Epic, Apple and the Subscription Economy
01 Jun 2021Epic Games vs Apple is providing a window onto changes that widespread adoption of subscription commerce has made to our economic markets.
In-court arguments have concluded in Epic Games vs Apple, the highest profile and most important antitrust case of 2021, and the judge is expected to render her verdict in the coming weeks. Epic is the creator of the hugely popular Fortnite, an immersive multi-player, multi-platform game first released in 2017. As originally created, Fortnite is classified as a “Battle Royale” which means that players fight each other to the last one standing. It has since evolved into a “metaverse” which enables players to hang out, socialize and create their own games to be shared with and/or sold to fellow gamers. Its closest analogue is Roblox which similarly contains games within its game, though Roblox is oriented at a younger age cohort than Fortnite. Fortnite is available for all the major game consoles (Sony, Microsoft, Nintendo), for PCs and for Android phones. Players can save progress and characters on one platform and continue to play on another.
Fortnite was also available on the iOS and Mac platforms until August 2020 when Epic contested Apple’s power to enforce the 30% cut it takes from sales in the iOS app store. After Epic released a version of Fortnite which contained pointers to Epic’s own online store (where it doesn’t have to pay Apple any percentage at all), Apple quickly barred the game. In court, Epic has argued that Apple is abusing its position as the owner of the platform and is taking a percentage of revenues unjustified by the benefits the app store provides. Apple responds that its policies protect all users because it reviews every app in the store to ensure that they meet standards pertaining to usability, data privacy and (especially) security.
One point that Epic’s lawyers brought up in the bench trial is that Apple allows Roblox to present user-generated content, which has not undergone App Store review, within its app, but is contending that the absence of such security-oriented reviews is why it cannot permit Epic to do anything similar in Fortnite. Under questioning, Apple executives claimed that the reason for this is that Roblox is not a game, but an “experience” and therefore different standards apply. Almost immediately thereafter, Roblox changed the copy on its website and other marketing materials to reflect that it is providing an “experience” rather than a “game.” Some observers noted that the real difference is that Roblox complies with Apple policies on in-app payments while Epic was trying to go around them. In essence, this case is about whether a platform owner has the right to exercise and police its monopoly powers.
Less noted during the trial is the fact that app revenues these days are mostly recurring subscriptions. If you have an iOS or an Android device, take a moment to review your app downloads. While many apps are free, it’s highly likely that most of the rest are for services you pay to use on a recurring basis. Companies offering subscriptions on an iPhone app have two payment choices: 1) get paid via the app store and pay Apple’s cut as specified or 2) offer a free app with content accessible only to subscribers, but which does not enable any purchases and also does not “steer” users to any external website where items can be purchased. Some larger tech companies like Netflix and Amazon offer apps with no in-app payment, but those companies are prominent and deep-pocketed enough to acquire customers through other means.
For the most part, the public has accepted the fact that many items that we used to own outright are now licensed to us for our use over a specified period of time (or, less commonly, up to a certain quantum of usage). But selling subscriptions in a world of dominant platforms is a complex affair. Should platform gatekeepers get to keep a cut in perpetuity - Apple takes 30% for a subscription’s first year and 15% thereafter? Should they be able to prevent other companies from selling renewals directly through their own sites? Does the platform have a right to sell bundles of subscriptions and determine the revenue share from those bundles? Should companies like Apple or Google be able to run an App Store and at the same time compete with other companies on the same platform? Think about Apple Music and Spotify: Apple Music doesn’t have to pay App Store fees, but Spotify does (or would if it offered in-app payments). What about selling virtual currency on the App Store (as Epic used to and Roblox still does): should the commission structure apply? There are many, many subscription-related questions to be sorted out.
We think this gets at another point which is essential to the case. What are people subscribing to? Are they subscribing to a product experience like a game, agnostic to the means of delivering the experience? Or, are they subscribing to a platform that guarantees that the experience will be available, reliable, and secure? It is challenging to untease what is delivered to the end user from how it is delivered, and to apportion a value to each of these (which would likely provide a way to settle the dispute).