Did Apple really lose the lawsuit with Epic Games?

Apple

First of all, I really recommend that you read a blog post I wrote earlier about the “The importance of the App Store legal battle between Apple and Epic Games

On 10 September 2021, the much-anticipated lawsuit between Apple and Epic Games came out.

Judgment points

Judge Yvonne Gonzalez Rogers stated:

  • Apple won almost all the accusations in the lawsuit.
  • Monopoly: Apple is not a monopoly, and “success is not illegal.” The court ultimately cannot determine that Apple is a monopoly as defined by federal or state law–this is particularly important. Apple wasn’t guilty of antitrust violations with the exception of its anti-steering provisions, which didn’t allow app developers to link to outside payment routes
  • The court found that the App Store has a market share of over 52-57% and “extraordinarily high profit margins,” but those alone don’t show antitrust violations since success isn’t illegal.
  • Judge Gonzalez Rogers decided the appropriate market was the US$ 100 billion mobile gaming market.
  • There will be no changes to the App Store business model, because the court held that Apple’s IAP and business model are both legal. IAP is not an application store app or payment processing or any other scattered products, but an integral part of its digital e-commerce system. The intellectual property that forms the basis of the IAP system gives Apple the right to profit in any reasonable way it deems appropriate, and Apple has the right to monetize IAP (that is, Apple can collect money).
  • The App Store review mechanism can improve the security, privacy, and stability of the iOS ecosystem without any changes.
  • The agreements between Apple and the developers are legal, so the App Store may charge commissions.
  • In terms of IAP (In App Purchase): “Apple’s restricted mobile apps can only be paid in the App Store” is a violation of California’s competition law. App Store policies must be changed and restrictions on in-app purchases must be relaxed. That is, program developers can redirect consumers to places other than the App Store to make purchases and payments. Judge Gonzalez Rogers has always emphasized throughout the judgment that Apple has the right to charge a commission for the app, but it does not necessarily have to be 30%.

In short, a US federal judge has ruled in the legal proceedings between Apple and Epic Games. Apple has won 9 out of 10 lawsuits. It can be said that a big victory is not an exaggeration. For the lost item, Epic Games can communicate with users through e-mail and other methods to inform third-party payment methods, thereby bypassing Apple Pay. However, this ruling did not support Epic Games’ request for third-party payment to be directly connected to the App store.

Apple’s response

Apple regards the verdict as a major victory. Chief Legal Officer Kate Adams said that Apple is pleased to see the court ruling and regards this as a major victory for Apple. In particular, the court ruled that Apple is not a monopoly, and that “success is not Illegal”.

Affected by the failure of the lawsuit, Apple’s stock price fell 3.3% on the 10th to close at $148.97, the largest one-day drop since May 4, and its market value fell by $85 billion.

Epic Games’ response

Epic’s central argument was that Apple’s App Store is a monopoly with no major competitors. But it failed.

This case was almost a complete victory for Apple and a devastating failure for Epic Games. Not only did it have no chance to establish its own app store or own in-app purchases, but Judge Gonzalez Rogers also ruled that Apple not only There are reasons to revoke the development license of “Fortress”, and you can also revoke the development licenses of all Epic subsidiaries, including Unreal Engine. This means that Epic is currently unable to develop its own engine for other developers, at least for now.

Epic Games must pay compensation to Apple because the company breached the contract. The compensation amount is 30% of the “Fortress Heroes” game revenue that Epic Games received directly from the iPhone and iPad, which is estimated between 3 to 6 million U.S. dollars, depend on 15% or 30% rate Apple will charge Epic Games.

Seeing the final verdict, Epic Games expressed extreme dissatisfaction that it would appeal. Epic Games CEO Tim Sweeney expressed his dissatisfaction with the ruling via Twitter, saying that “today’s ruling is not a win for developers or for consumers.” Epic’s spokesperson immediately stated that the company would appeal. This can be seen Epic Games was dissatisfied with the verdict.

How important is the App Store?

The iPhone’s long-term global market share is about 15%. At the end of 2020, Apple announced that there are total of 1.65 billion Apple devices in including more than 1 billion iPhones in use worldwide. But especially when the iPhone 12 supports 5G for the first time, coupled with the need for work form home and communication during the COVID-19 pandemic, it has been a great success.

The global market accounted for 23.4% of the peak market share at the end of 2020. The United States is the famous iPhone Republic, with a market share of 57.33% in July 2021. According to a survey conducted by GFK, the market share of Taiwanese mobile phone brands in 2020 will be 30%, followed by Samsung (SSNLF), Realme and OPPO.

Apple’s total revenue for the 2020 calendar year is 294.12 billion U.S. dollars, and the service sector revenue is 56.76 billion U.S. dollars, accounting for 19.3% of total revenue. Apple’s total revenue in fiscal year 2020 is 274.49 billion U.S. dollars, and service sector revenue is 53.7 billion U.S. dollars, accounting for 19.56% of total revenue. According to Trefis’ estimates, the revenue of each sub-sector of Apple’s service department in fiscal 2020 is estimated as follows:

  • App Store: 18.19 billion US dollars, accounting for 33.87% of service sector revenue
  • Apple Music: 6.66 billion US dollars, accounting for 12.4% of service sector revenue
  • iCloud: US$4.72 billion, accounting for 8.79% of service sector revenue
  • Third party subscription: US$4.6 billion, accounting for 8.57% of service sector revenue
  • License: $10.5 billion, accounting for 19.55% of service sector revenue
  • Apple Pay, Apple Care and others: US$8.8 billion, accounting for 16.39% of service sector revenue
  • Streaming Video US$180 million

