Here is a video I made explaining why Epic Games recent federal court Antitrust case against Apple in the Northern District of California will fail. Check it out.
Here is what I state in the video.
Okay, so here’s the thing a couple of days ago, Epic Games sues Apple, and it seeks declaratory injunctive relief in federal court in the Northern District of California. And what my YouTube video is about is how this claim by Epic Games is not really an antitrust violation. There’s really no basis for this. And if you understand what antitrust is all about, you’ll see why this doesn’t make sense.
Now, here’s the thing with antitrust. So antitrust is when a company has a monopoly in a market and it takes that monopoly in the market and uses that to destroy some other market or to destroy some other entity that is trying to compete. And that’s what antitrust is all about. This goes back to the Sherman act way back at the beginning of the 20th century.
So Fortnite — that’s the game that Epic Games is famous for. So they released Fortnite which is the shoot ’em up game, multiplayer game and actually had it’s probably its greatest success on the iPhone. And what Epic Games is claiming is that it’s unfair for Apple to take 30% from selling the game in the App Store. So Epic Games is basically trying to get a court to say it’s illegal for Apple to charge 30% to any app that is being sold through the app store or 30% of the services. Also, what’s going on is Epic Games is trying to claim that Court should then tell Apple that they have to allow other stores to enter to sell apps on the iPhone. And they’re claiming that, you know, Apple has a monopoly over the iPhone.
Okay, let’s think about this. What does that mean? First you have to establish what is the relevant market? And does a company have a monopoly power in a relevant market? Right, but the key is what is the relevant market? Right. And monopoly power historically had been, you got to be significantly over 50% usually 60%, 70%, 80% or maybe 90%, dominating the market. Okay.
So what are things that are typically monopoly power? Well, your local electricity company like the one where I live in New York City: Con Edison provides electricity. The relevant market for electricity is New York City because I can’t really buy electricity from California. That is because Con Edison owns the wire lines, and I have to get it through Con Edison in New York. Now, the government regulates Con Edison, because otherwise Con Edison could just raise the price a lot. And we don’t have any real choice.
The fact that a company created a product doesn’t mean that it has a monopoly in the market. That wouldn’t make sense, right? Think about it. Does Nintendo have a monopoly power? Because it makes the Nintendo Switch or other Nintendo devices? No, because the market isn’t just Nintendo’s switch. Similarly, Microsoft doesn’t have a monopoly power because it has the Xbox because, you know, yes, it controls the Xbox. But the Xbox competes with other things. So Microsoft doesn’t have monopoly power over the relevant market.
So you have to figure out what is the relevant market. And one way economists historically have tested monopoly power is to do an analysis of, could the monopolist significantly raise prices, and its customers couldn’t leave, there is no place to go. So for example, we need electricity, where we live in New York City. Now Con Ed, if it wasn’t regulated by the government, they could raise the power and maybe some people couldn’t afford it and would have to shut off the electricity. But a lot of people would have no choice and would have to pay much higher electricity. And there’s really no other product that they could get in New York City. We don’t have fireplaces for heating up and it’s not really practical to use candles for light That would be an entity that would clearly have monopoly power.
Buried in Fortnite’s complaint against Apple — I’m reading it, it’s, well, it’s on the web, you can find it, I found it at unrealengine.com. But if you look in the complaint, a lot of it is how users don’t have choices. And it sort of puts down the quality of the App Store. Let me let me take some of the arguments one by one. Here’s the key thing. If you go to Section three, paragraphs 156 157 and 158. These are the paragraphs that are alleging that, you know, trying to convince the court why just the iPhone is the market. The Complaint alleges this heading entitled Competition In The Sale of Mobile Devices Cannot Discipline Apple’s Conduct in the iOS distribution, or iOS in an app payment Process market. So basically, it’s saying Apple’s mobile device customers face substantial switching costs and iOS lock in. So that’s one argument that they make. The second argument is that Apple’s sticky iOS ecosystem protects its dominance in the sales of mobile devices. And then the third point they make is information costs and other market inefficiencies in iOS, iOS distribution iOS in that payment process market.
