‘Fortnite’ maker Epic faces uphill antitrust battle with Apple
In Sweeney’s view — a view likely shared with many programmers of an older school, those who witnessed the early days of computing and the legal and corporate battles involving the government, IBM, Microsoft, and Apple — closed platforms betray the ideals of the Internet and computing. Apple, and iOS and the app store in particular, exemplify the closed model Sweeney so often rails against. The iPhone, after all, is basically just a small computer. But because of how the original iPhone was designed, there are restrictions taken for granted on the device that would be unacceptable on a PC. Users cannot download software that hasn’t been approved by Apple, and can only download software via a storefront owned and operated exclusively by Apple.
“Imagine everyone starts using PCs in the 1980s, but it turns out that if you use an IBM PC, you can only use IBM approved software. If use an Apple PC, you can only use Apple approved software,” Mark Lemley, director of the Stanford Program in Law, Science & Technology, told The Post. “The fact that that was not true, I think, is actually the thing that made the PC such a transformative invention.”
This idea is at the core of Epic’s legal challenge following Apple’s ban of its popular “Fortnite” game and attempts to block Epic from using iOS development tools. Apple, the suit charges, maintains an illegal monopoly on app distribution through its app store, and uses that monopoly to impose all sorts of burdens on those who want to reach the iOS market, stifling innovation along the way. Those burdens include Apple’s in-app purchase system (IAP), which takes a 30 percent cut off all revenue made on iOS. IAP is the only way for companies like Epic, which aren’t selling physical goods, to make money on iOS.
To most ordinary users, Apple has been a benevolent warden of the app store (though there are ongoing cases in both Europe and the U.S. that challenge this view). And the iPhone maker has justified its closed ecosystem by pointing to security and stability. “You don’t want your phone to be like a PC,” Steve Jobs, the late Apple CEO, told the New York Times in 2007. “The last thing you want is to have loaded three apps on your phone and then you go to make a call and it doesn’t work anymore.”
But while technologists may view this as a clash between innovation and stagnation, competition and entrenched power, the case is likely to succeed or fail on different terms. There is, after all, a dramatic difference between what is obvious to open ecosystem evangelists, what is persuasive to the public and what will find purchase in court — where a complicated history of U.S. case law and judicial ideology looms over Epic’s case. Rather than a fight over walled gardens versus open ecosystems, Epic may have found itself in a long-standing battle over the scope and spirit of antitrust law.
A stormy legal landscape
Recently, far beyond the comparatively flashy world of iPhones and cartoony battle royale games, a federal appeals court made a consequential antitrust ruling regarding cellphone chips, patents and royalties.
In 2017, the Federal Trade Commission alleged that Qualcomm, which owns patents essential to the creation of mobile phones, was using its dominant position in the industry to extract unreasonable fees from companies that rely on its tech. And two years later, in May 2019, U.S. District Court judge Lucy Koh agreed. In a 233-page decision, she sided with the FTC, stating that Qualcomm had abused its monopoly power.
On Aug. 11, two days before Epic filed its suit against Apple, a federal appeals court reversed Koh’s decision.
“Anticompetitive behavior is illegal under federal antitrust law. Hypercompetitive behavior is not,” reads a now widely-cited portion of the federal appeals court’s decision. “The company has asserted its economic muscle ‘with vigor, imagination, devotion, and ingenuity.’ … It has also ‘acted with sharp elbows — as businesses often do.’” The FTC had to prove that Qualcomm was destroying competition. But it had failed to do so, in the view of the appeals court.
The decision points to the uphill battle Epic will face in both its efforts to restore “Fortnite” to iOS, as well as its grander ambitions of radically reshaping the closed iPhone ecosystem. Proving that Apple’s refusal to open iOS to competing stores and IAP systems is anticompetitive — as opposed to merely hypercompetitive or sharp-elbowed — will require vaulting an extraordinarily high bar, and in a judicial environment that has not been hospitable to antitrust claims.
The Department of Justice under President Trump, for example, intervened in the Qualcomm case, filing a memo arguing in favor of the chip maker and against the district court decision. It was an unusual example of the government in conflict with itself — the DOJ speaking out against a case brought by the FTC — and only the most recent example of decades of right-wing influence on the judiciary.
“The antitrust left movement says antitrust went off the rails in the 1980s. That was the Chicago school, the Reagan era,” said Randy Picker, a professor of law at the University of Chicago. “If you’re a conservative, the great success of the Trump administration is that they keep appointing conservative judges. So the federal judiciary looks pretty conservative.”
The impact of a federal court overturning a vigorous antitrust ruling could have serious ramifications, including on the rulings of district court judge Yvonne Gonzalez Rogers, who is overseeing Epic v. Apple, alongside two other Apple-related cases.
“[Gonzalez Rogers’] colleague on the northern district of California wrote a 233 page, very detailed, fact-finding opinion, and it was just summarily thrown out root and branch,” said Lemley. “I think that’s got to affect how far the judge is willing to stick her neck out on this issue.”
On Apple’s home turf
A preview of the uphill battle Epic will face surfaced on Aug. 24. In the hearing regarding Epic’s request for a temporary restraining order against Apple, Richard Doren, a lawyer representing Apple, drew an analogy to Best Buy. What Epic was doing, said Doren, was tantamount to going to the store, picking up a copy of software from the shelf, and then complaining about having to pay at the register. A lawyer for Epic countered that what Apple was doing was closer to selling software, then charging users every time they opened the software.
The exchange was revealing. The outcome of the case between Epic and Apple is likely to hinge on how the situation is characterized — and by talking about when and where customers were being asked to pay, Epic was playing on Apple’s home turf.
