One of the biggest news stories right now is the legal battle between Apple and Epic Games. Just this week, we saw the two companies appear in court. I will be breaking everything down for you in this video. Just to be clear, I am not a legal expert. I am accountant, and I do know about business history. By the end of this video, I will be explaining why Epic Games will ultimately win in court. But my main goal to explain how important this court case is. I do not think people realize the extent of what is going on here. The outcome of this trial will impact everyone for the rest of their lives. WATCH NOW!
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A good place to start is explaining monopolies. The central idea in business is that competition between businesses is an effective way for supply to meet demand. Competition is good for society. This works most of the time, however there are certain situations where business breaks down and supply does not meet demand. In those situations, customers cannot get goods at competitive prices. This problem usually occurs in areas of either extreme poverty or extreme wealth.
Let us look at some examples:
- A soup kitchen for poor people. No businessperson will set up a soup kitchen, because the customers have no money to pay you. That is why we have non-profits that run soup kitchens. Because unless society steps in, business does not solve the problem of extreme poverty.
- Extreme wealth. If you have enough money, you can buy up all of certain resource, and then, since there is no competition, you can charge whatever you want, and take advantage of the less fortunate.
We just saw this problem happen in the US during the Pandemic. Do you remember when you could not buy toilet paper? Supply was not meeting demand. People went around and bought up all the toilet paper and all the hand sanitizer. People had garages full of supplies, that they were selling on Amazon for extreme prices. Meanwhile, normal consumers could not get the items they needed to survive, while the people who had monopolies on toilet paper were getting rich. Law enforcement ended up stepping in and forcing the price gougers to donate the supplies to local hospitals, and they ended up losing all their money.
This is the exact issue we were talking about with monopolies. When you could not buy toilet paper, there were bad actors in the business world sitting on garages full of supplies. For these situations, we have decided as a society that there should be limits on monopolies. Large businesses should not be able to use their market power to beat down competition in a way that hurts consumers. In the current situation, we are going to be looking at Apple. Does Apple do business this way? Does Apple use their market power to beat down competition in a way that hurts consumers?
In the US, monopolies can be taken to court under the Sherman Act. This is a Federal Law that was passed in 1890. The Sherman Act makes monopolistic behavior a felony, punishable by up to $100M. Just so you understand what is going on, Epic Games has taken Apple to court and accused them of committing a felony.
This is not to say that all monopolies are bad. Many monopolies exist in the US today, like power utilities, water utilities, or cable companies. You want one company managing all the power lines for a city. But in these situations, monopolies are highly regulated to ensure they are not taking advantage of the public. We need to make sure these powerful companies are not cheating us, so we regulate them.
Several famous court cases have occurred since the Sherman Act where limits have been placed on monopolies for the good of the consumer.
- Standard Oil Company (1890s) owned all oil refineries. This was a wealthy company that bought up all the resources and then charged outrageous prices. The courts broke the company up to allow for competition.
- Columbia Steel (1950s) This was a massive steel company that was formed by a series of mergers of smaller companies which created vertical integration of a whole industry. This is interesting because the courts decided this was not a monopoly. And so, following the court decision, the US passed stronger laws against monopolies to prevent these situations.
- Paramount Pictures (1950s) In the 1950s, film studios also owned the movie theaters. These companies would both create the content and then distribute it. This meant that no independent filmmakers could get their films out to the market, because the big studios owned everything. The courts broke up the film studios and decided they could not also own movie theaters. This court decision is the reason you can watch independent films today.
- Most recently we have Microsoft (1999). Microsoft had Internet Explorer and was trying their best to prevent competition from the Netscape browser. Since Microsoft owned both the operating system (Windows) and Internet Explorer, they could push Netscape out of their “walled off” ecosystem. Microsoft ended up settling and agreed to stop any anti-competitive actions against other internet browsers. It is because of this court case, that we are all able to use Google chrome and other browsers on windows computers today.
All these cases are relevant when you start looking at whether we should place limits on Apple’s control over the market.
So, what happened in this case? Why are we in court.