So basically what they’re saying to the court is people who are iPhone users can’t switch can’t switch away from the iPhone can’t switch away from Apple’s devices, because they’re locked in and you know, they’re locked in because they have a lot of devices. They can’t switch. Now, I think this argument is ridiculous stretch and is kind of crazy. Okay, let’s take the situation with Fortnite.
First of all, I think most people would agree Fortnite the game is played by kids, a lot of teenagers, young kids, maybe even under 10 a lot of teenagers and maybe young adults. These kids are if they’re really passionate fortnight fans, they’re going to lobby their parents for an Android device. Now here’s the thing, Google kicked out Fortnite from the Google Store and Android, but Android allows you to side load apps and also Samsung has its own store and Fortnite is in the Samsung store. So, if you want to play Fortnite on a smartphone, you don’t have to stay with Apple, you can switch to Samsung phones and to other Android phones and get them on your device. This isn’t like the electric company, the electric company can raise the price a lot if its not regulated. There’s nowhere for me to go.
If I really want to use Fortnite and it’s not offered on the App Store for Apple, I can switch to an Android device and Android devices can be very cheap. And I can use it that way. So even now their complaint goes on at length trying to make arguments about how that’s impossible. Let’s take the first argument Apple’s mobile device customers face substantial switching costs and iOS locking. This is what Fortnite’s attorneys, a major law firm, is trying to argue:
So it’s Apple’s power and iOS app distribution market. And iOS in app payment processing markets is not constrained by competition in the sale of mobile devices, because Apple’s mobile device customers face high switching costs in are locked in to Apple’s ecosystem for at least six reasons. These costs make it more difficult for users to purchase a mobile device from a competitor after having committed to Apple’s mobile devices, thereby bolstering Apple’s market power.
So they’re basically saying again, that it’s very high switching costs. Now, I don’t think that’s the case. Okay. First of all, most people anyways after a couple of years, or if not every year, are upgrading their smartphone. It’s ike in some ways these smartphones are accessible luxuries that even people who are economically challenged go for, as well as middle class and upper class people. I remember years ago, I used to stand in line for the Apple store, you know, when that was a thing here in New York City and across the country. And I gotta tell you, it seemed to me there are a lot of people who were economically challenged, who are waiting for the 500 or $600 or $700 iPhone, and for good reason, because these devices are an incredible Information and Communication deal for people.
A lot of people who didn’t have a regular computer can afford a smartphone and particularly the iPhone. And even today, I think a lot of people upgrade every year or every other year or maybe every three years. But the thing is they have it’s not that expensive. The cell phone carriers are still doing these promotions where you get a free phone if you switch. So if you really wanted to switch, you could switch carriers and get a subsidized practically free Android or iPhone. T Mobile has these deals. So I’m not sure what switching costs now, in terms of the apps.
Well, one of the things this complaint doesn’t point out, you know, and what’s interesting that complaint at some point tries to compare the iPhone to the Apple’s Macintosh. And you know, the current Macs and long history of Mac’s Apple has an app store but also Apple allows people to download programs for the Mac from, from the web, or from alternative stores. Epic Games is saying that’s the way it should be. But here’s the thing for consumers. Apple’s App Store on iOS, which is exclusive has been better for consumers. Then this open system on the Mac, and the open system that was on Windows PC. And the best evidence of that is, look how cheap the programs are on the iPhone, compared to programs on the Mac. Programs on the Mac are much more expensive. You typically pay $10, $20, $30, maybe even $100. Well, you know, on the on iPhone, the biggest complaint has been a sort of, you know, the prices of apps keep going down and down and down and down. And developers can’t really charge that much money for an app like you can’t really, you never see somebody selling an app really for 100 bucks or 50 bucks on the iPhone. Instead, there’s a lot of free apps or $5 apps or a $10 app. And maybe if there was a really great you know, professional app Like, like ferrite, you know, that people use to edit audio and podcasts, you know, that might be $15. But if anything, these apps are really cheap. And, you know, I don’t use Android devices. But my sense is that the Android counterparts to a lot of these apps are also cheap. And don’t cost much. So if I wanted to, you know, if I really wanted if I was really into gaming, and you know, Epic Games basically says in its complaint that it wants to create, like its own store, on iPhone and sell other apps directly to people. Well, let’s say if they couldn’t do that. And they did that on Android, and I really loved Epic Games. I could easily switch. And I think a lot of people could just buy another Android device. It’s not that expensive to to play these games.