“If Apple can characterize this as, ‘Look, this is just the price we charge for access to the app store. And we could charge a single upfront price, or we could charge a monthly fee, or we could charge it in some other way, and the way we chose to charge our price is a share of the revenue you make.’ … Courts give a lot of deference to those [arguments],” said Lemley.
Apple’s public defense, thus far, has been to accuse Epic of trying to use the legal system to coerce the iPhone maker to cut a unique deal that would benefit Epic. The iPhone maker has insisted that it holds to its rules, and doesn’t make exceptions. This is, pointedly, not always the case: Emails released by the U.S. House Judiciary Committee show an exchange between an Apple executive and Jeff Bezos, the CEO of Amazon, in which Apple offers Bezos a discounted rate of 15 percent. [Bezos also owns The Washington Post.]
“It’s not like they have these hard and fast rules,” says Tim Wu, author of “The Curse of Bigness: Antitrust in the New Gilded Age” and a professor at Columbia Law School. “It’s like a restaurant where there’s no tables unless there’s a table.”
But while this may help Epic in the court of public opinion, it may not be of much use in an antitrust case. Antitrust is not traditionally viewed as a venue in which to haggle over prices, but rather whether a company is illegally exploiting a monopoly.
“Traditional public utilities regulation is precisely about rate regulation. Someone is selling electricity. It’s a natural monopoly. We want to control the prices. Do they get to charge five percent, five and a quarter percent? Five and a half percent? … That’s sort of like trench warfare over a tenth of a percentage point because there’s so much money at stake,” said Picker. “That is not really what antitrust does. Antitrust doesn’t really set prices. Antitrust regulates, as it were, mechanisms. And those mechanisms generate what prices they generate. But we’re not in the price-setting business.”
The recent Qualcomm decision doesn’t help. “If Apple can persuade the court that this is just about … Apple’s control of its own store and the prices it wants to charge, then Qualcomm says not quite ‘Do whatever you want, we don’t care,’ but something pretty close to that,” said Lemley.
Epic’s focus, then, will be on proving that the prices are a problem, but not the problem. The problem is the underlying mechanism — an illegal monopoly, in Epic’s view — that allows Apple to set the prices it does. The distinction is crucial.
To that end, Epic will be pursuing arguments in court that don’t easily translate into digestible marketing speak. A big part of Epic’s initial legal filing revolves, for example, around the idea of a “per se illegal tie.” An illegal tie is when a company forces you to purchase a product you don’t want alongside one you do, “tying” one product to the other. In Epic’s view, the product that developers want access to is the App Store (and only because they quite literally need access; on iPhones, the app store is the only game in town if you want to distribute software). The product developers and users don’t want is the in-app purchases system.
It’s a two-part tightrope act — making the case that a marketplace (the app store) is distinct from the payment mechanism (IAP), and that Apple’s monopoly on app distribution forces developers to use IAP.
Epic tried to make this distinction, forcibly. When it updated “Fortnite” to bypass Apple’s in-app purchases system, it effectively created a competing in-app purchase system, showing that the purchase system is distinct from the marketplace.
But here, too, an opinion that might make intuitive sense doesn’t necessarily give Epic any legal headway. Antitrust law doesn’t obligate Apple to do business with its competitors.
“On [Epic’s] side is the spirit of the original antitrust laws, which were designed to protect the little guys against the big guys and prevent extraction of monopoly profits,” said Wu. “The challenge for them is that the [former Supreme Court Justice Antonin] Scalia line of antitrust says that it’s your God given right not to deal with anyone you don’t want to.”
Part of Sweeney’s initial petition to Apple, revealed in a public email dump as part of the case, was a request to allow Epic to open a competing store, the Epic Games Store, on iOS. If granted, the change would open the door to other app and game marketplaces on iOS, including the Facebook Gaming app as well as Microsoft’s xCloud and Google’s Stadia services. It would also force the App Store to compete with these stores, likely leading to more favorable revenue share terms for developers — and less favorable terms for Apple. What Sweeney requested is expressly forbidden in Apple’s app store guidelines, prompted a sternly-worded letter denying Epic’s request from Apple’s legal counsel, setting the stage for the court battle about to begin.
Beyond the courtroom
Far from the glitzy PR campaign focused on parodies of advertisements and in-game events, Epic has queued up an impressive set of lawyers to make its case. Their roster includes former high-ranking Department of Justice officials, longtime antitrust litigators and Federal Trade Commission lawyers. (Cravath, Swaine & Moore, the firm representing Epic’s in court, has a storied reputation in the world of antitrust: The firm bested the U.S. government on behalf of IBM in a case about IBM’s alleged monopoly of the computer market that went on for 13 years. In a memorable 1982 profile, The Post described Cravath’s IBM team as “full-fledged, ample-bellied, handsomely recompensed partners.”)
But if Epic loses, there’s also the possibility that the threat of antitrust enforcement could nudge Apple away from decisions that could bring further scrutiny. In a recent paper, Wu wrote that although IBM won its 13-year antitrust case against the U.S. government, “IBM’s avoidance of exclusive contracts and its failure to acquire or seek control of obvious targets (like Microsoft itself) all suggest a firm with ‘antitrust phobia,’ and thereby one that allowed competition to flourish.” (Wu ran the theory by Bill Gates at a party: “He said, ‘I thought IBM was going to kill us.’ He said ‘We were really scared, but they didn’t pull the trigger.’”)
Barring that, ongoing scrutiny from the U.S. House Judiciary Committee may end up the open software evangelist’s unlikely source of hope.
“Antitrust is useful for someone like Epic because they can literally demand a day in court,” said Picker. “But maybe some of these issues are actually not better answered in the antitrust, and they’re better answered in Congress.”
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