On Friday, the judge released the long awaited judgement in the court case between Epic Games and Apple Computers. This is something I have covered a lot on this channel, go check out my other videos if you want more background on the case. Today I am going to be breaking down the judgement. This is the most important business court case of the last 10 years, because the outcome will directly impact your life as a consumer. WATCH NOW
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VIDEO SUMMARY
This judgement in this case was so shocking, I was sick to my stomach reading this because the stakes are so high. I think the judge in this case did a fantastic job in producing a very detailed 185 page document explaining the decision. The winner of this case is the consumer. You the consumer won big. Unfortunately, both Apple and Epic Games lost big time. This result is going to destroy both Apple and Epic Games.
To put the judgement in context, this court case is probably not over. Both sides are probably going to appeal the result, arguing the judge made mistakes. So there may be multiple trials after this. But regardless what happens next, this decision will stand as an important historical document on how tech companies can operate in the future.
As a recap, Epic Games sued Apple claiming they were a monopoly because Apple would not allow them to have their own purchase button on the video game Fortnite, meaning they had to use Apple’s purchase button and Apple collected a very high 30% cut of every transaction. Apple then countersued, because Epic Games put their own purchase button onto Fortnite without Apple’s approval, and Apple claimed their cut of the revenue Epic Games received.
Let us start with the results. The court found that Apple was not a monopoly. In the United States it is illegal to be a monopoly and block competition. In this case, Apple was found not to be breaking any laws. However, according to the laws of California, even if you are not breaking the law, a business is still not allowed to do something “unfair.” In this case, the judge found that even though Apple was not breaking the law, they were engaging in business activities that were “unfair.” The judge has ordered:
- Apple to allow developers to include their own purchasing buttons on their apps on Apple devices
- Apple to allow developers to communicate with customers about alternative payment methods on Apple devices through emails and push notifications
These two orders go into effect for all apps sold on Apple devices in the United States.
With regards to Epic Games, the judge did find that they breached their contract with Apple, and did not act in good faith by secretly installing their own purchase button. The judge has ordered:
- Epic Games pay Apple the 30% fee collected by Epic Games from Apple devices during the case
- Apple has the right to terminate their agreements with all Epic Games for breach of contract.
In essence, the judge decided that Epic Games was correct. Apple was engaging in anti-competitive behavior. And the judge has decided to allow exactly what Epic Games was asking for. Now software companies will be able to use their own payment mechanisms, completely cutting Apple out of their 30% commission. But in the great irony of the case, Epic Games is banned from the Apple Store. Epic has been unable to Free Fortnite. But not just Fortnite, ALL Epic Games are banned. So Epic Games won the greatest victory for the entire software industry and consumers everywhere, and yet Epic Games will not be able to participate in any of the benefits. Now Apple has the discretion to let Epic Games back on the App store, but I really doubt that is going to happen. This is devastating to Epic Games. I do not know how the company is going to survive, when it is cut off from half of the mobile video game market.
This is also devastating to Apple. Analysts are predicting that Apple will lose Billions of dollars a year because of this. The main issue became that Apple was blocking information that would benefit consumers. For instance, if a developer was having a sale on their website and selling their game for 30% off, they could not communicate that to the customer on an Apple device, because then Apple would lose their 30% cut from the customer purchasing through Apple’s system. Apple has been keeping customers in the dark so that they can maintain their profits even though they are the largest company in the world with incredibly high profit margins. The court found that it is unfair that Apple is keeping their customers in the dark about potential cost savings. It would be like going to a department store and being required to use the store’s credit card to make a purchase rather than Visa, Mastercard, or American Express. Customers should be allowed a choice on how to pay for a purchase. The order will now allow customers to see two buttons when they check out. One button will be to purchase through Apple, and the other button will be to purchase through the game developer directly at presumably 30% less. This is a huge direct cost savings to consumers overnight. This is something that consumers deserved, because in many cases these options were available to them, they just never knew about them.
Additionally, the notification order generates an even bigger impact. Before, companies could not even email their Apple customers and tell them about promotions that would take them away from paying through Apple. Now companies are free to tell their customers about deals without Apple approval, which is the way it should be. Companies can send notifications directly to their customers’ phones with deals. The court found that communication is good and “performs an indispensable role in the allocation of resources in a free enterprise system.”
The bottom line is that Apple and Epic Games lost big, and consumers won.