Please note that the above App Store revenue is estimated based on a 30% commission, but in fact it is between 15% and 30%, and there are many programs on the shelves that are not commissioned at all. Details as follow:

  • Apple App Store facilitated total of $643 billion in sales billing
    • China billing 300B, account for 47% of total global sales billing
    • U.S. billing 175B, account for 27% of total global sales billing
  • App Store’s actual net revenue is approximately $19 billion
    • Among them, 8.93 billion U.S. dollars of revenue comes from China.
    • Among them, 6.3 billion US dollars of revenue comes from the United States, and this resolution only has an impact on Apple’s revenue of 6.3 billion US dollars.
  • Games is very important to App Store
    • It account for about 70% of the entire App Store revenue and 98% of in-app purchase revenue. And 70% of App Store game revenue comes from only 10% of all App Store users; more than 80% of customer accounts have “almost no revenue” for Apple or developers.
    • Apple’s net income from video games in fiscal year 2019 was 8.5 billion, compared with Sony (ticker: SONY), Activision Blizzard (ticker: ATVI), Nintendo (ticker: NTDOY) and Microsoft (ticker: MSFT), the four major game listed companies in the same period. The total net income from video games is about US$2 billion higher.
    • Sensor Tower estimates that 2019 global consumer spending on App Store games totaled US$ 45 billion, of which about US$ 13.5 billion flowed into Apple’s pockets through the revenue sharing mechanism, accounting for 5% of Apple’s total revenue that year.
    • Sensor Tower estimates that the top five game programs in the App Store’s total revenue are all from China. In 2019, 31% of global consumer spending on App Store games came from China and 26% came from the United States.
  • According to other data, the App Store’s contribution to Apple’s earnings in fiscal year 2019 reached US$ 12.3 billion, accounting for nearly one-fifth of company total earnings.
  • But 90% of sales billing happens outside of the App Store, and Apple cannot make commissions
    • The commissionable apps are digital services and products, totaling US$86 billion, accounting for 13%
    • Those who cannot draw commission include e-commerce, food delivery, fresh food, ride sharing, travel and other major programs, totaling 511 billion U.S. dollars, accounting for 80%
    • In-program advertising, a total of 46 billion US dollars, accounting for 7%

What about Alphabet?

According to the document filed to court, Alphabet’s Google Play in 2020:

  • Net revenue 11.2B, gross income 8.5B, operating income 7B

Epic filed a similar lawsuit against Alphabet in 2020, and this case has not yet been heard. The situation of the Alphabet is slightly different from that of the apple. Alphabet’s Android platform supports third-party application stores, while Apple’s iOS platform does not. But similar to the Apple App Store, Alphabet’s Google Play Store currently does not support developers to choose other payment methods.

Apple’s App Store has not been ruled as a monopoly, which is good news for Alphabet, but Alphabet’s situation is not yet fully clear. The cooperation agreement between Alphabet and application developers and device manufacturers is more complicated, so it may be subject to more antitrust scrutiny than Apple. Any adjustment to the way that Alphabet charge developers is likely to only affect the largest application partners, which is the same as Apple, and will not have much impact on Alphabet.

Apple’s impact assessment

In 2020, Apple relies on App Store commissions to bring in $6.4 billion in revenue, most of which comes from in-app purchases. Loup Funds analyst Gene Munster estimates that the loss is in the range of $1 to $4 billion. The most famous Apple analyst in Wall Street, Wedbush analyst Daniel Ives, said the rule, in a worse-case scenario, would cost Apple 3% of total revenues and 4% of EPS.

I personally think that Apple’s 3.3% drop on the day the judgment came out was based on his report. The losses will likely be closer to 1% for the top and bottom lines as Wedbush believes “the vast majority of consumers will continue to use the App Store for in-app purchases.”

The change in the court’s injunction will of course increase the volume of transactions shifting to alternative (out of Apple App Store) payment methods. There are still many details to be resolved. Can developers provide a payment option similar to PayPal (ticker: PYPL) or Stripe (unlisted), or they must link to an external website? Can Apple require developers to charge the same price for third-party payments, or will developers offer discounted prices? How it will be implemented is unknown.

However, analyst McNealy sees the exodus as limited by most developers lacking the scale and brand recognition to build an independent payment workflow and “consumer aversion to entering payment details for a high volume of apps separately.” 

It must depend on how the developer changes the payment and the user’s acceptance, based on consumer experience and usage habits, many consumers will still choose to pay in the App Store instead of skipping the developer’s setting of non-Apple external links for payment. Image that will gamers really stop a game mid-way to go to a website and purchase the needed widget?(Game app is the most important part, because more than 70% of the charges come from game apps)

Apple
Credit: Activedia

Conclusion

I personally think that investors have overreacted to this result, and it is only a slight disadvantage to Apple, hurt part of App Store annual revenue. The judge ruled that “Apple did not violate the antitrust law, but does not allow application developers to link to external payment channels illegal.” In vernacular “Apple’s App Store business model is legal, and the money is reasonable; but it is necessary to provide payment methods that are not in the App Store.”

Because of the success of the iPhone and the App Store (iPhone users’ spending power is 4 times that of Android), Apple is eye-catching and has become an attack outlet for all parties. In fact, Apple itself knows that it is everyone’s target. In addition to the recent allegations, in response to huge disagreements, Apple has made many policy adjustments and has already reduced the degree of damage.

The judge’s ruling is to prohibit Apple from restricting developers to enable third-party payments, which does not mean abolishing Apple’s tax; because the judge also believes that Apple’s charges are reasonable. In short, opening up third-party payments does not mean abolishing Apple tax.

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