The business model of application distribution platforms, like Google’s Play Store, Apple’s App Store or Sony’s Play Station Store, all have at their crux one commonality: All of them charge a commission for in-app purchases. However, hailed as the ‘Super Bowl’ of big tech anti-trust cases, the trial between Apple Inc. (hereinafter, “Apple”) and “Fortnite” developer Epic Games (hereinafter, “Epic”), which was recently concluded on May 24, 2021, might just tumble this business model. To understand the plausibility of such a situation arising, it is important to analyse the merits of the case. While we still await a judgment in the trial, this analysis would give us clarity on what to expect and whether the App Store business model could possibly be changed forever.
In Part I of this analysis, the facts and legal framework of anti-trust law used in determining the case is established. The first issue in this legal framework is that of determining the “relevant market”. In this Part, possible consequences of this issue have also been explored. In Part II, Apple’s defence of pro-competitiveness and Epic’s counter-arguments regarding the same, are analysed. Further, possible consequences of both the issues and the possibility of whether this trial could have lasting impact on the App Store business model throughout ecosystems, is also addressed.
Apple via its App Store controls the sole source through which developers can distribute apps to iOS users. In order to host apps on this store, developers are required to mandatorily comply with certain strict guidelines which inter alia include paying Apple a 30% commission on the in-app purchases (hereinafter, “IAP”) made using Apple’s propriety payment system. Moreover, it mandatorily restraints the developers from circumventing their IAP system.
Epic Games, a game developer, was highly aggrieved with this “take it-or-leave it” policy that mandated them to forfeit 30% of their in-app sales. along with restrictions against hosting their own digital marketplace i.e. the “Epic Game Store” on iOS. This prompted them to circumvent Apple’s IAP system by installing a ‘hotfix’ in their game “Fortnite”, which allowed users to pay directly to Epic. This resulted in Apple banning them from the App Store. Subsequently, Epic Games sued Apple for the alleged anti-competitive practices of – i) monopolising the app distribution market on iOS devices and ii) mandating the use of their IAP system with the App Store and thereby, restricting developers from offering alternate payment mechanisms to their end users.
The legal framework & Rule of Reason
The anti-trust legal regime in the United States of America is based on S. 1 and S.2 of the Sherman Act which prohibits any unreasonable restraints on competition. However, determining what constitutes as unreasonable is a tricky affair and prominent jurist Frank H Easterbook’s explanation sums up this difficulty:
“Aggressive, competitive conduct by any firm, even one with market power, is beneficial to consumers. Courts should prize and encourage it. Aggressive, exclusionary conduct is deleterious to consumers, and courts should condemn it. The big problem lies in this: competitive and exclusionary conduct look alike.”
Therefore, to dissect this fine line between the two viewpoints, the jurisprudence has evolved to recognise two ways. The first is to analyse if a restraint is unreasonable “per se”. A small number of restraints are of such nature because they generally tend to restrict competition and are therefore, recognised to be inherently anti-competitive. However, to categorise a vertical restraint as "unreasonable per se” is explicitly prohibited by the courts. Since, the restraint in question is a vertical one i.e., between parties at different levels of the supply chain (Apple being the supplier and Epic being the customer), the unreasonable “per se” rule would not be applicable.
The other way i.e. the “Rule of Reason”, involves a comprehensive analysis of the fact of the matter. This rule has evolved to primarily involve a three-step framework for shifting the burden. Under this framework, the plaintiff has the initial burden to prove that the challenged restraint has a substantial anticompetitive effect that harms consumers in the relevant market. If the plaintiff fulfils this burden, then the burden shifts to the defendant to show a pro-competitive rationale for the restraint. If the defendant proves this, then the burden shifts back to the plaintiff to demonstrate that the pro-competitive efficiencies could have been reasonably achieved via less anti-competitive means. The testimonies in this trial were analysed under this very framework to reach a conclusion.
Excuse me, but what’s the relevant market here?
For fulfilling the first step of the burden shifting framework, Epic had to establish that the impugned acts of Apple gave it immense market power (resulting in an anti-competitive effect) in the relevant market. However, for this purpose, they first had to first prove what was the relevant market which remained the paramount contention in this trial. This was a question of fact for which economic enquiry into substitutability and cross-elasticity of demand was done.
Prof. Evans, the expert testifying on behalf of Epic claimed that the relevant market was a “single-brand market” i.e., the iOS app store distribution market. Moreover, he testified that this definition excluded gaming consoles like X-Box and Playstation since they were neither portable, nor used cellular services, hence, not providing substitutability for a mobile device. Epic backed this claim with statistics depicting that Fortnite users who played the game on their phone did not switch to other platforms after the game being removed. Another statistic presented showed the difference in number of hours of playing between phone and console users, wherein console users were found to play the game for 5x more hours.
Apple contended this market definition by claiming that it was too narrow and just like other consoles they were a “product company”, i.e., a combination of hardware and software catering as a platform for playing the same games, with the same accessibility and the same in-app rewards that could be used cross platform. They presented statistics of their own showcasing that 84% of the users who played Fortnite on iOS, also played it on another device.
It is imperative to note that even in the mobile application distribution market, Google is the dominant player and not Apple. Therefore, in order to keep its definition of relevant market restricted to iOS, Epic termed the iOS app distribution market as an “aftermarket” i.e., a derivative of the smartphone app market (primary market). It has been previously held by the courts that an “aftermarket” be the relevant market where market imperfections like switching costs “prevent consumers from realizing that their choice in the initial market will impact their freedom to shop in the aftermarket.”
Epic claimed that Apple’s business strategy of having a closed ecosystem which was difficult to move out of was the proof of such high switching over costs. They evidenced this strategy through e-mails of senior executives which categorially mentioned that spending on the iTunes store, economically lock users into the ecosystem and Apple’s CEO Tim Cook in his testimony as well has confessed to this strategy being adopted by Apple founder Steve Jobs. Apple, on the other-hand, dismissed this definition of relevant market by claiming that the “aftermarket” requires a user lock-in in the primary market and since users were free to choose between various operating systems, they were in no way “locked-in” to iOS. They backed this up by providing the data on users switching to another OS which was around 20% on an average.
The complexity of the answer lies not in doctrines but facts
While in this fundamentally contentious understanding of the relevant market, it might seem fitting to ask who has the probable chances of success in light of the letter of the law, however, it is the wrong question to ask. This is because, as Justice Rogers herself remarked on the last day of the trial, the question of the relevant market would remain a question of fact. In this regard, the major considerations of fact by Justice Rogers would involve whether the relevant market in question is the market for games or the overarching market for mobile applications.
Moreover, another key question would be whether the market only includes user-side or developer-side competition. It might also involve Justice Rogers’ factual understanding of whether an OS is a walled ecosystem or a free and open option. There is no doubt that identification of the relevant market as a “single-brand market” would be a rare occurrence in anti-trust law. However, given Justice Rogers’ unflinching questioning of Apple on the closed ecosystem model, it cannot be disregarded. Therefore, in this regard, it would be best to say that on the issue of determining relevant market, the scales remain balanced as of now, since it highly depends on Justice Rogers’ perception of the facts. As we witness in our analysis in Part II, the scales are certainly not as balanced in the second issue regarding legal frameworks, where the law clearly favours one of the parties.
The views expressed above are solely of the author.
A small software tweak without an update.
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