Epic’s legal victory against Apple was not a real win
Summary
The US ruling did not hold the company as a monopoly and only asked it to give app-makers some leeway
When the creators of Pac-Man thought of porting their blockbuster video game out of the arcade where it was born and into the fast-growing home video-game market, their first choice was to get it onto Nintendo’s Home Entertainment System (NES). Since this was the first time Nintendo (or, for that matter, any console manufacturer) was allowing another developer to distribute a game on its platform, no one had a clue of how to go about it.
Back then, NES games were distributed through proprietary console cartridges that only Nintendo could manufacture. In order to get Pac-Man onto the NES, someone had put the game onto NES-compatible cartridges. Nintendo eventually agreed to make these cartridges for a 20% manufacturing fee over and above its 10% platform-licensing commission. This, according to Bloomberg correspondent Takashi Mochizuki, is the origin story behind the 30% digital distribution fee that game developers pay gaming platforms to this day.
Arguably, this was also the reason why, when Steve Jobs launched the world’s first mobile app store, he set developer commissions at 30%. And yet, despite the fact that App Store commissions are no different from what game developers have been paying gaming platforms for decades, it has become the source of so much angst among developers that law suits have been filed against major mobile platforms in courts around the world. Last week, the judgement in the first of these lawsuits, Epic Games vs. Apple Inc, was announced and Apple was restrained from requiring in-app purchases to be processed only through its App Store.
Within hours of the US judgement’s news reaching India, I found myself in an impromptu Twitter Space filled with jubilant Indian chief executives, developers and journalists celebrating that victory as if it was their own. Most of those present were fighting their own battles against platform giants and what they referred to as their efforts to “suck the oxygen out of the Indian tech ecosystem". To them, it looked like the case had been well and truly decided in favour of developers, which could, as a result, finally rid themselves of what has pejoratively come to be known as the “App Store tax" on in-app payments. They sounded convinced that what applied to the Apple’s App Store in the US would extend to Google Play Store in India, and that Indian courts would, sooner or later, also allow alternate in-app payment (IAP) mechanisms.
But when I actually sat down and read the 185-page judgement in its entirety, it became clear to me that much of the initial excitement over the order was misplaced. This was not the slam-dunk victory that everyone seemed to think it was. Quite the contrary.
Instead of declaring the App Store and its restrictions on third-party payment solutions to be anticompetitive, the court had instead upheld the centralized solution offered by the App Store, pointing out that “the use of different payment solutions for each app may reduce the quality of the experience for some consumers by denying users the centralized option of managing a single account through IAP." Not only did the court not think the App Store model was monopolistic, it said that it demonstrated pro-competitive features of security, intra-brand competitiveness and protection of intellectual property investments, whose benefits outweighed the plaintiff’s concerns. The court also specifically pointed out that the provision of apps over Apple’s iOS platform constituted a use of Apple’s intellectual property, for which Apple was legitimately entitled to compensation. Furthermore, the court felt that the plaintiff had failed to show that there were alternatives “virtually as effective" as the current distribution model that could be implemented “without significantly increased cost."
At the end of the day, the only ground on which the US court held against Apple was made out under California’s Unfair Competition Law (UCL), a state legislation whose broad language made it possible for the court to recognize even “incipient" violations of the “policy or spirit" of antitrust laws in a manner that was not possible under the Sherman Act (the primary US federal antitrust statute). By relying on these provisions of equity, the court held that any prohibition on including “buttons, external links, or other calls to action that direct customers to purchasing mechanisms other than in-app purchase" threatened “an incipient violation of an antitrust law", which, while not unlawful, were unfair. And since Epic Games was a quasi-consumer (a description the court created even though it was not articulated as such in the UCL), it was entitled to an injunction.
Reading between the lines, this is not the victory that it appeared to be at first glance. By declaring that Apple was entitled to compensation from developers that developed apps for the iOS platform, the court has allowed it to continue to charge for in-app purchases. As the judge has not struck down the 30% commission as being too high, Apple can continue to charge the same amount as commission going forward. All that Apple has been prevented from doing is having measures in place to ensure that all in-app transactions are routed exclusively through its App Store so that commissions can be deducted at source.
That said, platform companies are now more acutely aware than ever of developers’ concerns and have indicated a willingness to conditionally offer lower fees. I hope this results in better outcomes all around.
Rahul Matthan is a partner at Trilegal. His Twitter handle is @matthan. Some of the organizations mentioned in this article are clients of the firm.