On 8/13/20, Epic Games issued a new version of Fortnite that included a new button. This button allowed people to use other payment options besides Apple. Epic did not tell Apple they were doing this, and they knew Apple would not agree to it. Apple took Fortnite off the app store. So today, consumers can no longer play Fortnite, the largest video game in the world, on Apple mobile devices. But Apple took the battle further. Apple banned, not just Fortnite, but every other Epic software, and banned all other software companies in the world that use Epic’s graphical software called “Unreal Engine.”
Apple puts the blame of their actions on Epic Games saying “[Epic] knew that the consequence of cheating the system and blatantly violating Apple’s contracts was that its ‘apps will be removed from the store’ and that Epic would be ‘expelled from the Developer Program,’ not only as to Fortnite but to other projects with Apple, including Unreal Engine.”
So just to put into perspective what Apple has done here. Unreal Engine is used by millions of developers around the world. Millions. All kinds of different software runs using unreal engine, including software for brain surgery, space exploration, and sports broadcasting. So because Apple’s actions, someone’s brain surgery is not going to happen. Because of Apple’s actions, a rocket ship will not launch to space. Because of Apple’s actions, there will be sports broadcasts we will never get to see. Apple is taking away sports. And Apple did this because Epic Games added a little button into Fortnite. I find this absolutely disgusting. Apple is an example here of business at its worst. Epic Games is trying to resolve an issue with Fortnite, and Apple is putting people’s lives at risk. What blows my mind, is that Apple has written up all these threats against the entire software industry in the court documents they filed with this case. Apple, what are you doing? Apple needs to fire their entire legal team. Apple’s own court documents are actually making Epic’s case. Apple is using their market power to beat down competition in a way that hurts consumers. This is exactly the type of behavior that the Sherman Act was enacted to stop.
Epic Games then requested a restraining order against Apple to allow Fortnite and the Unreal Engine to remain on Apple devices until the end of the court case. The judge refused to give a restraining order for Fortnite, but the judge issued a restraining order forcing Apple to keep Unreal Engine on Apple devices.
Last Monday 9/28/20, the companies were in court. No decisions were made, but the judge was highly critical of Epic Games, and said “There are people in the public who consider you guys heroes for what you did, but it’s not honest.”
What are the main issues here? There are two separate parts of Apple that are the issue:
- Apple App Store
- Apple Payment Processing
We will look at these one at a time. Is Apple a monopoly in the Apple App Store?
If you are a software company, you cannot put a software application on an Apple mobile device without going through the Apple App store. This is very different from Apple’s own computers. If you own a MacBook, you can go directly to a software company’s website, download software, and completely bypass the Apple App Store. But mobile devices (iphones and ipads) operate in a “walled off” ecosystem, which means that no software can be downloaded unless it goes through Apple. Any software that is purchased through the app store pays a 30% fee to Apple. This 30% fee happens, not just at the time of the initial app purchase, but anytime a purchase is made later through the app. So, 30% of all revenue made by software companies forever, must be paid to Apple for this 30% Apple Tax.
This 30% only applies to digital products. Payments made for services like Uber, or goods like Amazon, do not have to pay the 30%. Only software companies.
Epic Games argues that this is anti-competitive. Software companies have no choice, but to go through the App store and pay the 30% Apple Tax if they want to be on mobile devices. Epic has a competing product, the Epic App store, which they have been running for years at only a 12% fee. It runs great. It is much cheaper for consumers, and it is currently running on many people’s MacBooks just fine.
Let us look at this from Epic’s perspective. They have this great product, that is cheaper, and they cannot get it to consumers. Because the only way to the market is through Apple or Android phones, who both have App stores that charge 30%. Epic Games is also suing Google for their anti-competitive behavior.
Apple counters this argument by saying that it is their right to maintain products with a “walled off” ecosystem. If you do not like it, you can just go make software for someone else. But there is nowhere else for Epic to go. They have an incredible product, and they cannot get it to consumers.
