By Dan Offner
O&A Founder and Managing Partner
Two of the most brilliant business minds of today are playing a game – Tim Sweeney, the CEO of Epic, and Tim Cook, CEO of Apple. Not surprisingly, the game guy, Sweeney of Epic, is outplaying the hardware guy, Cook of Apple. But what makes this interesting to me is that Sweeney has accomplished this by intentionally losing the initial round of antitrust litigation with Apple on the in-app purchasing system.
Before you tell me that I am crazy for claiming that Epic is winning by intentionally losing and that Apple is getting played, hear me out. Epic has its eyes on the prize of protecting its platform for developers – the Unreal Engine – and after that victory, then winning the war of attrition on getting Apple to open up its platform to having competitive stores, payment systems, and distribution systems for Apple compatible apps. In Round 1 of the litigation, Epic achieved exactly that goal, thanks in large part to Apple’s doing exactly what any gamer would have told you that Apple would likely do.
OK so what I am saying here? Have I lost my mind in saying that Apple was outplayed by Epic, and that Epic intended to lose on getting Apple to allow Epic to have its own App Store? I don’t think so, but please bear with me and let me explain why the game company has outplayed the hardware company in Round 1.
In 2020, via an email from Sweeney to Cook, Epic directly attacked Apple by demanding an end to the 30% “tax” with the Apple App Store with its in-app purchase (IAP) system. Then Epic deliberately breached its development publishing agreements with Apple by putting up Epic’s own IAP in Fortnite (Epic’s best selling and cross-platform game)so Epic would not have to pay the 30% fee to Apple. All of this got Apple’s attention, and it behaved as you expect it to – or in gamers’ words, “predictably.” Apple kicked Fortnite off the platform for breach of the development publishing agreements, shut down the Epic IAP,and then, even though Epic had not breached these other agreements Apple, cut off Epic from the tools and technology on the Apple platform that Epic needs to power the Unreal Engine for Fortnite – as well as the whole Unreal developer and publisher community.
So, then poor Epic and Sweeney had to sue Apple to get Fortnite back on iOS and for violations of the antitrust laws in the U.S., despite the apparent fact that Epic could have just complied with Apple’s demands and stopped breaking the agreement. But no, Epic had to sue not just to put Fortnite back on the Apple platform (even though Epic intentionally breached the Apple agreements), but also under the U.S. antitrust laws to remove the 30% tax, allow everyone to be able to do their own IAPs, and lastly to get the Unreal Engine turned back on with the Apple platform by having access to the Apple technology.
Predictably, the court denied Epic’s claims to put Fortnite back (how can you be irreparably harmed if you are choosing to harm yourself by intentionally breaching your agreement with Apple) and to grant Epic an injunction to force Apple to allow Epic’s IAP and thereby bypass the 30% Apple tax (no injunction if Epic can’t prove that it will prevail on the merits at trial). , But then, the court did grant Epic’s demand for the Unreal Engine to be restored to the Apple platform and told Apple that shutting down Epic’s Unreal technology program, which powers thousands of developers and publishers, would cause irreparable harm to many people.
My thesis is simple. Sweeney cares most about protecting the Unreal Engine, and anything he wins on Fortnite and the IAP Epic store at this point is gravy as they move his goal forward of his future Metaverse. He can lose on Fortnite (and he won’t lose on Fortnite, because if he loses the antitrust case, he will fix Fortnite by taking out the Epic IAP and put it back up on the Apple App Store), and he can lose the Epic IAP, and still win (and I don’t think he will lose IAP issue either, but that is another discussion).
But what Sweeney has been playing for is making sure that the Unreal Engine can’t be kicked off the Apple platform despite whatever Epic is doing. Now, in light of this most recent ruling, it is really hard for Apple to do that. In a blink of an eye, Apple has just lost its most powerful tool for leverage with Epic. If Apple is unhappy or frustrated with Epic for any reason, Apple doesn’t have the ability to turn off the Unreal Engine and shut down the Unreal development and publishing community, and walk away from Epic.
Why does this matter? Epic and the court correctly note that there are plenty of Apps with their own IAP systems in the Apple App Store and on the iOS platform. The New York Times and the Washington Post are two examples, Netflix is another, and Uber yet another. So, why did Sweeney send a crazy email demanding his own IAP, dramatically and egregiously breach his contract by putting in a hotfix that Apple couldn’t see to put up Epic’s own IAP system, and put a mocking video of the Apple 1984 ad targeting Cook? Because Sweeney knew that Apple would immediately: 1) kick Fortnite off the Platform; and 2) terminate the Unreal Engine’s access to the Apple Platform’s technology. Epic knows this because Apple is a big tech company that will behave predictably, and Sweeney is a gamer. Epic knows that Apple believes this one-two punch (especially the second) will bring Epic, the intentional breacher of Apple’s TOS and other agreements, to its senses and cause the breacher to come crawling back to compliance.
But from a gamer’s perspective what Sweeney and Epic have done is obvious and simple. Sweeney has drawn out his adversary into the open field and through misdirection is causing his opponent to expose his unprotected flank. The misdirection is setting up the basis for the antitrust lawsuit with Fortnite being kicked off the platform. Sweeney wanted this to happen, and he wanted Apple to retaliate and shut down the Unreal Engine – the unprotected flank.
