Epic vs Apple: The Battle for Power

Transcript

0:00 Speaker A: Hi, I'm Sander and today I want to discuss with you the battle between Apple and epicave specifically related to Fortnite. Speaker A: What are the true motives behind it and what could be the larger implications to the digital economy? Speaker A: So it all started last year when Fortnite launched an update that actually had a hidden bypass for Apple payment systems. Speaker A: So they offered a direct payment that was cheaper, that was clearly going against Apple's terms of service.

0:25 Speaker A: So they've removed Fortnite from the App Store overall, after which Epic Games was ready with a PR stunt. Speaker A: Free Fortnite for following the 1984 campaign that Apple had run before. Speaker A: And they also formed a coalition for App fairness, bringing together others who are fighting against the App Store restrictions. Speaker A: Apple at the same time also launched a PR campaign to support small business and they all were still going against each other. Speaker A: Where Epic Games is saying that they're building a walled garden and Apple is saying they're just doing it for their own benefit to make themselves look good and make Apple look bad.

0:57 Speaker A: So why is Epic suing Apple? Speaker A: What are they saying? Speaker A: Number one is that they're limiting consumer choice, that they don't allow other marketplaces, other app stores on the platform. Speaker A: Number two, that they're restricting developers to offer alternative payment methods or alternative solutions within the app and they're not giving a full access to the development ecosystem. Speaker A: And number three is that they're forcing a 30% tax through that on all developers.

1:22 Speaker A: So what's Epic's proposed solution? Speaker A: What do they want to get out of that? Speaker A: Their ideal scenario is if they can put Epic Games store, a third party store on other platforms like iOS, they could also allow sideloading apps to the platform and also offer third party payments so they can offer those lower cost solutions for their customers. Speaker A: What Apple is saying on higher level is that hey, there's so many substitutes, you don't have to use iOS and App Store if you don't want to.

1:48 Speaker A: They're also saying that they're offering great access to developers already through all of the APIs that they have available. Speaker A: And they're doing it in order to provide a secure and safe place for their consumers. Speaker A: And regarding the fees, they're following the same fee structure as everybody else in the industry with 30% with integrated payment solutions into the operating system. Speaker A: So let's dive into each one of them and see what is it all about, what the substance is or limited choice.

2:16 Speaker A: As I said, Epic is saying that they're building a walled garden to lock in consumers. Speaker A: That's specifically related to buying all of the content on the platform that they can contact with them or even something like imessage service that you can't take to other platforms. Speaker A: Apple at the same time is saying that hey, there's great market substitution out there that you can use. Speaker A: IPhone is just one device and one platform that is one way of paying for the service, but you can use other ways of monetization and you can use all the other devices.

2:44 Speaker A: The second thing on limited choice is that there's Epic Games is saying there's very few switching after they're so locked into the platform. Speaker A: They're showing only 1% of consumers switching from the platform. Speaker A: And Apple is saying no, almost 95% of consumers are using multiple devices, multiple platforms, they're multi homing their experiences across different devices. Speaker A: And also they're saying that they're limiting choice for the security and safety reasons.

3:12 Speaker A: But actually they're very inconsistent in their app review processes and there's so much bad stuff going through. Speaker A: And they're showing specific examples from the emails and also showing how developers are frustrated about Apple's inconsistencies. Speaker A: But Apple is saying we're super consistent. Speaker A: We got more than 500 people with specialists reviewing the apps and we got more than 1.8 million apps available and 40% of the submissions get rejected.

3:38 Speaker A: The second thing that Epic is saying that there's the developer restrictions in place. Speaker A: So let's say what do both have to say against that? Speaker A: Number one, Epic is saying that they're unable to deliver alternative payment methods which is against Apple's terms of service. Speaker A: And they're saying that Apple is doing that purely in order to get other developers to use their payment services versus others. Speaker A: Apple is saying that no, actually this is enabling innovation and creating network effects.

4:05 Speaker A: Apple was the one that really brought in app payments into masses and enabled a new ecosystem. Speaker A: And they're saying that Fortnite would have never happened without in app payments being available for them and other developers. Speaker A: Number two on developer restriction they're saying that those security Epic is saying that the security mechanisms that are insisting on an iOS actually can be replicated on IO can be replicated similarly as Mac OS.

4:32 Speaker A: So on Mac OS you can sideload app, you can have Steam app stores available. Speaker A: And they're saying that all of the same functionality on operating system level in the kernel can be built in and ensure that all developers follow that. Speaker A: Also on iOS so they could allow other payment methods and sideloading apps by doing it completely safety. Speaker A: And Apple is saying no, no, no, we need an integrated ecosystem to ensure security, privacy and reliability.

4:58 Speaker A: And therefore we have very few infections compared to someone like Android or other more open platforms that are not fully integrated ecosystems. Speaker A: In addition, Epic is saying that Apple is giving a preferential access that is only limited to Apple that's specifically related to when you're buying books on the platform that you can't tell elsewhere or imessage that doesn't work on other platforms and other examples that I brought in in their documents app woising on the other hand, no, we brought tremendous access to Apple IP on the platform.