Let’s look at Section B in the complaint where Fortnite alleges that: Apple sticky iOS echo system protects its dominance in the sales of mobile devices. This is kind of a rehash of the other one, but it says Apple’s ability to raise customer switching costs creates customer lock into its ecosystem. iOS ecosystem is reflected in Apple’s ability to maintain its dominance in the sale of premium smartphones as well as in the sale of tablets. First, Apple’s iPhone dominates sales of premium smartphones. In 2019 alone, Apple’s global iPhone sales generated more than $150 2 billion in revenues. And in the first quarter of 2020, Apple was able to capture 60% of global premium smartphone revenue. Okay, so then it goes on to say that Apple maintains substantial operating profits ranging from 62 to 90%. And it goes on to say Apple has also been able to maintain its pricing power over many years. It’s then it’s then it sort of segues into that. But to say the high switching costs are obvious from empirical evidence. According to 2017 survey by Morgan Stanley 92% of iPhone users intending to upgrade with the next year indicate they would stick to an iOS device.
But wait a second, this evidence is not evidence of high switching costs. See, this logic doesn’t make sense. This is a survey that says a lot of iPhone users tend to stick to iOS devices and upgrade to a new one. And and then they’re arguing that’s a switching cost. It’s not a switching costs. People are happy with iOS devices. Apple makes a premium product. And the irony is the reason that Apple is making a premium product is because it curates the App Store and prevents crappy apps from coming in there. The curating prevents third party apps from over your device and hijacking it. Now what do I mean by that? Okay, now the Mac. And just like the PC for years was around before the iPhone, right? But the Mac just like the PC was susceptible to malware taking over your PC or Macintosh.
And even recently, you know, my teenage daughter I gave her gave her and my son 13-inch MacBook Pros a couple years ago. And my daughter, you know, who probably learned when she was younger how to use an iPhone before she used the Mac. She was clicking stuff on the internet with her MacBook Pro. And I’m telling you, malware got into her to her MacBook Pro, because she clicked on the wrong thing. And next thing you know, both browsers, both Chrome and Safari. were sort of hijacked by this fake Google thing that made it look like you were using Google. But you weren’t using Google, you were using some third party unrelated to Google hijacking your browser to think that it was using Google when it was using its own stupid malware.
This argument in the complaint that because so many people want to stick to the iPhone, there’s high switching costs, there’s no basis to say people are sticking with the iPhone because they don’t have a choice. This is kind of a logical if you think about it, right? What they’re trying to argue is, people don’t want to stay with the iPhone, but they’re forced to stay with the iPhone. But how are they forced to stay with it? Apple’s coming out every year with expensive iPhones for a premium and people they’re not getting the deal. No one’s giving like if there was a subsidy, right? What if If you could like somehow, you know, turn in your iPhone and get a huge subsidy for the more expensive iPhone, that’s why you would stay for it. That would be cheaper than buying an Android. But that’s not the case.
For iPhone users, they can now go to Android. You could go out right now and get a much cheaper Android device that will do a lot of the basic stuff that an iPhone does, right? But a lot of people are finding that it benefits consumers to use an iPhone, right? And how does it benefit the consumer? it benefits the consumer because Apple is investing a lot of its profits into creating better processors. So you get a much more powerful processor for your bang for your buck with an iPhone than you do with an Android device. I mean, now that’s well documented. I don’t know if the average consumer knows that. But the other thing is Apple does a really good job with the camera but then look the Google does with its with its camera, the Google phones right that are androids.
