Epic Games' Antitrust Case Against Apple Is a Dead End

Epic Games' Antitrust Case Against Apple Is a Dead End

Epic Games, the maker of the hit game Fortnite, recently sued both Google and Apple in civil court for antitrust violations. Fortnite had been removed from both the Apple App Store and the Google Play Store after Epic added its own payment processor to the app to avoid paying the 30% platform fee (a direct violation of both app stores’ policies). It is deeply ironic that the gamemaker sued two companies on the same day for monopolizing app stores.

Epic’s beef with Apple has gotten more attention recently — as have Apple’s App Store policies generally — so this post will focus on the lawsuit against Apple. Thus far, public discussion surrounding this case has focused on whether Apple is a monopoly and whether antitrust officials should break up the company. As I’ll show below, the answers to both of these questions is likely no.

It’s unfortunate that the debate has become bogged down in an antitrust dead end, as there are more interesting conversations to be had about platform governance and the competing incentives these companies face. In recent years, there have been numerous cases of inconsistent and capricious enforcement of App Store rules and there is clearly room to improve the status quo. But by putting so much energy into the antitrust angle, Apple’s critics are neglecting the other regulatory or non-governmental solutions (e.g., the Facebook Oversight Board) that would involve hard tradeoffs but might be net beneficial.

Before we get to those more nuanced approaches, we must first put the antitrust question to bed.

Is Apple a monopoly?

There is a difference between the layperson’s use of “monopoly” and the technical meaning of the term. In casual commentary, “monopoly” is often used interchangeably with “large” or “dominant” when describing a company. But the term has a much more precise legal definition. According to DOJ guidelines, a company has monopolized a market when it has “maintained a market share in excess of two-thirds for a significant period and market conditions (for example, barriers to entry) are such that the firm’s market share is unlikely to be eroded in the near future.”

So what’s the relevant product market in this case? In the US, Apple has 59% of the market and Android has 40%. Even though Epic is suing Apple in the US, we should also care about the global market to an extent. Smartphone markets are local for consumers — I only care about which smartphones I can buy in my home market — but for developers, the global app market is also relevant (they can code an app once and sell it worldwide at zero marginal cost). While Android mimics many of the App Store’s policies, a key differentiator is that users can sideload apps on Android phones without downloading them from the Google Play Store. Globally, excluding China, iOS has 25% of the smartphone operating system market and Android has 74%.

This at least partially answers one of the strongest points from Apple’s critics. As Francisco Tolmasky, a former Apple engineer on the original iPhone team, pointed out on Twitter, if the web browser were invented today, it would run afoul of multiple App Store rules:

Are we missing out on other amazing inventions because of Apple’s strict rules? Going back to the global market share numbers — iOS 25% and Android 74% — if a groundbreaking app were being suppressed by the App Store rules, it would likely have surfaced by now on Android phones (and made them much more appealing to consumers relative to iPhones!).

So, it seems that Apple does not clear the DOJ’s threshold of two-thirds market share. But what about the App Store? Apple controls 100% of the market for app stores on iOS. Is that an antitrust problem?

Apple and the App Store

“Apple has a monopoly on iOS apps” is not the slam dunk antitrust argument some people think it is. In antitrust parlance, the App Store is an “aftermarket”, because iOS apps can only be downloaded after you purchase an iPhone or iPad. In this case, the market for mobile devices is known as the “foremarket”. For other examples, think of printers and printer cartridges or coffee makers and capsules. The DOJ and FTC — the two leading antitrust enforcers in the US — produced a memo to the OECD in 2017 summarizing competition issues in aftermarkets. According to the two agencies, the current U.S. aftermarkets case law includes several principles:

  1. “[W]hen a purchaser signs a contract containing aftermarket obligations regarding parts or servicing at the time of an initial sale, U.S. courts are unlikely to find antitrust liability where the manufacturer lacked market power in the foremarket and consumers had other pre-purchase choices.”
  2. “[If] aftermarket costs are clear to customers at the time of their initial purchase, purchasers have likely engaged in rational ‘lifecycle’ pricing analysis and courts are unlikely to intervene. On the other hand, if aftermarket costs or the availability of such parts or services are hidden or difficult for customers to acquire, antitrust liability is not precluded.”
  3. “[W]here there is no change in policy or where any changes are predictable to customers, U.S. courts are unlikely to impose antitrust liability.”