Indeed, the misdirection becomes obvious when in the first part of the antitrust lawsuit about Fortnite and the Epic IAP, the claims by Epic are almost comical in their ineptitude and I think deliberate weakness on Epic’s part. And the court recognized those comical or over-the-top qualities in the pleadings. . To paraphrase the court’s opinion, the court said to Epic, you don’t get to breach contracts just because you say Apple is a monopoly, leaving aside the fact that you can’t even prove that Apple is a monopoly. Furthermore (and again paraphrasing), the court said you missed on key elements in your argument for an injunction such as your claim of irreparable harm caused by Apple – you can’t prove irreparable harm when you, Epic, not Apple, are the cause of your own harm. Accordingly, the court’s tone and approach to Epic’s demand for a temporary restraining order to put Fortnite back into the Apple App Store with the Epic IAP was quite dismissive and critical of Epic’s claims and arguments.
But in the second part of the court’s decision, the language is almost frightening in its simplicity, clarity and acceptance of Epic’s arguments, and then deadly with its impact on Apple (the comedy show is over). The court is clear, concise and direct when it simply states to Apple that it can’t retaliate against Epic and turn off Epic’s Unreal Engine and technology on the Apple platform, and harm thousands of developers and publishers, just because Epic did something unrelated that Apple doesn’t like and Apple is having an unrelated dispute about a different contract.
And just like that, Sweeney has destroyed his adversary’s most powerful weapon – the ability to shut off the Unreal Engine when Epic misbehaves elsewhere on the Apple platform or breaches another agreement with Apple. Not only has Sweeney removed Apple’s nuclear bomb capability in a single stroke, but he has won several other things as well:
- The court is now recognizing the power of the Apple platform vis a vis the consumer, the true end users of the apps – Apple could hurt many of those consumers if Apple chose to remove a technology solution that powers a tremendous amount of content on the Apple platform to those consumers. In essence, Epic can now argue that the court has recognized that the Apple platform, the App Store, iOS, and the IAP are a market and ecosystem (built on the iPhone) where Apple is a monopoly, and that monopoly deserves to be regulated to achieve pro-competition solutions for the end user/consumer. Be prepared for Epic to drive this point home at trial. Epic will repeatedly argue that the court has already de-facto recognized that Apple is a monopoly here by forcing Apple to restore the Unreal Engine.
- By moving this antitrust case to trial now, even though Apple won on the IAP point with the temporary restraining order (regardless of whether Epic cures its breach and demands that Fortnite be restored), Epic is still seeking adjudication of its antitrust claims. Apple is now all in and has to win this antitrust case, or it loses control of the App Store and the iOS platform. So, Apple now potentially has to negotiate a settlement with Epic to avoid the gamble of losing control of the App Store through an unlucky decision by the judge at trial.
- So, if Apple recognizes that it has to negotiate a settlement to avoid the risk of a bad judgment, we are back to the original point: Apple now has lost real leverage in its negotiations with Epic, because Apple can’t threaten to turn off or remove the Unreal Engine from the Apple platform.
So, I rest my case; I think Epic has outplayed Apple. The question is whether Cook will recognize the game that Sweeney is playing and reset the game by resetting the rules. But how?
For that the answer is not in litigation, but in business. Apple can come out with a new policy that allows IAPs with certain qualified partners and only on Apple’s terms and conditions. These third party IAPS would charge less than the premium 30%, but would be licensed by Apple and would be charged a different usage fee for using the Apple platform. In essence, such a business step removes Epic’s reason for its antitrust lawsuit, and by Apple “losing,” Apple wins in that it avoids having its ecosystem subjected to full antitrust review as a monopoly and potential regulation through a judicial decision. If Apple does this, the basis for the claim that Apple is a monopoly and requires regulation by a court is removed, and Apple can seek to dismiss the case. Then Apple can say Cook has won – and Sweeney can still say Epic has won.
And everyone loves a winner, but also maybe while everyone is congratulating themselves, Apple and Epic will have cut a new deal to bring Epic’s sanctioned IAP to iOS and to the gaming community, enabling tthe Metaverse and the Unreal Engine for all! The end result is that Apple still has the biggest bank in iOS land and the most commonly used credit card in iOS land, but also is starting to give out banking licenses to certain qualified companies and allowing those new banks to be credit-card processors as well. And this little opening of the Apple walled garden may have the unexpected effect of Apple not just avoiding antitrust scrutiny today by this court, but also by building a firewall against future antitrust probes and actions by federal and state governments.
Also, Apple is pulling an Android on a business level while not having to really create an open platform. With a slightly more open platform, where more people can come onto the Apple platform than before because of more IAPs run by different parties, then Apple’s platform may grow almost exponentially again as the world becomes more and more mobile-centric. Why should Apple do this practically? Maybe because Apple’s true competitor tomorrow is not Google with Android, but the coming competition with Amazon, Tencent/WeChat, or even Facebook with its AR/VR Apps and devices? And if Apple coopts its enemy today into its ally for tomorrow, Apple can beef up its ability to take on Apple’s true competitors tomorrow in the world of mobile games and entertainment.