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An Epic Fail or an Epic Win for Tech Antitrust?

Posted  September 20, 2021
By Ankur Kapoor

On September 10, the court issued its judgment in the trial of Epic Games, Inc. v. Apple Inc., ruling in Apple’s favor on nine out of Epic’s ten claims and on Apple’s counterclaims, but in Epic Games’ favor on its claim under California’s Unfair Competition Law.  Judge Yvonne Gonzalez Rogers’ 180-page, single-spaced findings of fact and conclusions of law are the first exposition, by a U.S. court, of antitrust issues involving the digital media platforms that have recently been the focus of legislators and antitrust enforcers.  The implications of the court’s analysis are myriad, and a full discussion of them is beyond the scope of this (or any) blog.  But there are four important lessons from the court’s judgment.

First, as the court made clear, Epic’s failure at trial was in its evidence of competitive harm, not in its theory that Apple could be a monopolist in the market for mobile-gaming platforms:

Given the trial record, the Court cannot ultimately conclude that Apple is a monopolist under either federal or state antitrust laws.  While the Court finds that Apple enjoys considerable market share of over 55% and extraordinarily high profit margins, these factors alone do not show antitrust conduct.  Success is not illegal.  The final trial record did not include evidence of other critical factors, such as barriers to entry and conduct decreasing output or decreasing innovation in the relevant market.  The Court does not find that it is impossible; only that Epic Games failed in its burden to demonstrate Apple is an illegal monopolist.[1]

Epic’s principal theory was that Apple was the monopolist in each of two “aftermarkets” consisting of: (1) the distribution of iOS apps; and (2) payment processing for in-app purchases in iOS apps.[2]  Such antitrust claims, which assert a manufacturer’s monopoly over aftermarket services provided for the manufacturer’s own products, were recognized by the Supreme Court in the landmark 1992 case of Eastman Kodak Co. v. Image Technical Services.[3]  The theory underlying aftermarket claims has been reaffirmed in the lower courts ever since, although relatively few aftermarket claims have succeeded.[4]  Aftermarket claims typically fail when: (1) competition in the market for the initial purchase—the “foremarket”; here, mobile phones—suffices to check the exercise of market power; and (2) buyers in the foremarket are fully aware of the manufacturer’s allegedly restrictive policies or practices.[5]  In other words, there’s no antitrust claim where buyers have voluntarily bought into the platform in a free market.

According to the court, Epic failed to account for competition by competing mobile platforms, including Google’s Android, Microsoft, Nintendo’s Switch, and Nvidia.[6]  And both consumers and game publishers, including Epic specifically, had always been made fully aware that Apple did not permit distribution of iOS apps outside the App Store and did not allow in-app purchases other than through Apple’s in-app payments (IAP) service.[7]

The court also held that Epic failed to account for price effects on both sides of what the parties agreed is a two-sided platform.[8]  A two-sided platform connects two distinct sets of consumers—here, consumers and publishers—whose demands for the platform are interdependent.  Consumers’ demand for the iOS platform increases as publishers’ demand for the platform increases, i.e., as there are more apps.  And conversely, publishers’ demand increases as consumers’ demand increases, i.e., as there are more potential app sales.  In Ohio v. American Express Co.,[9] the Supreme Court held that, for two-sided transaction platforms, the analysis of competitive effects must account for both sides of the platform.  An antitrust plaintiff’s failure to do so makes its claims untenable.

Notably, however, the court rejected Apple’s position that its 30% commission is a competitive rate.  The court dismissed Apple’s argument that 30% is competitive simply because it’s the prevailing rate in other app stores.[10]  And the court found 30% to be unjustified by the value provided by Apple’s services to game publishers and developers.[11]  Quite the opposite.  The court found that “Apple has provided no evidence that the rate it charges bears any quantifiable relation to the services provided,” 30% was “incredibly profitable,” and “there appear[] to be no market forces to . . . motivate change.”[12]  The court also found that Apple’s innovation in the App Store had been “slow” given the relatively small amount that Apple allocated for the App Store’s research and development.[13]

Moreover, “Apple’s restrictions on iOS game distribution have increased prices for developers.”[14]  A “third-party store could likely provide game distribution at a lower commission and thereby either drive down prices or increase developer profits.”[15]  Those findings should give Apple, and those that consider this an Apple-friendly decision, considerable pause.  The court found substantial anticompetitive effects on developers from conduct that reinforced Apple’s market power.  With a better developed record of two-sided effects—namely anticompetitive harm to consumers—the court may have found an antitrust violation.

Ultimately, however, the court held that Epic’s showing of the anticompetitive effects of Apple’s iOS app distribution restrictions was outweighed by Apple’s proffered procompetitive justification: app security from both the technical and human app review enabled by centralized distribution, which also promoted competition with other mobile platforms.[16]  Although the court acknowledged the anticompetitive harm to developers, it found consumers’ data security more weighty in the balancing required by antitrust law—an understandable conclusion given the court’s finding of insufficient proof of consumer harm.

In short, the court’s judgment was highly specific to Epic’s failures of proof (an “Epic” failure) as opposed to antitrust law being incapable of addressing competitive issues in technology markets (which would have been an “epic” failure).  But it was an Epic win for software developers facing a platform’s supra-competitive commissions and anticompetitive conduct.  And it was a reinforcement of one of the principal lessons of antitrust teaching: consumers matter.

