Apple is going to court with ‘Fortnite,’ and it could forever change how apps work

Apple is set to take the stand Monday in a landmark trial that could alter the business model of the country’s most valuable company and serve as a catalyst for new antitrust laws.

Apple is being sued by Cary-based Epic Games, the maker of the popular video game Fortnite, for allegedly using its control of its mobile operating system to stymie competition. Apple kicked Fortnite off the App Store last year after the video game maker offered an alternative payment option to its customers, bypassing the mandatory 30 percent commission charged by Apple.

Up for debate is how Apple allows apps to function on iPhones. The only way to install software on Apple’s mobile operating system, called iOS, is through the company’s App Store. Developers who make software for iOS must follow Apple’s rules and use its payment system, which charges a commission on every sale.

The trial will determine whether Apple’s control over iOS is a monopoly, and whether Apple can use that control to force developers to use the App Store and its payment system. One possible outcome in the case is a very different smartphone landscape, in which the powerful computers in everyone’s pockets operate more like desktop computers, where any kind of software is allowed to exist.

“Frankly, for Epic, it’s been a case of very good timing, because pretty much everybody around the world is looking at this problem,” said Herb Hovenkamp, an antitrust professor at the University of Pennsylvania Law School. “The DOJ I’m sure is paying close attention to this.”

The outcome of the three-week trial, where Apple’s Tim Cook and Epic CEO Tim Sweeney, the well-known chief executives of both companies are expected to take the stand, could have far-reaching implications.

If Epic wins, federal judge Yvonne Gonzalez Rogers, who will decide the case, could force Apple to give up control of app distribution, allowing customers to freely install software on iPhones, much like they do on desktop computers.

If Apple wins, the case could become a lightning rod for debate over new legislation in Washington and in states around the country, where lawmakers are taking a close look at whether new rules are needed to rein in Apple’s power. Evidence unearthed in the lawsuit could also become the basis for a future lawsuit brought by the U.S. Department of Justice, which is investigating Apple’s market power and has more leeway on arguments it can make in court.

Apple, Epic and the DOJ declined to comment.

Hurting innovation?

The case forces Apple to defend its business tactics under oath. Tim Cook, Apple’s CEO, has taken the company to new heights, adding nearly $2 trillion of shareholder value since he took over a decade ago. During trial, he is likely to be cross-examined by lawyers for Epic who will aim to paint him as a monopolist who is hurting innovation and competition.

The Epic lawsuit represents a philosophical divide that the courts and lawmakers have yet to sort out: whether the mobile devices that play an increasingly important role in the lives of people all over the world should be open like traditional computers or tightly controlled by two companies: Google and Apple.

Epic’s lawyers will argue that Apple’s customers are “locked in,” and that the high switching costs from iOS to Android, Google’s mobile operating system, underscore Apple’s market power.

While Epic argues that Apple erects barriers to switching form iOS to Android, Apple has argued there is nothing wrong with such tactics, because Apple is simply shying away from helping competitors like Google, which owns Android. Apple argues in the suit that customers switch from iPhone to Android at high enough rates that customers should not be considered locked in.

“It’s your phone. You should be able to run whatever software you want on it,” said Evan Greer, director of Fight for the Future, a digital rights advocacy group. Greer says Apple’s “stranglehold” on the App Store hurts competition and innovation, but also represents a human rights problem, because it gives authoritarian governments around the world a “choke point” to ban or censor apps.

Apple has argued that its tight control over iOS is necessary to keep the system secure and to protect the privacy of its users. Apple says it vets every app that is allowed on the App Store for malware. And the commissions it charges for digital payments go to funding the App Store, which provides tools that help developers build software for iOS.

Epic says Apple does a poor job of protecting users and is using the argument to justify its alleged monopoly power.

What Epic needs to do

Epic’s first hurdle is to convince the judge that Apple is a monopoly. Only about half the smartphones in the United States are iPhones, but Epic argues Apple’s iOS is a market unto itself.

Apple wants Rogers to look at the case through a narrower lens. Fortnite is a video game, and an iPhone is just one of many ways to play the game, Apple has argued. Apple’s competition isn’t just Android. It’s Xbox, PlayStation, Nintendo and anywhere else Fortnite is available. Apple says it can’t be a monopoly when there is so much competition.

Simply having a monopoly is not a crime. Epic must also convince Rogers that Apple is abusing its alleged monopoly. Epic argues that because Apple forces all app developers to use both the App Store for software distribution and Apple’s proprietary payment processing system, Apple is violating an antitrust provision that prohibits tying one product or service to the sale of another.

Apple says Epic’s reading of the law is wrong because Apple’s payment processing system is part of one product: iOS. Tying can only occur if there are two separate and distinct products.

Because developers are forced to use Apple’s payment processing system, they must pay a commission of up to 30 percent on all revenue earned on the App Store. Apple recently reduced the commission to 15 percent for developers who earn less than $1 million in revenue per year. But that group of developers accounts for a tiny portion of the overall revenue on the App Store, according to industry analysts.

Epic’s lawsuit started when it gave iOS users of its Fortnite game an alternative payment option without Apple’s permission. By using Epic’s payment processing service, customers got a discount. When Apple discovered this, it kicked Fortnite off the App Store and Epic immediately sued.

The move by Epic was planned out well in advance. The lawsuit came with a big public relations campaign, including a “trailer” comparing Apple to Big Brother in George Orwell’s “1984.”

Epic is also suing Google, which also removed Fortnite from the Play Store for the same reason Apple removed it. Google is slightly different from Apple, however, because it allows Android customers to install software outside of the Play Store. Fortnite, for instance, can still be installed in Android phones now. Epic argues it is still difficult to install software outside the Play Store.

Google declined to comment.

In a court hearing, Rogers admonished Epic for the theatrics around the lawsuit and the company’s calculated tactics on the App Store.

But the public relations component of Epic’s gambit against Apple, led by Sweeney, a well-known figure in the video gaming industry, has also been successful.

Epic helped create the Coalition for App Fairness, a group of roughly 50 app developers, some big and some small, who aim to convince lawmakers to loosen Apple’s grip on mobile software. Members of that coalition testified on April 21 in front of the Senate Judiciary Committee for a hearing on the power of the app stores.

Legal experts say they are unsure of how the judge will come down on Epic’s argument. Since 1992, the courts have grown more favorable to large companies in their interpretation of antitrust law, so much so that some lawmakers see the need for an overhaul of the underlying laws.