Epic Battles Apple: I Missed a Spot

On Tuesday I wrote about how Epic Games’ CEO Tim Sweeney was engaging Apple on at least three battlefronts.  I missed a battlefront and I’m here today to rectify that mistake.

I mentioned Epic’s groundbreaking and lucrative product, the Unreal Engine, which can be downloaded on Github for free and provides a basis for software developers to start creating games. In today’s business model, Epic can charge the developer 5% of revenues or waive that fee altogether if the game is sold through the Epic Game Store.  A few years back, Epic also opened the Unreal Engine Marketplace, a place where programmers can offer “art assets, models, sounds, environments, code snippets, and other features that others could purchase, along with tutorials and other guides.” Not only is the Unreal Engine the basis of hundreds of well-known video games, but it also used in Hollywood to create virtual sets for shows like the Mandalorean and Westworld.

Apple has its own version of a game development engine called Xcode. We could anticipate that the use of Xcode would benefit from problems with the market-leading Unreal Engine. In another shot from the war I discussed earlier this week, Apple has now threatened to cut off Epic from developer accounts and iOS/Mac development tools. According to Epic, “without that access, all future versions of Unreal Engine can’t be developed for iOS and Mac devices like iPhones and Macbooks. In turn, subsequent updates to iOS or Mac devices could make software running on Unreal Engine unusable.” This means that many hit games that use the Unreal Engine, including the Mortal Kombat series and the popular Sea of Thieves game may be cut off from the iPhone mobile market.

Game Developer Breanna Wu was quoted in the Washington Post saying “that Apple seems to be pushing iOS developers to use Xcode, Apple’s own integrated software development program. ‘Apple’s 3D tools are better than they were a decade ago, but it’s not anywhere near the league of Unreal Engine.’”

Many developers will be caught between Epic, who supplies their gaming engine, and Apple, who controls one of the most significant gaming platforms. Apple has said that this problem can all go away if Epic just steps back in line and continues to pay 30% of its revenue to Apple on all in-game purchases. Both companies will lose significant money if Epic game Fortnite remains off of Apple mobile platforms and if properties built using Unreal Engine also fall off of those same platforms from lack of support.

So is this a fight over the right to serve apps to the over a billion devices that are forced to use the Apple app store or over the ability to sell software developers the code that underlies their creations?  Maybe it is both.

From a lawyer’s standpoint, the anti-trust issues are fascinating. It seems like Apple is leveraging its dominance in one part of the market – access to mobile smartphones and iPads – to gain an advantage in an entirely different market – gaming engines for app development. Under U.S. and EU law, companies are not supposed to be able to leverage dominance in a market to force competitors out of a different market.  AT&T was broken up for similar behavior and Google has paid billions of Euros in fines for the same. And yet the gaming console makers Sony, Microsoft, and Nintendo act in almost exactly the same manner in regard to their closed software systems, and no one has thought to push them to open further.

As noted in Ars Technica, “Back in the days of the Atari 2600, anyone with the programming skill and cartridge manufacturing capacity could make games for the console. That state of affairs led to a glut of poorly made Atari software flooding the market, a situation many observers blame for the video game industry crash of 1983. To prevent history from repeating itself, Nintendo created a lockout chip for the NES that gave it effective control over what cartridges could run on its hardware (and gave it the capability to extract a licensing fee from game developers for the privilege of producing cartridges). When companies like Tengen tried to get around this restriction, Nintendo took them to court and won, cementing its right to Apple-style control of its own software marketplace. Decades later, this kind of absolute control over compatible software is treated as the de facto standard in the console space. But in the world of mobile phones, companies like Epic are increasingly and publicly lambasting similar restrictions as anti-competitive monopolistic practices. What's the difference?”

Does the smartphone’s flexibility as a platform for all types of programs make it more important to open software platforms than closed gaming platforms? Does the fact that Apple sells its equipment at a profit and consoles makers take a loss on sales make any difference in measuring these markets? Or could the fact that Apple plays in many more spaces in online software development and marketing mean that anticompetitive behavior from Apple just means more to the markets than it would from Sony or Nintendo?

This week, as Apple becomes the first company to pass the two trillion-dollar mark in stock value, is it overreaching to protect its massive income streams? Courts and regulators have not seen fit to address this question yet but could pass final judgment on the strategy.