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Epic vs Apple verdict: What changes does it bring to App Store guidelines?

The judge ruled in favour of Apple on all counts except the one that could deal a huge blow to Apple’s future revenues.

Apple must allow iOS apps to direct users to purchasing mechanisms other than the one offered by Apple, Judge Yvonne Gonzalez Rogers ruled in the monumental Apple vs Epic lawsuit on September 10.

This ruling comes at a time when regulators around the world are looking into curbing the dominance of the Apple App Store and Google Play Store. Last month, South Korea set precedent by passing a new law that requires Apple to allow alternative in-app purchase mechanisms as well, but the US ruling goes further because it will likely make Apple change its guidelines for all countries.

You can access a copy of the complete 185-pages ruling here.

Anti-steering rules are anti-competitive

Concluding that Apple’s anti-steering laws are in violation of California’s Unfair Competition Law, the order says, Apple is:

permanently restrained and enjoined from prohibiting developers from (i) including in their apps and their metadata buttons, external links, or other calls to action that direct customers to purchasing mechanisms, in addition to In-App Purchasing and (ii) communicating with customers through points of contact obtained voluntarily from customers through account registration within the app.

This injunction is set to go into effect on December 9, 2021, unless Apple appeals and wins a stay.

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A nuanced reading of the order

Although it appears as if the developers can avoid paying Apple’s 30 percent commission by offering in-app purchases through alternative payment mechanisms, Apple can find another way to charge this commission. The ruling only hinders Apple from charging this commission through the in-app payment system. If Apple finds another way, then consumers are unlikely to see reduced prices anytime soon.

Apple could also reframe guidelines to dictate how these external payment links or buttons appear or mandate that Apple’s payment system must also be used alongside third-party options. Many developers would choose to stick with Apple’s payment option if the alternative has too much friction and is inconvenient for users.

What spurred the lawsuit?

Back in August 2020, Epic Games allowed Fortnite game users to pay directly to Epic for in-app purchases rather than through Apple’s billing system. While the company did not specify why it introduced this, it is safe to assume that it was done to avoid paying the 30 percent commission that Apple levies, which many developers have said is too high. Regardless, Epic’s move went against App Store guidelines and Apple removed the Fortnite game from App Store and suspended Epic’s developer account. This prompted Epic Games to file a lawsuit against Apple.

Epic said that its lawsuit aims to bring an end to Apple’s “unfair and anticompetitive actions” in two distinct, multibillion-dollar markets: (i) the iOS App Distribution Market, and (ii) the iOS In-App Payment Processing Market.

Separately, Epic has also filed a lawsuit against Google’s Play store for similar reasons, the hearings for which are yet to begin.

Apple is not a monopolist

Judge Rogers rejected both Epic’s and Apple’s definition of the marketplace and said that “The relevant market here is digital mobile gaming transactions, not gaming generally and not Apple’s own internal operating systems related to the App Store.” Epic had claimed the market was iPhone apps, over which Apple has a monopoly, while Apple claimed that people played games on a wide variety of devices and that Apple controlled a small slice of this big market.

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Given this market definition, “The court cannot ultimately conclude that Apple is a monopolist under either federal or state antitrust laws,” the judge said. “The Court does not find that it is impossible; only that Epic Games failed in its burden to demonstrate Apple is an illegal monopolist,” the judge added.

Other wins for Apple

Although the judge’s decision to allow alternative payment systems deals a major blow to Apple’s future revenues, the judge ruled in favour of the iPhone maker in 9 out of 10 counts.

The judge ruled that Epic Games was in breach of its contract with Apple when it implemented an alternative payment system in Fortnite and it must pay 30 percent of the revenue the company collected from users in the Fortnite app on iOS through Epic Direct Payment and interest according to law. Epic CEO Tim Sweeney tweeted on September 13 that Epic has paid Apple $6 million as ordered by the court

In addition to wanting alternative payment mechanisms, Epic wanted Apple to open up iOS to third-party app stores and sideloading apps, both of which it did not get. Apple also does not have to allow the return of Fortnite to iOS and it can choose to terminate other Epic-affiliated developer accounts.

The judge also does not order Apple to lower its commission as wanted by Epic. “Indeed, while the Court finds no basis for the specific rate chosen by Apple (i.e., the 30% rate) based on the record, the Court still concludes that Apple is entitled to some compensation for use of its intellectual property,” the order read.

“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.” – Judge Rodgers (emphasis ours)

What have Apple and Epic said?

Apple: “Today the Court has affirmed what we’ve known all along: the App Store is not in violation of antitrust law,” Apple said in a statement. “Apple faces rigorous competition in every segment in which we do business, and we believe customers and developers choose us because our products and services are the best in the world. We remain committed to ensuring the App Store is a safe and trusted marketplace.” However, Apple is still evaluating whether it wants to appeal.

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Epic: “Today’s ruling isn’t a win for developers or for consumers. Epic is fighting for fair competition among in-app payment methods and app stores for a billion consumers,” Epic CEO Tim Sweeney tweeted. “Fortnite will return to the iOS App Store when and where Epic can offer in-app payment in fair competition with Apple in-app payment, passing along the savings to consumers.” Epic Games has filed an appeal.

A wider-reaching US bill in contemplation

The United States is contemplating a law that is wider in scope than this ruling. On August 11, US lawmakers introduced a new bill titled Open App Markets Act that proposes:

  • Operating systems must allow third-party app stores
  • Developers must be allowed to choose their choice of in-app payment system
  • Pricing for various app stores or in-app payment systems can be determined by developers
  • Developers can freely communicate pricing offers with users
  • Google and Apple cannot use non-public data to build competing apps
  • No self-preferencing in app stores
  • Third-party developers must be provided with the same access to developer tools

How are other countries dealing with app store regulations?

India: In India, both Google and Apple are facing regulatory scrutiny over their app stores. While the Competition Commission of India ordered a detailed investigation into Google Play Store last November, it is currently reviewing an antitrust complaint filed against Apple App Store last month.

EU and UK: The European Union has launched an investigation into Apple App Store following a complaint from Spotify and the United Kingdom has launched a broad investigation into Google’s and Apple’s effective duopoly over the supply of operating systems (iOS and Android), app stores (App Store and Play Store), and web browsers (Safari and Chrome). Both investigations are ongoing.

Japan: Japan’s Fair Trade Commission too had been investigating Apple App Store, and earlier this month Apple made a concession to settle this investigation. The concession allows developers of “reader apps” like Netflix and Spotify to include an in-app link to their website for users to set up or manage an account. But this new ruling effectively renders this concession inconsequential.

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