(Bloomberg) — Apple Inc. was ordered by a court to allow developers to steer consumers to outside payment methods for mobile apps, in a ruling that’s a severe blow to the iPhone maker.
A federal judge granted an injunction sought by Epic Games Inc. Friday while also ordering the game maker to pay at least $4 million in damages to Apple for breach of contract. The order could take a big bite out of the profitability of the App Store: according to analysts the App Store takes in more than $20 billion a year with a profit margin above 75%.
U.S. District Judge Yvonne Gonzalez Rogers concluded that Apple has engaged in anticompetitive conduct that harms consumers by preventing them from getting cheaper prices, but she didn’t go as far as Epic sought.
“Given the trial record, the court cannot ultimately conclude that Apple is a monopolist under either federal or state antitrust laws,” she wrote.
Apple called the ruling a vindication.
“Today the court has affirmed what we’ve known all along: the App Store is not in violation of antitrust law,”’ the company said in a statement. “As the court recognized ‘success is not illegal.’”
Still, the decision is a significant setback for the world’s most valuable company as it faces growing antitrust scrutiny from lawmakers and global regulators.
Why App Store Fees Are Drawing Fire Worldwide: QuickTake
Apple recently has made some modest concessions amid criticism of its market dominance, including allowing developers of media apps like Netflix to link from its App Store to external websites for payments by users and making it easier for developers to promote alternative pricing plans and ways to pay — without Apple taking a cut.
Nonetheless, the ruling is a warning shot across the bow for the Cupertino, California-based company as legislators and regulators examine the role Apple and other big tech companies have as gatekeepers to the digital economy. It could also open the floodgates to follow-on lawsuits seeking millions of dollars in damages.
Epic didn’t immediately respond to a request for comment.
“Apple faces rigorous competition in every segment in which we do business, and we believe customers and developers choose us because our products and services are the best in the world,” according to the iPhone maker’s statement. “We remain committed to ensuring the App Store is a safe and trusted marketplace that supports a thriving developer community and more than 2.1 million U.S. jobs, and where the rules apply equally to everyone.“
The evidence outlined in the three-week Epic trial in Oakland, California, cast a harsh light on tech’s power and will help build the larger case against Apple and other technology giants including Alphabet Inc., Amazon.com Inc. and Facebook Inc.
Rogers found that Apple engaged in anti-competitive conduct in enforcing its so-called anti-steering restrictions on developers.
“A remedy to eliminate those provisions is appropriate,” she wrote. “This measured remedy will increase competition, increase transparency, increase consumer choice and information while preserving Apple’s iOS ecosystem which has procompetitive justifications.”
Epic sued Apple in August 2020, after the iPhone-maker removed the Fortnite game from its App Store because the gaming company created a workaround to paying a 30% fee on customers’ in-app purchases. Epic wasn’t seeking monetary damages, but sought a court order to stop what it called Apple’s “illegal restraints” on competition.
The judge stopped short of ordering Apple to cut its 30% fee, though she said it isn’t justified.
“Apple has not adequately justified its 30% rate,” she wrote. “Merely contending that its commission pays for the developer’s use of the App Store platform, license to Apple’s intellectual property, and access to Apple’s user base only justifies a commission, not the rate itself.”
The outcome of the trial won’t be the last word from the game maker in its global campaign against the world’s most valuable company.
Epic, which took in more than $5 billion from Fortnite last year, also has filed complaints against Apple in the European Union, U.K. and Australia, and the game maker is suing Alphabet Inc.’s Google over its Google Play store.
The trial featured testimony from Apple Chief Executive Officer Tim Cook and a handful of high-ranking Apple executives and Tim Sweeney, the founder and chief executive officer of Epic, along with several experts in antitrust law.
Epic argued at trial that Apple exercises control over the market for mobile-app distribution on iPads and iPhones to juice profits from commissions on payments made for virtual goods inside apps. Apple denied abusing its power, maintaining that it competes in a market for digital game transactions that occur on numerous devices including video game consoles.
The companies were once allies. Apple forged a partnership Epic a decade ago that was one of the iPhone maker’s closest with any app developer. But the relationship began to sour in 2017 when Epic released the mega-hit Fortnite. That’s when Sweeney began publicly criticizing Apple’s payment system.
South Korea became the first country to force Apple and Google to open up their app stores to other payment systems, setting a potentially radical precedent for their lucrative operations elsewhere around the world. The measure passed by the National Assembly Aug. 31 will ban app store operators from forcing developers to use their online payment systems and instead allow users to pay through a variety of methods.
Meanwhile, the U.S. Congress is considering legislation that would rein in Apple and Google’s ability to set the rules that govern their marketplaces. Bills with bi-partisan support introduced in August would give Epic much of what it asked for in its suit against Apple.
The case is Epic Games Inc. v. Apple Inc., 20-cv-05640, U.S. District Court, Northern District of California (San Francisco).
(Updates with excerpts of judge’s ruling and Apple’s comment)
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