5:29 Speaker A: There's more than 2500 APIs, application programming interfaces that developers can take and make use of that we actually enabled a lot of developers rather than restricting them. Speaker A: You can see the contrast moving on to the last point around forced tax and payment methods, around going only through the Apple in app payment route and forcing the 30% tax. Speaker A: EPIC is saying that actually Apple is making outsized operating margins compared to everybody else in the industry, getting more than 70, almost 80% margins on their product compared to everybody else who's hovering less than or around 20%.

6:06 Speaker A: Apple is saying no. Speaker A: This is actually very consistent with industry before them who was charging 30% for example the Microsoft store or other stores and also other stores that come after Apple like Apple, Amazon Store or Google Play store that all follow the suit on 30% that is consistent across the industry. Speaker A: There's nothing unique about Apple in this case. Speaker A: The Epic is saying that there's no alternative payments accepted, that consumers are locked in only using Apple payment solutions and in app payments.

6:36 Speaker A: And Apple is saying no. Speaker A: Actually there's cross wallet play, meaning you can actually go and buy your credits on let's say PlayStation or Xbox and use them the in game credit on iOS devices, those coins, those virtual coins. Speaker A: And apparently as Apple is reporting, Fortnite is getting only 7% of their revenue through iOS and vast majority of that, almost two thirds is coming from Xbox and PlayStation platforms for Fortnite.

7:03 Speaker A: So why are they brought into the mix? Speaker A: What's at stake? Speaker A: Why are those companies arguing between each other? Speaker A: Overall there's a larger objective in place. Speaker A: Well, Epic wants to build the Metaverse. Speaker A: They want to be the next iOS. Speaker A: They want to offer the music app, the artists, the radio apps, 3D model stores and painting apps and web browsers all within the EPIX universe. Speaker A: While at the same time Apple's bigger objective is to grow their services revenue, which is inherently much more profitable and higher margin business for them and also helps them diversify away from their dependency on Hardware sales.

7:38 Speaker A: There's Epic Games revenue wise is making around 5 billion last year and Apple made around 15 billion estimated in App Store commissions. Speaker A: And for Apple, 90% of that revenue is actually games. Speaker A: So there's also a lot of money in addition to the larger objective in play. Speaker A: And if you look at the upside, let's say it all went down from 30% to 3%, then the potential upside to someone like Epic games could be 2 billion additional a year.

8:05 Speaker A: So it sounds like a worthy cause to fight for. Speaker A: The potential downside for Apple actually can be huge. Speaker A: They could lose. Speaker A: If they go down to 3%, they can lose almost more than 13 billion of their revenues. Speaker A: So it's a huge chunk of money that is at stake, not just to talk about the strategic objectives, why they're doing it. Speaker A: Actually discussing lower fees has been on the table for a while. Speaker A: Epic is showing several examples. Speaker A: Both are using Steve Jobs quotes, by the way, on both sides of the aisle.

8:33 Speaker A: Epic is saying that Steve Jobs said that they love free apps and they want free apps to enrich the iPhone experience because that helps them to sell more iPhones the more apps they have available on the platform. Speaker A: And that actually they considered lowering the margins to 80, 20 split or something even lower and, and still keep it profitable. Speaker A: At the same time, Apple is saying no, no, no. Speaker A: There's actually two big forces. Speaker A: They want to keep the open platform for developers.

8:58 Speaker A: At the same time, they want to protect the consumers that are coming to on the platform from the malware and keep them safe on the platform. Speaker A: And that is no easy task. Speaker A: And that's why they need to keep charging those fees. Speaker A: Apple has actually made some special treatments over time. Speaker A: As we mentioned, they did the small business program where actually impacts 98% of developers. Speaker A: It has a huge impact on the number of developers, but only 5% of the revenue.

9:24 Speaker A: So it's a true PR piece just to go out there and say, hey, until your first million, you only have to pay 15% tax to Apple. Speaker A: They also have a special program for video streaming services such as Prime Video and Canal plus for example, who can use their own payment methods and only pay 15% using Apple payment methods. Speaker A: Apple is saying that also if you don't like the monetization that they're offering, you could also go with others like for example, selling physical goods and services that have no tax on it, or in app ads or in app promotions, or even using web app services.

9:56 Speaker A: By the way. Speaker A: None of them I don't think are realistic because developers have really gained a lot from Having this direct, seamless, frictionless access. Speaker A: What's my personal take or what can we learn from all of that? Speaker A: Apple prides themselves on having built the great hardware, software and services integrated ecosystem from all the way that IO, iPhone to the iOS to the app stores and payment solutions and customer management and leaving very little for the developers to have control over.

10:23 Speaker A: That has caused them to be massively successful in transforming the way developers are making money on mobile devices. Speaker A: Consumers have a trusted and frictionless way to interact and transact with developers and developers have a seamless way to monetize their app and enable distribution access to those consumers. Speaker A: I think the bigger question here is how do the parties see each other? Speaker A: Epic is looking at Apple as hey, they're just a payment processor.