Second, many of the court’s statements identify problems specifically with Epic as an antitrust plaintiff.  Fundamentally, Epic’s theory of harm to competition and to itself—proof of both harms is required under antitrust law’s rule-of-reason analysis—conflicted with the economic realities of Epic’s successful business model.  Epic’s theory was that Apple’s market dominance and game developers’ competitive need to be in the iOS App Store enabled Apple to charge its supra-competitive 30% commission.  While that theory may explain Apple’s pricing to other game developers, it was not especially credible with respect to Epic.  As I’ve learned from my 11-year-old son and his Fortnite-loving buddies—and now confirmed by a court of law—Fortnite is a “cross-platform” game.  A cross-platform game can be played on multiple platforms—Google’s Android, Nintendo’s Switch, Microsoft’s Xbox, Sony’s PlayStation, and personal computers running MacOS or Microsoft Windows.[17]  Fortnite is also “cross-progression,” meaning that a player can continue to progress in the game while switching from platform to platform.[18]  And it is “cross-wallet,” meaning that a player (or their parent) can fund their Epic account from any supported platform.[19]  Because Fortnite is fully cross-platform, “the vast majority of [its] revenue (93%) is generated on non-iOS platforms” despite the “staggering number of iOS Fortnite players.”[20]  Given Epic’s financial success notwithstanding Fortnite’s removal from the App Store, Epic appears to have been the wrong developer plaintiff to prove its theory.  Again, an “Epic” failure specific to it, and not the result of a flawed theory.

The court’s findings of fact also portray Epic as a successful company that engaged in “a highly choreographed attack on Apple and Google, Inc.”[21] which included: (1) “a ‘hotfix’ to covertly introduce code that would enable additional payment methods for the iOS and Android versions of Fortnite . . . in willful violation of [Epic’s] contractual obligations”[22]; (2) “a public narrative and marketing plan” to “‘make Apple [and Google] out to be the ‘bad guys’’”[23]; (3) concealing the existence of the Coalition for App Fairness that Epic had created to wage a media campaign against Apple and Google[24]; (4) engineering the hotfix to take effect and force Apple to remove Fortnite from the App Store just before the new season of Fortnite[25]; and (5) filing the lawsuit and “unleash[ing] a pre-planned, and blistering, marketing campaign against Apple.”[26]  So, from both a competitive and fairness standpoint, the court did not appear to view Epic as a sympathetic antitrust plaintiff.

Third, given the high profitability of Apple’s 30% commission, the court did find that Apple possessed market power in mobile gaming (albeit something less than monopoly power) and that Apple’s preventing apps from notifying consumers about lower prices on other platforms (“anti-steering” restrictions) “artificially increase Apple’s market power.”[27]  Yet despite its factual finding that the procompetitive justification for Apple’s in-app payment (IAP) restrictions was essentially only streamlining the payment process,[28] the court held that the IAP restrictions were not anticompetitive on balance.[29]  Although the court also noted the security of Apple’s IAP services,[30] the court found that, as a factual matter, competing payment services with greater scale and data could provide better security.[31]  Trying to read between the several thousand lines of the court’s opinion, one wonders whether Judge Gonzalez Rogers herself was unsure if she struck the right balance on the IAP restrictions’ competitive effects.  Perhaps that motivated her to find in Epic’s favor on its claim under California’s Unfair Competition Law, and to enjoin Apple from preventing developers’ steering consumers to lower prices on other platforms.

Finally, the court’s opinion teaches us that gaming is a huge and important industry.  According to the court, mobile gaming alone generates $100 billion of revenue.[32]  And “gaming apps account for approximately 70% of all [Apple iOS] App Store revenues.”[33]  To the extent there is anticompetitive conduct in the gaming industry, it has meaningful consequences both to the consumers who buy gaming content and to the game developers and publishers who create that content, often for their livelihood.  Antitrust challenges by developers and consumers have been brought against other gaming platforms, most notably Sony’s PlayStation Store[34] and Valve’s Steam.[35]  Such challenges promise to shed further light on an important industry that perhaps had not previously received the attention it deserves.  Regardless of the ultimate outcome of Epic Games, Inc. v. Apple Inc., the litigation’s bringing public attention to this vital industry has been an Epic Win.  And with Epic having almost immediately filed its notice of appeal, it’s not “game over” yet.

Edited by Gary J. Malone

[1] Slip op., at 1.

[2] Id. at 44.

[3] 504 U.S. 451 (1992).

[4] Slip op., at 127 – 129.

[5] Id. at 129.

[6] Id. at 95 – 96, 132, 139.

[7] Id. at 18 – 19, 130 – 131.

[8] Id. at 56 – 57.

[9] 138 S. Ct. 2274, 2285 (2018).

[10] Slip op., at 97 – 98.

[11] Id. at 98.  Properly speaking, developers design and write the game software, and publishers provide funding and marketing and sell the game in a store.  Developers and publishers can be the same entity.  For readability and to be consistent with the court’s opinion, I sometimes use the term “developers” for both.

[12] Id.

[13] Id. at 102.

[14] Id. at 99.

[15] Id.

[16] Id. at 145 – 146.

[17] Id. at 9.

[18] Id.

[19] Id.

[20] Id. at 14 (emphasis added).

[21] Id. at 19.

[22] Id. at 21.

[23] Id. at 22.

[24] Id. at 22 – 23.

[25] Id. at 25.

[26] Id.

[27] Id. at 93.

[28] Id. at 115 – 117.

[29] Id. at 150.

[30] Id.

[31] Id. at 116.

[32] Id. at 1.

[33] Id.

[34] Class Action Complaint, Caccuri v. Sony Interactive Ent’mt LLC, Case No. 3:21-CV-03361 (N.D. Cal. filed May 5, 2021) [ECF No. 1].

[35] Consolidated Amended Class Action Complaint, Wolfire Games, LLC et al. v. Valve Corp., Case No. 2:21-CV-00563 (W.D. Wash. filed Jun. 11, 2021) [ECF No. 34].  Constantine Cannon LLP is counsel for Wolfire Games.

 

Tagged in: Antitrust Enforcement, Antitrust Litigation,

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