Epic Games’ simmering antitrust dispute with Apple and Google turned into a hot war Thursday, as Epic Games announced a discount policy and direct payment mechanism for Fortnite that Apple and Google said violated their terms of service.
Apple tossed Fortnite out of the iOS App Store, and Epic Games filed an antitrust suit. Later in the day, Google also dropped Fortnite from Google Play, and Epic Games sued Google as well.
I queried game developers and other friends on social media about the dispute, and I’ve synthesized their arguments with my own thoughts. While Epic Games is fighting what it believes to be a noble cause on behalf of gamers and game developers, its gambit carries a lot of risks of alienating its platform partners, who may be necessary evils. It risks hurting revenues for Fortnite at a time when rival games are catching on, distracting itself with legal cases, and potentially turning off gamers as well, who might not appreciate that they can’t play Fortnite on mobile devices so easily anymore.
Epic Games’ CEO thought about this very carefully
Above: Epic Games satirized Apple’s own 1984 ad in Fortnite.
You can tell that Epic Games was ready to get tossed out of the app stores by Apple and Google. The Cary, N.C.-based maker of Fortnite had its lawsuits ready and it even had a hilarious satirical video about 1984, the famous Apple ad that kicked off the Macintosh and accused IBM of being an anti-consumer behemoth. The video played inside Fortnite, but fans couldn’t see it on iOS because the app had been pulled.
Epic Games CEO Tim Sweeney has been saying for years that open-source and free competition have been squelched in the game industry in favor of monopolistic platforms that don’t have the interests of developers or consumers at heart. He has taken aim at Microsoft in the past as it contemplated moving the PC toward an Apple-like single store for apps. He has since patched up that relationship.
Sweeney raked Google over the coals for having a “fake open system,” saying it tried to scare players into fearing the security risks of downloading Fortnite directly from Epic’s site rather than through the Google Play store. And most recently, he criticized the tech giants during the antitrust hearings that Congress held. Sweeney struck while the iron was hot and the attention of the government was focused on the dangers of tech monopolies. That shows how savvy he is about timing, striking out with something controversial just after he closed a deal with investors to get more money.
Sweeney dared to say these things because Epic Games isn’t beholden to the tech giants. The wealth of Fortnite has given the company a valuation of $17.3 billion. In 2019, Epic Games reported $4.2 billion in revenue and $730 million in earnings before interest, taxes, depreciation, and amortization (EBITDA, a key measure of profitability). Revenue for 2020 is forecast to be $5 billion, with EBITDA of $1 billion. And Sweeney recently raised more money, including $250 million from Sony. Apple has a valuation of $2 trillion, and Google is worth $1 trillion, but it won’t be easy for them to push Epic Games out of business by drowning it in lawyer’s fees.
Epic Games is taking the moral high ground
Above: Epic Games CEO Tim Sweeney argued to make the game industry more open in the next decade at the Dice Summit 2020.
In an email to GamesBeat, Gary Reback, the antitrust attorney at Carr & Ferrell who once took on Microsoft in an antitrust case in the 1990s, wondered at first if Apple would just slow Epic Games down with litigation paperwork and outspend it on lawyer’s fees, making the case painful for Epic. But he recognized that Epic Games has a lot of cash and it might have done better using its clout to get a sweetheart deal with Apple instead to avoid litigation.
“Would Apple have been receptive? What kind of deal would be workable from a legal point of view?” Reback asked. “It’s hard to imagine a sweetheart deal now. Does Epic really think Apple will change its whole revenue model? What does Epic foresee as a way to end the litigation or are they going to fight to the end with the expectation of winning? Maybe they think Congressional pressure will help.”
Reback hasn’t considered that Sweeney has orchestrated a kind of crusade. He raised money to have an extra war chest to fight this battle. He made sure he retained enough ownership to ensure that he could control the company if shareholders got jittery. And he has signaled his intentions by giving talks about how the industry needs to do the right thing.
Sweeney’s vision has been about creating an industry that makes it far easier for developers to make a living, even if they’re small indies. He believes that Apple and Google — who created an enormous mobile game industry with their app stores on mobile devices — no longer earn the 30% fees they take. (Apple was once the hero, charging only 30% when the carriers were taking 70% fees).
Sweeney opened the Epic Games Store to challenge the 30% fees, cutting deals with developers in which Epic only keeps a 12% fee. So far, Epic’s focus has been on high-end PC and console games, and so it is mainly doing damage to the business of Valve’s Steam service, which also takes a 30% cut. But at some point, the Epic Games Store may want to take on both the iOS and Android stores directly.
There may not be much financial gain in this crusade. In fact, Epic Games made less money in 2019 — as it was building up the Epic Games Store — than it did in 2018. But clearly, Epic Games isn’t prioritizing profits over its standing in the industry. I think this is the most laudable part of what Epic has done in its quest to ensure a more open and fair game industry.
But there are some risks.
Antitrust law may not topple duopolies
Above: Apple’s 1984 ad for the Macintosh.Epic Games alleged in its lawsuit that Apple has a lock on a billion iPhone consumers. But Apple only has a 44% market share in the U.S. with iOS, while Google has a 56% share with Android, according to Consumer Intelligence Research Partners. On a global basis, Apple has a 14.6% market share, compared to 85.4% for Android.