So what is it? I mean, the other thing that they don’t really talk about is great customer service. Apple has all these Apple stores, right? So you know, if you have a problem with your iPhone, you just go to a Genius Bar, and they take care of it. Android doesn’t have any genius bars. There’s no Google stores. There’s no Samsung stores, that you can just go in that that I know of, and solve that. So what is going on is that, to the extent people are sticking with the iPhone, it’s because there’s better customer service. And I’m telling you one of the better customer services, that Apple is curating the App Store.
Now remember, Apple has kicked off a lot of things from the App Store. Apple has, there’s no pornography in the App Store. There’s no you know, crazy apps that are like for like Nazis or something like that. Or, you know, Holocaust denying apps or anything like that. Now on a Foogle device, you can’t get it through Google Store because Google stores is trying to do curating just like Apple’s trying to do. But Android is an open system. So you could side-load pornographic apps. But here’s the other thing, an Android phone is more susceptible to malware being installed into it, because it can be side loaded. And by side loading it you can get into the system. And so that is a risk. That’s why if you see a lot of a lot of businesses and enterprise and government are using iPhones instead of Android phones because of the security.
So one of the reasons that the app store is closed is for that security and for that peace of mind. Take also an example customer service. Now remember a while back, Apple went to you know, allowing service by some games. Games like Fortnite, frankly, you know, make more money by selling points or coins or, or something in the game. And we know, you know, many years ago, there were these horror stories of kids buying games in the app store, and racking up huge, huge fees that with their parents credit cards, buying gold coins or something stupid like that in games, people were upset and people reached out to Apple, and Apple is the one who refunded those monies and cracked down on that practice.
Now, here’s the thing. Epic Games has its own store. Parents are going to have to rely on Epic Games to prevent that kind of abuse of children, where kids rack up and waste money on points on games. And, I mean, with me, I’m very strict with my kids in the sense that I don’t let them play games, where they’re gonna have to buy coins and wrap things up. Okay.
And so you know what Epic Games wants it? So Epic Games wants to do two things: it wants to not have the 30% fee. But let’s go back to that. If Apple has doesn’t have monopoly power, it can do whatever it wants. If Apple doesn’t have monopoly power over smartphones, it can if it wanted to kick out everybody out of the App Store, Apple could decide. Remember, the original iPhone didn’t have an app store. It just had a few of Apple’s own apps. And Steve Jobs said, Oh, people can download from a website, make a website, be an app on the iPhone, and you can still do that you can save any website, you know, look like it’s an app, but it can it can’t do much other than what the website does, because it can’t go into everything that’s in the iPhone.
If Apple doesn’t have monopoly power, it can do anything it wants. It doesn’t have to be fair to anybody. Apple can make deals and say okay, you know, Netflix is a big provider. I’ll give you a special deal. You guys are smart. All developers, they’ll give you a different now, people aren’t gonna like that maybe developers weren’t like that. And so for business reasons. Apple wants to be fair, but that’s for business reasons for you know, for the company.
Now, if you remember companies before they’re a monopoly, the whole point is to compete with the competition. And Apple has lots of competition. Lots in the sense of Apple is competing with Amazon. Apple is competing with Microsoft. Apple is competing with Google and Apple is competing with Facebook. Okay. And Apple has a lot of other count competition. Spotify is competing with Apple. But let’s take these other big entities. These other big entities are worth over a trillion dollars, just like Apple is worth over a trillion dollars. Apple is in ferocious competition with them and Apple does not have dominant market share of the smartphone market.
And here’s what I’ll point out to you. Okay, so a little while back when another app was trying to claim, you know, antitrust violations. I did an article on my blog, MacsFuture.com Apple does not have monopoly power in the smartphone market. And that is the relevant market. There are charts. And so if you look at smartphone sales from the third quarter of 2007, through the fourth quarter of 2019, which is last year, you could see that Apple has anywhere from under 15% to a little over 20% of all smartphone sales, globally. Right. So I mean, the world is kind of integrated economically, and smartphone sales Apple is every year more than 23% in some quarters, it’s down below 15 or 12%. Obviously, its fourth quarter around Christmas time is the big one.
Now in terms of worldwide smartphone shipments, market share forecast, Apple is listed as having less than 15%. And the rest is really dominated by Android. Android has 85% of the market in terms of mobile operating system market share. Apple has less than 20% of the market share.