The biggest problem with Apple’s argument is that Apple is the largest publicly traded company in the world with a market capitalization of $2T. If Apple was a small company, or a medium sized company, they can have whatever “walled off” environment they want. But when you are the largest company in the world making tons of money, you have a greater responsibility not to act anti-competitively. You cannot have a business model that blocks out all competition. You cannot block your customers from using anyone else’s products, even though they are better and cheaper. Apple cannot get away from the fact that they are the largest company in the world.
This situation has been made worse by the pandemic. When you look at computer users and mobile users, more people are using mobile phones as their primary computer. Less people are using computers. The pandemic has sped up this transition. We are all sitting at home, purchasing things on our phones. Software companies are making software for both markets. In the computer market they are paying 0% Apple Tax, but in the mobile market they pay 30% Apple Tax. As the computer market is shrinking, software companies are going out of business. Because remember Apple’s business model. Apple takes 30% of all software companies’ revenues forever. Apple, already the biggest company in the world, is destroying the software industry so that they can make more money. And software companies have no other choice to pay, because there is no other way for them to get their products to customers without going through Apple. This is exactly the type of behavior that the Sherman Act was enacted to stop.
Let us look at Apple’s Payment Processing. Is Apple a monopoly by only allowing Apple Pay to be used on mobile devices?
All Apple payments are processed using the 30% Apple Tax. In comparison, the standard processing fee in the industry is 3%. Now Apple argues in its court documents that this is an unfair comparison. The Apple Tax is not just a processing fee. The Apple Tax is part of Apple’s unique business model that provides them a return on their investment in R&D.
There is problem with Apple’s argument. Apple is the largest company in the world. I know I keep bringing this up, but it is true. When you are the largest company in the world, you have a bigger responsibility to show your customers that they are not being cheated. And I am sorry, but this certainly looks like we are all getting screwed by Apple. You cannot hide your processing fees by rolling it into some sort of return on investment fee. If you are a small business, you can have whatever unique business model you want, but not when you are the biggest company in the world. I am sorry Apple, but you do not get to do this.
Let us be brutally honest about what is really going on here. This Apple Tax is completely arbitrary. Everyone in the software industry knows this because they do not pay anything on MacBooks. Apple needs to have a business model just like every other technology company where you make your profit when you sell the device. I do not know if you have noticed, but Apple iPhones are expensive. The iPhone 11 Pro sells for $1,000. Apple should make its profit off your $1,000 phone, not by taking 30% of the revenue of software developers forever. The only reason they are doing this is because they can, and it is not fair. The people getting hurt by this is the consumer. You, watching this video, are paying the price when there are so many other cheaper options out there that are being blocked from the market.
So, this is the basis of Epic’s arguments. Apple is using their market power to beat down competition in a way that hurts consumers in both areas:
- Apple App Store
- Apple Payment Processing
In both areas, Epic Games has products that provide customers alternatives that are better and cheaper, but Epic is unable to bring the products to the market. Epic is not asking for any monetary damages, but simply the ability for themselves and the rest of the industry to compete in the marketplace.
Apple of course disagrees with this and has filed court documents suing Epic Games and asking for damages. Apple claims that Epic breached their contract and has acted in bad faith by secretly releasing the Fortnite update, pre-planning the court case, and issuing PR campaign to smear Apple.
But Apple’s argument has a flaw. If Apple was engaging in a felony, like Epic is alleging, then the contract is invalid. You cannot have a legal agreement to do something illegal. So, from Epic’s perspective, they were not breaking any legal agreement.
I think Apple backed Epic Games into a corner, with an illegal contract, and Epic had to act. Epic had to release the Fortnite update. Epic has been asking for this and speaking out about this unfair treatment for a long time. Apple does not listen. If Epic sued Apple without showing that there was a viable alternative, Apple would argue that what Epic was proposing was impossible. Apple would argue it would destroy the ecosystem, and be too difficult, and would not work. What Epic did, was showed the world that it could be done, and it would be so easy. Epic showed us what the world could be like. Epic showed us that we could have choice and competition, that we do not have to live a life under Apple’s oppression. Epic showed us that we do not all have to continue to pay the 30% Apple Tax while the largest company in the world continues to get bigger.
