The PR storm that Epic Games' fight with Apple (AAPL) has ignited, together with Epic's lawsuit against Apple and ongoing antitrust scrutiny from both U.S. and E.U. regulators, just might make Apple revise its payment policies for iOS and iPadOS apps by the time the dust settles.
However, such a turn of events probably wouldn't cause major damage to Apple's bottom line. Indeed, it might only do moderate damage to its App Store revenue.
To recap: Epic filed an antitrust lawsuit -- clearly prepared in advance -- against Apple last Friday shortly after Apple pulled Fortnite from the App Store for adding a payments feature for in-game transactions that circumvented the App Store's payment-processing system (and with it, the App Store's 30% revenue cut on in-game transactions). Not long afterwards, Epic sued Alphabet/Google (GOOGL) for pulling Fortnite from the Play Store for similar reasons.
Since then, we've seen a slew of other moves that suggest both Apple and Epic are digging in for a long fight. Among them:
- Epic put out a 1984-themed commercial (echoing Apple's famous Super Bowl ad introducing the original Mac) that puts Apple in the role of Big Brother.
- Apple has told Epic that its developer accounts for Apple platforms will be terminated on Aug. 28 unless it pulls its Fortnite payments feature. This is something that stands to remove all Epic apps from the App Store and end Epic's access to Apple developer tools.
- Epic responded to Apple's threat by filing for a preliminary injunction to prevent its developer accounts from being terminated, while also claiming that their termination will lead third-party developers to lose access to the popular Unreal game engine on Apple platforms.
- Epic is reportedly talking with Spotify (SPOT) and other developers upset about Apple's App Store policies about forming a united front.
One key difference between the Apple and Google fights: Google's actions only served to take Fortnite off the Play Store, while Apple's actions served to end their distribution on iOS and iPadOS devices altogether. Though Fortnite can be installed on Android by other means, its removal from the App Store makes it effectively impossible to install on iPhones and iPads.
As a result, unlike its Google lawsuit, Epic's lawsuit against Apple is about two pretty different things: Apple's insistence that all iPhone and iPad apps be distributed through the App Store, and its insistence that all digital content transactions taking place on those apps go through the App Store, with Apple receiving a substantial cut along the way.
While I think it would be foolhardy to predict exactly how a federal court will rule on these two policies, a lot of observers have argued that Epic faces an uphill fight in both instances. Ben Thompson, though critical of Apple's App Store policies in many respects, has pointed out that past Supreme Court rulings suggest Apple is under no obligation to deal with Epic under the terms that Epic seeks.
Also, Apple can point out that the iPhone only has about a 15% global smartphone unit share -- its share of smartphone app store revenue is admittedly a lot higher, thanks in part to favorable demographics, but is still well below monopoly levels. And with regards to its control of app distribution, Apple can argue that this control is in the interests of mainstream consumers, as it prevents buggy, insecure and/or privacy-unfriendly apps from being installed on its hardware.
But when it comes to its fight over App Store payment policies, Epic and like-minded developers could score some victories in the court of public opinion, including among (as The Verge's Nick Statt pointed out) younger gamers who have been loyal buyers of Apple hardware. And they're also likely to find sympathetic ears among some of the antitrust regulators scrutinizing both Apple and other tech giants.
The fact that Apple demands that certain types of transactions happening on iOS and iPadOS apps go through the App Store, but is fine with alternate payment methods being used for many other transactions (for example, e-commerce transactions, ride-sharing, ticket purchases and food delivery) will probably get a lot of attention as this fight plays out. So will the fact that -- unlike game console makers, which typically lose money on console sales and try to make it up via 30% cuts on game sales and transactions -- Apple already generates substantial profits on iPhone and iPad sales, profits that have helped make it the world's most valuable company.
Throw in the fact that many iPhone/iPad gamers would be less satisfied with their devices if popular games from Epic and other developers -- or for that matter, cloud gaming services currently not supported by Apple hardware -- remain unavailable on iPhones and iPads for an extended period of time -- and Apple arguably has strong incentives to reach some kind of compromise here. Perhaps one in which Apple maintains the App Store's control over iPhone/iPad app distribution, but lets alternate payment systems be used for digital content transactions.
And if such a compromise was reached, it would be far from a crippling blow for Apple. The App Store appears to have generated about $15 billion in revenue in 2019, a number that's equal to less than 6% of Apple's revenue for the year.
And even if Apple was to allow alternate payment options for content transactions, a lot of that App Store revenue probably wouldn't go anywhere. Paid download transactions would be unaffected, and many smaller developers would still probably use the App Store for in-app transactions, given that many users are still likely to prefer App Store-based payments for reasons of both trust and convenience.
All of this helps explain why Apple's stock has been largely unscathed by Epic's lawsuit. Though it's far from clear how a battle that simultaneously has legal, regulatory, PR and user experience angles to it will play out, even a worst-case scenario will probably do limited damage.