Now one thing that is true is in terms of profits made in the smartphone market. Apple, does have a majority of the profits, but that’s because it’s making premium phones and it’s making its own chip and It’s integrated. In other words, there’s no other company making its device, and also the operating system. I mean, Google is trying to do it. But in very small quantities, only a small quantity of the Android phones or pixel phones. And Google, I think, is outsourcing the actual manufacturing of the hardware. But Apple is making the hardware. It’s making the chips, it’s making the operating system and so it has more efficiencies in making these devices.
And I think because of that, it’s garnering more profit. It’s the premium now, but is that the relevant market, that they have a majority of the hardware profits in the smartphone market? I don’t think that’s the relevant measure of market and think about it. Think about it from Epic Games perspective. Epic Games, wants to be able to get to as many customers as It can. But Apple only has 20% of all smartphones. If Apple kicks it out, they’re still 80% of the other smartphones, right that Epic Games can sell to. So Apple can shut out Epic Games from a majority of all smartphone users, because it only controls maybe 20% of all smartphone users.
So then what’s the argument for Epic Games Epic Games? And I don’t think they’re arguing this in the complaint because they can’t, because they also sued Google. Right? But they can’t argue that the people who use iPhones are more likely to pay for games. And so that’s the more lucrative market and we’re being shut out of the more lucrative market. Well, I’m not sure for gaming if that’s true. I mean, I think there are a lot of gamers on Android.
And so that’s not the relevant market. But then here’s the thing. It’s not just smartphones and for gaming, right? mean, Epic Games a little too cute by half here. But the gaming market isn’t just smartphones, right? A lot of people play Fortnite on the PlayStation, on the Sony PlayStation, the Microsoft’s Xbox, I think even maybe Nintendo Switch, the Mac, the PC, all these other devices are gaming platforms. Windows is a huge gaming platform. And I’m sure a lot of people play Fortnite on that.
So when you factor that in, in the universe of gaming devices, Apple has only a teeny percent of installs. So can’t really shut out and dominate, right? Like if Apple was a monopolist truly in this market. For games, Apple would be able to dominate 80% of the market for games of the people playing in games and then shut out for it. Right, but it can’t.
What this really is, is that Epic Games, which grew in Apple’s App Store, and is now making hundreds of millions of dollars, if not billions of dollars, is greedy, and doesn’t want to give Apple its cut of activity in the App Store. Now, regarding Apple’s app store, something like 80%, or 90% of the apps in the app store are free. And Apple’s doing all this backend work in terms of developing the technology for the developer tools like Xcode, and the API’s that come out every year that are revealed WWDC, lots of money is spent to do that. And for every game like Fortnite that makes money, Apple has all these free games that it’s supporting and those developers. Apple has an economic basis for charging 30%.
And then the other thing is if you look at this 30% cut, it’s not high. You know, if you go to Walmart and try to sell some product through Walmart, Walmart, I’m sure Walmart’s taking a significant cut out of that. And I’m sure Amazon takes a cut out of products that you’re trying to sell through Amazon. And you know, if you want to go in if I want if somebody wants to release an app into into Nintendo store, sure Nintendo’s taking a cut, Microsoft is taking a cut. Everybody’s taking a cut. So 30% is appropriate where Apple’s doing all the work in terms of collecting the money from users, providing the support is a reasonable fee.
Look, I think when a court looks at this case, the first thing they’re going to do is look at whether or not what first they’re going to decide what is the relevant market and I just think that the arguments that Epic Games is making — basically saying that the iPhone is itself a relevant market — are a big, big, big stretch. And I am going to follow this case, but I have a feeling that Apple is going to prevail on this. Apple may be worth close to $2 trillion. But it’s facing competition from other trillion dollar companies. And we’re not even talking about the Chinese companies that are out there that are worth, you know, maybe close to trillion dollars and are giants that are going to compete with the American companies. Apple’s a big company, but it still isn’t dominant in terms of market share. That’s why I think Epic Games is going to lose. We’ll have to see.