(upbeat music)
- On August 13th,
one of the biggest games in the world
disappeared from the App Store.
Fortnite had implemented its own in-app payment system,
bypassing Apples in house payment network
and violating the App Store's rules.
But when Apple followed through on its policies
and kicked Fortnight off the store,
the company got a big surprise.
Fortnight had a 65 page lawsuit
set to file as soon as they got banned,
complete with an extended video
parodying Apple's iconic 1984 commercial.
- [Announcer] Ooh yes,
they have given us their songs,
their labor,
their dreams.
- Epic set a trap,
and Apple walked right into it.
Epic pulled the same trick on Google too.
So, it's gonna be taken on both major App Stores at once,
but there's way more at stake here
than just Fortnight.
With the App Store,
Apple revolutionized the way we distribute software
to mobile devices.
Google followed that model on Android.
And the two companies have been at the center
of mobile software distribution ever since.
It's an incredibly powerful position to be in
maybe too powerful.
But to really understand how that power works,
you gotta look at the big picture.
25 years ago,
if you want to buy this hot new game called Doom,
you had to go to the mall
and get a physical cardboard box
with the game inside it.
You got it at a regular store that looked like this.
And that store was probably charging
a regular retail markup of around 50%.
Add in the cost of physically fabricating the boxes
and shipping them out to all the malls all across America.
And the share that was going to developers
was actually pretty small.
Fast forward to 2020,
and if you wanna buy this hot new game called Doom,
you go to an online portal like Steam
or the PlayStation store,
which will usually take 30% of whatever you're paying.
The way those portals see it,
it's a great deal compared to how we used to do things.
They're taking a smaller cut
and because it's all digital
publishers have to spend a lot less money
getting out their prop.
Apple basically made this shift happen,
and it's a huge part of the legacy of Steve Jobs.
- What we're gonna solve that problem for every developer,
big to small,
and the way we're gonna do it
is what we call the App Store.
- It's made it easier and cheaper for developers
to get their work out
and resulted in tons of new options for iPhone users,
as Apple sees it that's well worth the 30%
and Tim Cook made this exact point
at the Tech Antitrust hearing in July,
when he was asked about the so-called Apple tax.
- So to zoom out and to give you some historical context
on this,
when we entered the App Store market,
the cost of distributing software was 50 to 70%.
And so we took the rate in half
and to 30% and we've held it
in that same level over time or lowered it.
- But what are these stores actually doing
to earn their 30%.
Back in 1995,
electronics boutique had to cover rent,
employee salaries and inventory management.
But the only real expense for the App Store
is vetting the games and keeping the servers running.
There were $50 billion in App Store sales in 2019,
which means Apple brought in around $15 billion in revenue,
just from the App Store,
maintaining the digital store only costs a fraction of that.
It gets even trickier,
now that most software isn't a onetime purchase,
instead of buying Photoshop once
you're paying a little bit each month.
Free to play games like Fortnite
have become hugely popular,
making money off a virtual items sold within the app.
Apple takes its 30% on subscriptions
and in app purchases too.
But with so many services existing
across multiple platforms,
it leads to some really strange situations.
Right now you can't buy a book on the Kindle app.
You have to buy it on the web
and then read it on the app
just because they don't wanna pay Apple's extra slice.
The same goes for Spotify,
which you used to allow purchases from within the app,
but would charge an extra $3 just to cover Apple's cut.
Wherever they can,
developers are moving the point of sale off of Apple devices
just to avoid Apple's transaction fee.
Suddenly that 30% starts to look an awful lot like attacks
paid to Apple for the privilege
of distributing software to Apple devices.
Apple controls the platform,
you can't put software on an iPhone without them.
So, if you wanna play on their platform,
you gotta pay the tax.
At least with portals like Steam or the Epic games app,
you can shop around between stores,
but for iOS devices,
the App Store is the only game in town.
There's no jail breaking,
no side loading,
you pay the 30% or you can't be on the iPhone.
This is where Epic's lawsuit comes in.
Epic is accusing Apple of violating the Sherman Act
saying the company unlawfully maintains
a total monopoly in the iOS app distribution market.
That might sound weird.
Of course, Apple has a monopoly over Apple products.
But there are enough third party developers on the App Store
that it's a serious charge.
The way Epic paints it,
you can't make iOS software,
if you're not on the App Store
and you can't be on the App Store,
if you don't use Apple's in-app payment system.
The payment system is important
because that's where the 30% tax gets collected.
So, if Epic were able to use its own payment system,
like it tried to do,
it would be able to get around the tax.
Crucially Epic isn't asking for any money here.
Instead, they're asking for the judge to enjoin Apple
from continuing to impose its anti-competitive restrictions
on the iOS ecosystem.
In short, they want the court
to break up the App Store monopoly.
Spotify is already weighed into uproar the lawsuit,
saying, Apple's unfair practices
have disadvantaged competitors and deprived consumers
for far too long.
The interesting thing is,
Apple already makes exceptions to that rule
when it wants to.
In April Amazon's video apps started to allow Prime rentals
through its own payment system,
that is without paying the Apple tax.
It was the exact same thing Fortnite had tried to do,
but this time Apple let it happen.
At the time the company said
it was because of a program for premium video rentals,
but really it was just that Amazon was powerful enough
to set its own terms.
There were enough Prime Video members
with iPhones and iPads and Apple TVs
that Apple is willing to bend the rules a little bit.
Android is supposed to be more open than that,
but Epic says they had the same problem,
Epic actually to make a go of it outside the Play Store,
offering a side load only version of Fortnite for Android,
but in practice almost all Android downloads in the US
still come through the Google Play Store.
Not even Fortnite was enough to convince Android users
to look outside the Play Store.
It's not a coincidence
that Android ended up running on one big App Store
controlled by Google.
Google makes it hard to compete,
bundling the Play Store alongside must have Android apps
like Gmail,
Search and YouTube.
We actually got to see those agreements firsthand
when regulators in the EU tried to unbundle Android
from the rest of Google.
But even when you peel apart Android,
Google make sure that manufacturers
can't pre-install Gmail or Google Search
without making Google Play the default App Store,
bundling everything together as Google Play Service.
The only way to avoid that bundle
is to build a whole new ecosystem
on top of the open source Android code,
like Amazon's Fire OS,
but for the most part,
the dominance of Google services on Android is unchallenged.
Regulators have been where have these problems for a while,
and Apple in particular
is already kind of trouble over it.
There's a case about this headed
to the Supreme Court right now,
and an ongoing antitrust inquiry in the EU.
But Epic is putting pressure on Apple
in a way that regulators just can't.
It's a sign of things to
not just for Apple,
but for the whole industry.
Tech companies are used to being able
to set their own rules,
whether it's Google Search,
Amazon Marketplace
or the Facebook Newsfeed.
And it's so surprised when those rules
end up benefiting the companies themselves,
but with antitrust pressure mounting
the folks on the losing side of those rules
finally have a chance to fight back.
Epic was the first one to take its shot,
but it probably won't be the last.
Thanks for watching
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