But Epic Games sued Google as well, later in the afternoon, after Google also announced that it would remove Fortnite from Google Play. Apple can try to escape the antitrust allegation by pleading that it does not have a dominant market share in the relevant markets. Epic Games did bring up that Apple has two-thirds of the profits in mobile games, and that could be a winning argument that will keep it in the case. But to really win an argument that consumers have no choice, Epic Games might have to show that a duopoly is the problem, as it locks consumers into higher prices and results in bad deals for developers.
This means that Apple and Google would have to behave more like oligopolists, rather than fierce competitors, and that may be a hard thing to prove. Epic Games could accuse Apple and Google of collusion, seeing as how they both acted to drop Fortnite from the app stores on the same day, and neither has cut its 30% fee since the dawn of the smartphone era. But that charge would only stick if there was some real proof of that, and it’s hard to believe that these antitrust savvy companies would leave such evidence lying around. That’s a fishing expedition that I don’t expect Epic Games to win when all is said and done. It’s not impossible to win, as the two companies have behaved in a similar way in terms of their pricing, but I expect Apple and Google to mount a vigorous defense that they are fierce competitors.
Apple and Google have to tread very carefully
Above: While Apple just has a 14.6% market share globally, it does have flashy stores.
Epic Games’ lawsuits come at a sensitive time, as a long-dormant Congress has turned its eye to the tech giants, with the recent testimony of the CEOs of Facebook, Apple, Google, and Amazon. In the questioning by lawmakers, it seemed like both Democrats and Republicans agreed that the companies had gotten too big and that breaking them up might be a service for consumers.
Epic Games may also have some sympathetic compadres in the lawsuit in the form of Microsoft and Facebook. Yes, these companies have had their antitrust problems as well. Bill Gates is probably laughing at Apple and wondering how it feels now that the shoe is on the other foot. Flash-forward a couple of decades later, and Microsoft this year tried to get its cloud gaming app Project xCloud on iOS, but Apple rejected it.
Facebook also tried to open a store (or really, just a way for friends to play with each other) of its own within the instant games feature of its Facebook Gaming app. But Apple rejected the part of the app that allowed players to play instant games, so Facebook had to launch the app without that feature available, even though it was allowed to do so on Google Play. In a number of these cases, Apple has fallen back on the defense that it is making the app store safe for users. But it may not be that easy for Apple to win that argument, particularly because Epic has been allowed to do things on the Google Play store without wrecking the app store and making it unsafe.
Apple is also about to make life very difficult for mobile game marketers to track how well their advertising does at getting new users for games. It will do so by retiring the IDFA, or the Identifier for Advertisers. This means that, in the name of privacy, Apple will make it harder for third-party companies to track user behavior when it comes to downloading apps or making purchases.
Dan Barnes, the chief operating officer of mobile gaming and platform company N3twork, was so concerned about this that he gave a primer on the IDFA change at the Game Developers Conference Summer event last week. Protecting privacy may sound good, but perhaps only 20% or fewer will opt-in to share their data with third parties, and that means that advertising performance will now have a missing data link. This could hurt a lot of game developers and publishers, and it could generate a lot of sympathy for anti-Apple voices.
Perhaps Apple is right in driving forward with its own causes, like keeping its rules the same for all developers and protecting privacy. But it is running the risk of making executives like Sweeney and game developers unhappy. And that could draw government attention.
Even if Epic Games wins, it will have to be careful
Above: What does Epic’s lawsuit have in store?
There’s a question smaller developers have, and it comes down to a matter of trust. Will Epic behave as well as it wants the tech giants to behave? A segment of gamers has been critical of how Epic Games has been giving away a lot of things for free in order to gain market share with the Epic Games Store. Those gamers are reportedly benefiting from this, but they don’t like the fact that they can’t play some of the games on the Steam platform anymore. They’re saying that Epic is behaving in an anti-competitive way as it loses money on its store in an effort to get Steam to reduce its fees for developers.
Epic Games hasn’t disclosed how much it pays developers for the exclusivity deals that benefit the Epic Games Store. I happen to be playing Total War Saga: Troy from Sega’s Creative Assembly, which is an Epic Games Store exclusive and free for its first 24 hours. Epic Games is clearly subsidizing that game in the hopes of gaining customer loyalty. It could be a very good deal that way.
And it’s worth remembering that Epic Games’ other business, the Unreal Engine, is part of another industry duopoly. Epic’s main competitor in game engines — the tools that developers use to make games — is Unity Technologies. Unity CEO John Riccitiello has complained that it is a bit “unsavory” that Epic Games has been giving so many grants to Unreal Engine developers. Sweeney has defended that practice and says that his company is not forcing the grantees to use the Unreal Engine.
If these strategies prove to be so successful that Epic becomes even more powerful, it could subject itself to the same kind of antitrust complaints that it is lodging against Apple and Google. Such tactics have been used by bigger companies to drive rivals out of business. Just as Epic accused Apple of failing to live up to its 1984 promise, Epic could fall into the same trap. And that would be a shame.
But, perhaps worst of all, the crusade that Epic Games is fighting on behalf of gamers may fall on deaf ears. As one of my friends noted, “What difference does it make to me which one if [one big company or the other] gets the bigger cut of my money?”
Author: Dean Takahashi.
Source: Venturebeat