Let us get into some of the details. One of my big takeaways is that the judge criticizes Epic Games for acting in bad faith. The judgement makes it very clear that Epic Games’ business practices were underhanded. Epic Games planned a whole operation, using covert means and deception to secretly violate Apple’s terms of service in a coordinated publicity stunt. The rule of law is based on the idea that people engage in business using good faith. That means you need to be up front with your business partners and engage with each other honestly. The judgement does not reward underhanded behavior, and Epic Games will suffer the consequences of breaching their contract. I think what the court wanted to see, is for Epic Games to have filed their lawsuit and argued their case without breaching their terms of service.
Another big takeaway was that we got to see a lot of secret financial information during this trial. A key part of the decision turned on finding out the profitability of Apple’s App Store. Throughout the whole trial, Apple kept maintaining that it was impossible to determine the profitability of the App Store. They claimed that the App Store was integrated into the overall company and there was no way that they could pull out the finances of a separate unit. The judge did not buy that explanation, as it is ridiculous. As a business, you should never go into court and tell the judge, “We have no idea how much money we make.” Because the judge will then decide for themselves, which they did in this case. The judge looked at Apple’s finances and sided with Epic Games’ analysis that they were making around 75% operating margins on running the Apple App Store, which is an enormous operating profit. Apple was also not able to justify why their profits were so high. They made the argument that their profits were paying back R&D investments from previous years, but they never provided any analysis on why those investments justify a 30% cut of every gaming transaction. The fact that Apple is incredibly profitable and the largest company in the world drove the court’s decision to find their actions unfair.
One of the disturbing takeaways is that profits largely come from video game addiction. The judgement does not call it addiction, but Apple claims that “game spend is highly concentrated” among a few consumers. Looking at the numbers. Gaming apps account for 70% of all App Store revenues, and this revenue is generated by less than 10% of App Store consumers. I do not know who is spending $740 on video games. That is $62 per month. Most of that is in-game, impulse purchases. The strategy seems to be to give people apps for free in order to get them out to as many people as possible. Of those customers, find the video game addicts, and then ping them constantly on their phone so they keep giving you money. This is different from how most people think of a normal business model. It is disturbing to think that a game like Fortnite is designed to target addicts. This small portion of consumers is essentially funding the entire Apple App Store which is mostly free. The judgement even writes in a footnote, “these consumers frankly appear to be engaging in impulse purchasing and both parties’ profits from this sector are significant. This specific conduct is outside the scope of this antitrust action, but the Court nonetheless notes it as an area worthy of attention.”
Another surprising revelation, is that Epic Games laid out their strategy for the next twenty years. It revolves around a concept called the Metaverse. Tim Sweeney, the CEO of Epic Games, believes that with the creation of Fortnite, he has started to create the Metaverse. The Metaverse is a virtual world where players can interact. The goal is that the Metaverse will become so advanced and engaging, that people will prefer to perform daily tasks within the virtual world rather than in real life. For instance, you would rather hang out with your friends inside of Fortnite rather than hang out with your friends in real life. Tim Sweeney actually references the movie directed by Stephen Speilberg in 2018 called “Ready Player One” as an accurate description of the Metaverse. In the movie, everyone in a futuristic society spends most of their daily lives inside of a video game. The video game becomes more real to them than real life. This is the Epic Game’s strategy, which they could not implement while Apple maintained a 30% cut of all their revenues.
Unfortunately, I doubt that Tim Sweeney will succeed in creating the Metaverse now that his company is cut off from half of the world’s mobile devices. However, I do think that the Metaverse will happen. It is just like social media today. We find ourselves at a moment where you cannot do business unless you are on Facebook. People cannot find you. And if you get kicked off Facebook, you are essentially out of business. The Metaverse could likely become the next thing. If your business does not operate within this new virtual world, you will not be able to reach customers, and you will essentially be out of business. This is relevant because we are talking about Monopolies, and the Metaverse will be the monopoly of tomorrow. The problem is that reality is free. You don’t have to pay someone to be born. But you will have to pay someone to exist in a virtual world, because someone else owns it. In the future, everyone will be forced to exist inside a virtual world like Fortnite, and if you want to wear clothes, you will have to buy Fortnite skins.
This brings me to my final point. This court case is an important moment in business history. It is ironic that Apple had their landmark case against Microsoft in 1994, 27 years ago. At that time, Apple was the smaller company going up against the market dominant company Microsoft. Here we are, in another court battle, but now Apple is the market dominant company against Epic Games. It might just be the case, that 30 years from now, we will see another court battle against Epic Games and the metaverse. We see a pattern in history of new technology being developed, and then the courts deciding how business can be conducted in these new markets in a fair way. The court spoke loudly and clearly in this decision that in the market of today that consumers will be protected, and it is our hope that the trend to maintain protections for consumers will continue into the future.
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Neither Zach De Gregorio or Wolves and Finance shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.