I think Epic Games is on the right side of history. I think they stood up for what is right, and we should be congratulating them. Apple is so big, that Epic is the only software company with enough money to say anything against them. Epic is the only person who can stand up and say, “Hey, what Apple is doing is wrong.” Everyone else is too scared and too small to say anything. Epic Games has now made it possible to speak up. In fact, since the court case, more and more software developers are now speaking out against Apple. They have joined together in a group called the “Coalition for App Fairness” to fight against Apple’s app store fees.
Apple still says, none of that matters. Everyone signed a contract. Everyone in the industry agreed to Apple’s terms of service. All you people in the public clicked that accept button. Everyone agreed legally that Apple controls everything and gets the money. You can’t break a contract, right?
Apple said something interesting thing in their court documents. They offered an olive branch to Epic Games. Apple said “The offer to cure remains open. If Epic returns to compliance with Apple’s contracts and policies, Fortnite would be available, within days…” Pay attention to what is being said here. Apple is not offering to compromise. Apple is telling Epic “Just go along with it.” This is a classic business ethical dilemma, and it is written in Apple’s court documents. If someone is committing a crime in a business, this is what they say to you. “Just go along with it. There is a table over there full of money that you can have if you just go along with us committing a felony. I hear you have concerns that we can address later, but just go along with it for now.” Epic Games is doing the ethical thing here by standing up and saying this is wrong and they do not want to be a part of it.
Now just because Epic is on the right side of history does not mean they will win the court case. So why will Epic Games in court?
This area of law is governed by a legal concept called the Rule of Reason. The Rule of Reason says that if a normal person looks at a situation, they need to find it reasonable.
So, let us do this test right now. We are all normal people. Let us look at how Apple does business and see if it is reasonable.
- Apple’s App store charges a 30% Apple Tax for all software revenues forever on mobile devices while there is a 0% charge on Apple MacBooks. That does not sound reasonable.
- Apple hides their transaction fees in the 30% Apple Tax, while the industry standard for transaction fees is 3%. That does not sound reasonable.
- Apple runs their App store with a 30% fee, while blocking competitors like Epic that could offer software at only a 12% fee. That does not sound reasonable.
- Apple threatens millions of software developers around the world, by banning the Unreal Engine, putting people’s lives at risk, so that the largest company in the world can maintain their ludicrous 30% fee. That does not sound reasonable.
None of this is reasonable. It is pretty obvious that Apple is doing something shady here. Just the fact, that the largest video game in the world, Fortnite, is no longer available on Apple mobile devices is a huge blow to consumers. Kids all over the world rely on Fortnite as a positive part of their lives, and Apple took that away from them over a 30% Apple Tax. Kids all over the world are crying because of Apple. It is one thing for Apple bully the software industry, it is one thing to charge a ridiculous 30% tax, but you cannot do all of that and make all of our kids cry. Apple, you are making all of our kids cry. Apple has a responsibility as the largest company in the world to not stifle competition. Since the pandemic, we are all locked inside our houses and we rely on our phones to do everything in our lives. Meanwhile, Apple is raking in the money with their 30% Apple tax on all our transactions. We the consumers should be protected here, and that is precisely what the Sherman Act was designed to do.
So, I think it is pretty obvious that Epic Games is going to win this case. However, that is not really the issue. The real question is what is going to happen once Epic wins. What is the court going to do to correct the situation? What typically happens, is the court will break the company into pieces to ensure they stop their anti-competitive behavior. So, it is possible the court may order Apple to break the App store and the payment processing into separate companies that are no longer part of Apple. Then of course, the court can also order Apple to change their operating system for mobile devices to allow consumers the choice to download software and App stores directly from software companies websites, effectively bypassing Apple’s payment system, just like what happens on Apple MacBooks.
I hope you found this summary helpful. I know there is a lot of different opinions on this, so let me know in the comments below what you think. Are you Team Apple or Team Epic? Leave it in the comment section below. But I will tell you right now where I stand. I stand with consumers, I stand with software developers, and I stand with all you gamers out there, and I say #FreeFortnite.
Leave a comment down below letting me know what you think!
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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.