10:49 Speaker A: Of course they want to push that view because they want to be themselves a platform like iOS and therefore they're saying, hey, why Visa, MasterCard and Stripe are only taking 2.5 to 3.5% of their share, why Apple is taking 30% of the share, there should be a way to have those available on the platform. Speaker A: And Apple themselves is saying no, we're actually much more than a payment processor. Speaker A: We are a distribution access to our 1 billion devices. Speaker A: We enable discovery and we are there to develop your apps to those consumers.

11:18 Speaker A: We also enable monetization through building those APIs, frictionless payments. Speaker A: We also are going to help you lower your churn because the credit cards are always up to date that are associated with your Apple account and we're also going to take care of the customer management for you at the same time. Speaker A: I think this case will however be mostly around the market definition, around how Epic is seeing is narrowly about mobile transactions. Speaker A: And if you look at that then Apple controls about a half of the US smartphone market, therefore defining monopoly in that market.

11:49 Speaker A: And that's a clear and blatant example everybody that Apple is therefore abusing their power and implying higher fees. Speaker A: If you look at Apple's definition of market, then they're saying this is all gaming transactions that are happening and therefore they have quarter or about a quarter of those transactions. Speaker A: Therefore there's no monopoly and there's no need to penalize Apple and there's no way for Apple to use their market power at the same time while this court case is going on.

12:17 Speaker A: I think there is going to be some solution that might come from this court case or also might come from legislation. Speaker A: Let's see what we think Epic games solutions are viable and which ones are not. Speaker A: I don't think the third party app Stores would happen anytime soon, at least because Epic itself is pushing this as to be an app store that's going to include competitive apps to Apple's own ecosystem.

12:43 Speaker A: But I do think that there will be potential to have in app third party digital stores that Apple will allow on the platform which enrich the app experience itself rather than be a substitution for the app store delivery. Speaker A: However, I think this is totally possible the same way as on the Mac you have the Steam app Store, which is utilizing and sharing other experiences that are not necessarily available on the Mac. Speaker A: App store itself and still providing the same level of security as was shown previously is possible to also do on iOS.

13:13 Speaker A: I think it's technically possible and I think it could potentially enable much larger growth for developers and Apple themselves in building a much richer ecosystem. Speaker A: I don't think that sideloading apps will however happen also anytime soon because that's a massive sales argument for iPhones is to be this safe, secure and privacy friendly device and enabling sideloading, however, it could potentially be done in a safe way. Speaker A: It still opens up this huge hole of vulnerability for the platform and also the key sales argument for iOS devices.

13:45 Speaker A: I do think that third party payments, if sideloading is not going to happen, will have to come at some point. Speaker A: That Apple will have to enable developers to allow their own payment processing. Speaker A: Whether that's going to be through web views and not in the operating system. Speaker A: It's not going to be as frictionless so that developers can choose, hey, do I want to pay X percentage for Apple? Speaker A: Let's say it ends up being 20% or want to pay, let's say 10% to someone else who's going to offer that Through Browser or 3% if you're going to build it yourself.

14:10 Speaker A: So I think that will come to the platform. Speaker A: And another thing that will I think have to come at some point is a deeper or level access between developers and Apple themselves. Speaker A: So if you pair your iPhone or your Apple AirPods to your iPhone, it's all seamless, very easy experience. Speaker A: I do think that in order to enable a level playing field between developers and Apple themselves, they would need to enable the same level of access across all of their products.

14:37 Speaker A: All of it is far from being resolved. Speaker A: In addition to the court case, there's also investigations happening from governments. Speaker A: The European Commission is investigating Apple's behavior against Spotify, putting them into an antitrust position. Speaker A: And in their preliminary findings they found that Apple has used their market power against Spotify, implying a fee on Spotify streaming service while pushing their own pre installed service on their own operating system, putting that into a beneficial position.

15:04 Speaker A: At the same time, the US own Senate as well as the House committee are investigating app stores like Apple and Google against their anti competitive behavior. Speaker A: In addition, Epic Games themselves is also suing Google against the same arguments that they're doing with Apple. Speaker A: And for Epic, of course, it's not just about winning, but it's also creating the narrative for their own company to be this, the good, good part, the good cop in this mix and showing that how all those big corporates are bad with the goal of themselves building a platform for the future and their own metaverse.

15:38 Speaker A: So clearly there is a lot in play, a lot of lot of things in motion that are not just related to Epic, but also the antitrust cases that are happening around the world. Speaker A: And I think one in the US Senate doesn't capture better than the recent hearing from Mr. Blumenthal. Speaker B: Let me just say after listening to my colleagues, I'm tempted to say Google and Apple are here to defend the patently indefensible.

16:12 Speaker B: If you presented this fact pattern in a law school antitrust exam, the students would laugh the professor out of the classroom because it's such an obvious violation of our antitrust laws. Speaker A: Thank you very much for watching. Speaker A: I hope you enjoyed this video. Speaker A: If you did, please give it a thumbs up and let me know in the comments. Speaker A: What kind of changes would you impose against these companies and who might be the winner in this battle between Apple and Epic in the court that's happening right now?

16:44 Speaker A: If you'd like to see more of those videos on business and strategy, just subscribe to the channel and I hope to see you next time.