The importance of the App Store legal battle between Apple and Epic Games

App Store

App Store and Google Play dominate mobile apps trading, upload and download.

Alphabet and Apple forced to lower commissions to 15%

I described one of the major challenges of modern software in the 3-7 sections of my book “The Rules of Super Growth Stocks Investing”. The mobile program can only be selected in Apple (ticker: AAPL) AppStore and Alphabet (ticker:s: GOOGL and GOOG)’s Google Play online store and accept a 30% commission. However, due to pressure from various parties and the face of government antitrust investigations, the two companies announced that from 2021, before the forfeiture of software vendors’ revenue reaches $1 million, their commissions will be halved from 30% to 15%.

Money from software store is easy to make

Let me show you some statistics first:

  • In 2019, there were approximately 1.96 million mobile app on Apple’s App Store, and 2.9 million programs on Alphabet’s Google Play.
  • According to Sanford’s estimation, in 2021, Apple’s AppStore will generate 18.7 billion U.S. dollars in revenue, accounting for about one-third of Apple’s total service revenue in 2021.
  • Among them, Apple’s AppStore accounts for two-thirds of all mobile apps revenues, while the Google Play online store only accounts for the remaining one-third.
  • In 2020, among all mobile apps on Apple’s App Store, gaming revenue accounted for more than 70%, and it is contributed by 10% of App Store users.
  • Moreover, the profit of this part of the software store is much higher than that of the hardware product. Wall Street estimates that the gross profit of Apple’s App Store is as high as 90%. Epic Games publicly stated in the court that the net profit margin of Apple’s App Store in 2020 is as high as 80% (Apple’s financial report only announces the profit margin of the entire service department, but does not detail the profit margin of the App Store sub-sector under the service department).

Epics Games is an agent of the opposition camp

Epics Games, a game company, is just a spokesperson for many who opposed the rake policy of Apple’s online software store. The shadow fighters behind Epic Games include Microsoft (ticker: MSFT) and Netflix (ticker: NFLX), Spotify (ticker: SPOT), Match (ticker: MTCH) and a bunch of well-known software leaders, behind them represent the huge interests of these industries. Thirteen companies including Spotify also formed the App Fair Alliance to protest the rules of the Apple App Store.

The main argument from the opposition camp

In short, the main arguments of software developers are as follows:

  • Forcing software vendors to use Apple’s built-in In-App Payment, there is no flexibility at all. Users are only allowed to purchase through Apple’s own App Store, and they are not allowed to choose to directly purchase virtual goods and content with lower prices from developers. This is where the current judge questioned Apple.
  • No software vendor wants to be commissioned.
  • It is believed that Apple is taking advantage of its platform’s monopoly to implement unfair policies against software developers; Apple has not treated Apple’s own built-in programs with a consistent standard.
  • Many policies or management provisions of the Apple App Store on the software on the shelves are unreasonable. For example, Microsoft has imposed Apple’s regulations on game programs for this purpose, because Apple insists that game programs must be reviewed one by one and cannot be packaged on a platform for review. However, Microsoft believes that this policy is blocking their game program development career.

Apple’s defense points

The main points of defense put forward by Apple are as follows:

  • These software vendors relied on Apple’s hard work to build a customer base for them from the beginning, and used Apple’s devices to attract a large customer base for them (Apple announced at the fourth quarter of 2020 that there are 1.65 billion Apple devices in use worldwide, including 1 billion iPhones in use).
  • Apple’s annual investment in the platform has spent a great deal of research and development and maintenance costs.
  • In fact, they only need to be drawn 15% from the second year on the shelves. There are even 8 categories without paying commissions: including YouTube, Instagram, Snapchat (ticker: SNAP), TikTok, Messenger, Gmail, Netflix (ticker: NFLX), Facebook (ticker: META), Google Maps, Amazon (ticker: AMZN), BuzzFeed (ticker: BZFD), Instagram, Pinterest (ticker: PINS), Twitter (ticker: TWTR), etc.
  • The Apple App Store platform needs to be managed to maintain the security of the platform, protect the rights of app users, and ensure that the apps on the shelves meet the basic quality requirements.

Others’s opinions

The EU antitrust director recently expressed that he hopes to pass legislation to force Apple to allow a second alternative version of the App Store. But Apple was tough because it was backed by previous cases of the US Supreme Court (Kodak and Image Technical Services cases, and Verizon vs. Trinko in 2004). The Court of Appeal has greatly reduced the scope of the ruling, limiting its scope to the company’s sales of products that would lead to such a market because customers know what kind of market they are entering. This means that Apple is not obligated to provide access to these APIs and development tools to companies that do not comply with its own terms.

For a long time, other technology companies have generally adopted the practices of Apple’s online store (running rate, platform management policy, etc.). The legal battle between Epic Games and Apple involved too many interests. The result of the judgment will have an important and far-reaching impact on the business model of the entire technology industry, and even end consumers.

App Store
Credit: mohamed_hassan

The verdict of the case

On 10 September 2021, The court’s decision has been issued; please refer to my blog post “Did Apple really lose the lawsuit with Epic Games?

Disclaimer

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