Here is how these three principles might apply to the iPhone and App Store markets:

  1. iPhone consumers likely understand that they will only be able to download apps from the App Store when they buy their devices.
  2. Consumers likely consider “lifecycle” pricing because smartphones are frequently upgraded (as often as every one or two years). If Apple were abusing its power in the aftermarket (App Store), consumers would have experienced firsthand the higher prices and lower quality apps and they could then switch to the more open Android operating system on their next upgrade.
  3. Apple has not changed its App Store policies regarding in-app payments. It was Epic Games that changed the Fortnite app in direct contravention of pre-existing App Store rules.

And apart from the question of foremarkets and aftermarkets, the case law makes it clear that, generally speaking, companies like Apple do not have a duty to deal with competitors like Epic Games.

Should it matter that Apple has a monopoly on the App Store?

Of course, Congress could always change the antitrust laws to make Apple’s conduct illegal (and there is a soon-to-be-released report from the House Judiciary Committee that may suggest significant changes). But before we commit to upending decades of common law and economic learning, it’s important to know why the law evolved to the point it is today.

Regulators and the courts are hesitant to break up a dominant incumbent if it has achieved its position via superior performance rather than anticompetitive conduct because they want to maintain the incentives for companies to invest in the next round of competition. If there are no spoils to be had, there might be less ferocious competition for the market. We need incentives set up to actively undermine the incumbents’ position in new territory. And those incentives to invest require the possibility of a huge payoff. Lessening that payoff in the future reduces investment today.

Even after some famous antitrust battles of the past, the defendants have maintained a dominant share of the legacy market. Microsoft still has 77% of the desktop operating system market. IBM still has more than 90% of the mainframe market. No competitor directly unseated them from their dominant positions in the market. Instead, the market shifted to something new. Or as Benedict Evans said, "Market power in one generation of tech didn’t give them market power in the next — it doesn’t matter how big your castle is if the trade routes move somewhere else."

And just as we went from mainframe computers to personal computers to smartphones, there will likely be another platform shift that will take the incumbents by surprise (if you think we’ve reached the end of history in computing, then that would certainly change the calculus). The duopoly currently enjoyed by Google and Apple in smartphones might be here to stay, but it might also cease to matter, just as Microsoft’s monopoly in PCs and IBM’s monopoly in mainframes ceased to matter.

Questions beyond antitrust

Complaints about Apple’s control over the App Store come in two varieties. First, there are legitimate, reasonable complaints about inconsistent and arbitrary enforcement of App Store rules. Apple can and must do a better job enforcing its own rules and providing a speedy and transparent appeals process for developers. Second, there are blinkered takes about how Apple should open up its operating system to any app store or payment processor that developers want to use.

These critics ignore the very real tradeoffs at stake here. It is impossible to maintain Apple’s promises on safety, security, and privacy while allowing users to download any app or use any payment processor inside apps. Once Pandora’s box is opened, users can be tricked into downloading all sorts of malware to their devices. Dictating that Apple open up iOS would be a top-down mandate to favor one business model — and some consumers’ preferences — over others. And it is no coincidence that the loudest voices calling for these changes tend to be the most sophisticated tech users. That’s because they are not the ones who would be at greatest risk of downloading malware or having their financial data stolen.

To be sure, it’s also far from clear that the current set of rules is ideal. As Ben Thompson suggests, the current App Store dichotomy — 30% fees for digital goods & services and 0% fees for physical goods & services — might be the wrong approach. Structuring fees based on whether a good or service has positive vs. zero marginal costs could be a better system. Under these new pricing rules, Epic Games would still pay a 30% fee under this new structure because most video games have zero marginal costs. This is the market rate for video games, as PlayStation, Xbox, and Nintendo all charge developers a 30% fee (and demand control over the games on their platforms). Again, this is why Epic Games’s antitrust suit is a dead end.

Interesting ideas like this and others will be addressed in future posts. But here’s the bottom line: I've always found it odd that no one tries to argue that Apple doesn't have the best products in the market. It's taken as a fact that iPhones are the best smartphones, even by Apple’s fiercest critics. This tacit assumption makes it difficult to rule out the possibility that Apple has achieved its market position not by exclusionary conduct but by having the best products. For all the shortcomings of iOS and the App Store, the platform is a juggernaut for spurring economic activity while protecting user privacy and security.

On Twitter, Ben Thompson said,

While Thompson is correct about Android apps — they’re generally considered to be inferior to iOS apps — he gets the causation backwards here. Android apps are not worse because developers “don’t give a damn.” Android apps are worse because Android the platform is less conducive to monetization than iOS. Apple has created a safe and secure ecosystem that consumers trust to conduct transactions and share their personal information with strangers. That is no small feat — and those advocating for changes should acknowledge the tradeoff between platform openness and user trust.