Pay4Fun in Brazil, can be huge!”, stated Leonardo Baptista, CEO of Pay4Fun.
The decision and its consequences apply in the United States of America, but, fear not, Epic Games has taken this on the road for a world tour:
UK: in the UK, Epic Games launched a similar case in the Competition Appeals Tribunal (CAT) against both Apple and Google. In February 2021, the judge in that case allowed the case to go ahead against Google but not Apple as it found that the UK was not the best place for this dispute. In response Epic Games filed a complaint with the UK’s Competition and Markets Authority (CMA) in March 2021.
European Union: Epic Games made a formal antitrust complaint against Apple to the European Commission the outcome of which is still pending.
Australia: Epic Games have also launched a case in Australia and a judge has granted permission for it to proceed to full trial that is scheduled to start on 28 November 2022.
Asian countries have taken their own initiative to implement practices that are reminiscent of the Epic Games v Apple decision:
Japan: Apple reached a settlement with one of the Japanese regulators, the Japan Fair Trade Commission, that it will allow “reader apps” to include links to their own websites for the users to manage their accounts. This encapsulates apps that manage purchased content such as Netflix and Spotify.
South Korea: the National Assembly of South Korea has passed a bill that requires App Store platforms to allow apps to have alternative payment methods available within their apps. It will become law once the President of South Korea signs the bill.