Epic Vs Apple Lawsuit: Why It Matters

In the early days of cell phones, you would bought “the extras” from the service provider, like AT&T Inc (NYSE:T). That all changed when Apple Inc (NASDAQ:AAPL) released the first iPhone. Since then, the iOS App Store and Android’s Google Play Store replaced service providers as the intermediary middlemen.

But a historic split ruling from U.S. District Judge Yvonne Gonzalez Rogers is changing the mobile ecosystem again.

Her verdict was that Apple can’t force Fortnite developer Epic Games to pay Apple a fee for every in-game transaction. After earning over $9 billion in revenue from 2018-2019, the company was kicked off of both Apple and Google’s stores in August 2020 after a dispute over implementing its own in-app payment system.

The 2021 ruling appeared to hurt Apple’s stock to the tune of as much as 10 percent subsequent to the news. It could cost companies like Apple, Google (GOOG), Samsung, and Microsoft (MSFT) money in the long term, but it’s unclear just how it’ll effect the overall market.

How Apple’s App Store Worked

Anything you install on your iPhone or iPad must be done through the iOS App Store, which was an ingenious way for Apple to insert itself into the payment structure of apps in its ecosystem. You can still set up carrier billing as a payment method (if your carrier supports it), but then the developer ultimately earns less money.

That’s because every online transaction carries a fee, and the fees get higher depending on what payment method you use. Payment networks from Visa (V) to PayPal (PYPL) charge merchants a transaction fee of around two percent, and both Apple and Google want their cut too.

Apple currently charges anywhere from 15-30 percent of transaction fees, meaning it makes up to $3 of revenue for every $10 you spend. This includes both apps/games and in-app/game transactions, no matter which app business model you use.

If you select carrier billing, you’re adding another middleman, and thus decreasing the revenue of the app and game developers. And thus, Epic’s lawsuit is so…well…epic.

Why Epic Sued Apple

Epic failed to prove that Apple is a monopolist, which means that it does need to pay three months of revenue (about $3.6 million) back payments to Apple, alongside any revenue since the trial started. This is because it halted Apple’s payments during the case, which took some time to litigate.

However, the judge agreed that Apple can’t stop developers from implementing their own alternative payment methods. This means Fortnite (which has around 350 million registered players) may be able to return to both app stores (Google has to follow the same rules for Android) and continue using its own payment system to bypass Apple.

It’s not just Epic – Apple grossed over $64 billion in App Store purchases in 2020, with around $6.3 billion of that coming from the U.S. It’s a key growth stream in the company’s $274.52 billion in annual revenue last year.

And more countries could implement similar rules in the future, meaning the company will need to adjust to continue bringing value to shareholders used to a comfortable ride. Its legal team must change its terms and conditions, and that’ll affect the broader market.

What the Ruling Means for Mobile Developers

The ruling specifically applies to mobile game payments. This means consoles or PC platforms like Steam aren’t directly affected, and neither are apps. But it does open the doors for developers to negotiate, and we’ll likely see more developers contest their payment terms.

It’s true that Apple could simply change its payment requirements for developers using its OS and marketplace, which are patented and protected IP.

Still, the ability to charge for in-game and in-app purchases through an in-house payment processor and bypassing Apple gives developers more power. Vendors from media to app and game developers have been siphoning money to Apple in the current setup, so the ability to steer users to off-platform marketplaces should be a boon.

That doesn’t mean Apple and its compatriots won’t find a way to get their revenue. They could still collect a commission using different means, and this could have a ripple effect that transforms the mobile business model.

Will Apps Get Cheaper?

It is possible that currently paid apps, games, and in-app purchases will get cheaper moving forward. But there’s also a chance currently free or freemium apps will convert to paid solutions. For now, there’s no telling how the rules will be rewritten to adjust to this ruling, though they are being closely monitored by the broader tech community.

Apple controls about 55 percent of mobile game transactions, so bypassing its payment option allowed Epic to offer a 20 percent discount to gamers. Epic added 10 percent to its bottom line, though it’s having to pay back some proceeds because both companies entered into a valid contract.

This means Epic knowingly violated its legal agreement with Apple, which did not breach the Sherman law needed to establish antitrust. As a result, the lawsuit is a loss for both companies – Epic immediately appealed.

Epic Vs Apple Lawsuit: The Bottom Line

Apple revolutionized the mobile industry when it introduced the iPhone. It set a standard that we’re all used to today, and that has allowed Apple to arguably overreach when it comes to monetization of apps featured on its store.

One game you won’t find in its App Store is the uber-popular video game Fortnite. That’s because both Apple and developer Epic are locked in a stalemate over the 30 percent “Apple tax” it pays for each in-app purchase.

The ruling is just the start of a long legal battle that could become a series of problems if Apple doesn’t find ways to create a win-win solution for its partners. Until then, the tech industry and regulators are watching closely, and investors should too.

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