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When thinking about the future of entertainment, consider the differences between credit cards and movie theaters. The major credit card companies play an important role in facilitating consumer purchases and, for that, they get a small percentage of each transaction. Theaters, meanwhile, offer the communal experience of seeing movies on the big screen. Traditionally, movie theaters have kept as much as 45 percent for the services they offer. (Studios get the rest.) So how to think about the app stores within the streaming economy? Are they like credit cards or movie houses? Three years ago, one executive chose his side. “The system is pretty unfair at the moment,” Epic Games founder Tim Sweeney told a gaming website at the time. “These app stores take 30 percent of your revenue for distribution … That’s strange because Mastercard, Visa and other companies that handle transactions take 2 percent or 3 percent of the revenue.”
Sweeney’s grievance hasn’t abated, and on Aug. 14, it escalated into a major antitrust lawsuit against Apple (plus another against Google). After Epic attempted to bypass Apple’s 30 percent “tax” on in-game purchases by instituting a direct payment system, Apple pulled Epic’s mega-hit game Fortnite from its App Store. Epic returned fire in federal court, plus shamed Apple with a video that parodied the tech giant’s iconic dystopian “1984” commercial. Apple’s tactic “will go down as one of the dumbest tech moves ever,” wrote Wedbush analyst Michael Pachter.
But what if the Apple App Store is closer in spirit to a movie theater for providing an arguably premium experience where customers enjoy entertainment? If so, taking 30 percent isn’t quite as outrageous. As software developer Darel Rex Finley put it on his website in June, people like Sweeney “want Apple to provide its unprecedentedly secure, piracy-proof, malware-proof, junkware-proof, revenue-generating, vibrant platform to them for free.” Apple concurs. “In the nearly 12 years since the App Store debuted, the best measure of its success is the dynamism it has unleashed and the state of the app economy today,” said Apple’s App Store chief Dan Matray at a conference in Europe the same month.
The court battle pitting Epic vs. Apple is one between a game developer and a tech behemoth, but the litigation could have outsized impact on the movie and television sectors as well. Until recently, streaming apps like Netflix and Spotify have avoided the 30 percent fee by forcing subscribers to sign up for subscriptions on their websites. In turn, Apple and Google have sidestepped any issue by creating a special exemption for so-called “reader apps” that allow users to merely access existing subscriptions. But now that that theatrical windowing has blown up thanks to the COVID-19 pandemic, and a studio like Disney wishes to premiere a tentpole like Mulan on its streaming app for $29.99, uncomfortable questions arise about what non-subscription money might be owed by the studio to the app platforms. It’s a topic that neither Disney nor Apple will comment upon, perhaps reflecting a sensitive area of ongoing negotiation. At least one senior entertainment executive speaking to THR believes it’s not worth circumventing Apple or Google to retain 100 percent of the revenue. Disney could drive customers to Disneyplus.com to make a Mulan purchase, but it might create a more confusing purchasing process and hurt marketing too. “Disney would win the battle but might lose the war,” says the executive.
Then again, looking wider, these negotiations will have to be navigated carefully as there already have been escalating tensions recently between streamers and digital middlemen as both position themselves for the future. NBCUniversal’s streaming service Peacock isn’t on Roku over an impasse about how much advertising inventory the latter should get from the former. An individual close to the negotiations tells THR that Roku is demanding 15 percent of the ad space in the new streaming app. A similar problem has kept HBO Max off of Amazon Fire, say sources, with the added complication that Amazon wishes to keep HBO as a channel on its own streaming app, Prime, which means it would control the viewing experience. The burgeoning dispute between Amazon and HBO parent AT&T even earned some attention at a July hearing in Congress where Amazon’s Jeff Bezos, Facebook’s Mark Zuckerberg, Google’s Sundar Pichai, and Apple’s Tim Cook testified before an antitrust subcommittee.
At that Big Tech hearing, Cook took the least amount of questions, which is ironic given the Epic lawsuit that would soon follow. But, despite the lack of attention among lawmakers and the seeming swiftness in how Epic launched its action, Apple couldn’t have been too surprised. Not only is Apple facing an antitrust investigation by European Union authorities over Spotify’s complaints about the 30 percent fee, but last year, the U.S. Supreme Court decided that consumers can sue when those fees are passed along to them as the cost of products and services. (Meaning, that tens of millions of Fortnite players could soon file their own antitrust claims against Apple.) In its briefs to the Supreme Court, Apple tried to avoid that outcome by warning of “duplicative damages,” saying that suits by app developers would suffice. To the notion that app makers would be too afraid to take on a mighty giant, Apple responded, “It is implausible that no one in this wide range of sophisticated companies has the ability and wherewithal to sue Apple, if they truly felt wronged.”
That prophesy has now been realized. Epic will claim that Apple only maintains its monopoly power by imposing technical and contractual restrictions or has violated the Sherman Act through its denial of an “essential facility” — access to software on iPhones — although no one should think that Epic’s case is any sort of slam dunk. One of the major hurdles for Epic will be showing an actual market that Apple has monopolized. As Don Pepperman at Baker Marquart puts it, “It’s tough to prove one has a monopoly over its own services,” before mentioning how the judges are typically reluctant to decide fair pricing in a free market. “There’s nothing in antitrust law that prohibits a monopolist from charging high fees unless it is accompanied by other anticompetitive conduct.”
Seven years ago, in the consumer case over Apple’s App Store that eventually went to the Supreme Court (and is again pending at a lower court), plaintiffs attempted to navigate the legal terrain by saying there were actually two markets — one for iPhones and then a second “aftermarket” for the goods and services that were derivative from the first. According to these plaintiffs, Apple was attempting to monopolize the aftermarket with its tight leash over apps.
Apple wasn’t pleased with this thought. Making an argument that never reached judicial conclusion as the case was about to go on a seven-year appellate journey over whether consumers had standing to sue, the tech giant framed the issue as the plaintiffs essentially trying to force an open platform. “Antitrust law does not constrain the design of products (like the iPhone or the iOS operating system) or business models (Apple’s allegedly ‘closed system’) on the grounds that they are not ‘open’ enough,” wrote Apple’s lawyers at the time. “One simply cannot build a monopolization claim by postulating that there would have been more competitive benefits if Apple had chosen to structure its business differently.”
Epic’s sterling legal team at Cravath, Swaine & Moore (that includes both Christine Varney, formerly head of the Justice Department’s Antitrust Division, and Katherine Forrest, a former federal judge in New York) put forward different legal theories, but nevertheless arrive at essentially the same place. In particular, Epic’s suit focuses much more on what’s known in antitrust parlance as a “tying” claim. As the game company sees it, Apple is conditioning access to the App Store on a developer’s promise to use Apple’s payment system. In the end, however, no matter how the legal claim is articulated, U.S. District Court Judge Edward Chen is going to have to determine whether to #freefortnite from Apple’s closed system. Sweeney recognizes that. He says this his company is fighting for “the basic freedoms of all consumers and developers.”
Will the future of streaming happen on closed or open platforms? No less is at stake here.
Randy Picker, an antitrust professor at the University of Chicago, agrees the case has potential for being groundbreaking. With a judge now scheduled to consider a temporary restraining order at an Aug. 24 hearing, Picker sets up the debate: “Apple is going to want to say that whole experience [in the iPhone and Mac ecosphere) is the product. Epic will say that’s pretextual. How one thinks of the product becomes key in this case.”
A version of this story originally appeared in the Aug. 19 issue of The Hollywood Reporter. Natalie Jarvey contributed to this report.
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