An Epic Revolt in the Realm of Apple

David C Donald – The Chinese University of Hong Kong

-- The realm of Apple Inc is well-sealed – and has been much more stable and far more profitable than the Beatles' record label which first bore the name Apple. The firm has an air of cult, and this derives not only from the trials of its revered co-founder, but also from twin forces of user devotion to its design and culture and the carefully structured circularity with which content and connections available for Apple devices are restricted to Apple control so they feed revenue back into the parent company. Much of that cash is then (with similar circularity) used to engage in enormous, multi-billion-dollar repurchases of own shares, which makes Apple a favorite of Wall Street, and its executives very wealthy.

Apple’s hallowed place in American culture has followed the cultivation of this sealed system. Like Hoover (once generically used to mean “vacuum cleaner”), Kodak (once generically used to mean “camera”), Xerox (once generically used to mean “photocopy”) and Kleenex (once generically used to mean “tissue”) before it, the word “iPhone” became a synecdoche for all devices with similar characteristics, rendering all smartphones “iPhones”. The iPhone itself was a wonderful piece of opportunism. As Mariana Mazzucato has carefully laid out, the iPhone is a collage of technology (click-wheel navigation, GPS, multi-touch screen and SIRI) developed with US government funding, largely military, which was then bundled together in a new product. The modern accelerometer, also perfected for military purposes, was another piece of the puzzle. In this way, dull inventions paid for by faceless US taxpayers became “Apple cool”, making shareholders and executive officers very rich. Even repeated violations of labor law and staff suicides in factories producing the iPhone cannot diminish the device's aura.

The genius of the Apple temple – transforming the offerings of common people into something finer and better and locking in profits in the process – was carried to an even higher level in Apple’s developer platform, iTunes (now the App Store). By ceding to Apple content control, a monopoly on distribution to Apple users and nearly a third of the returns, developers’ games and apps took on the quality of being Apple-approved. And if content became truly profitable, Apple could simply buy it out, the way Facebook, Amazon and Google do to their young competitors as well. In this way natural network effects compound with Apple’s control over platform content and distribution to Apple devices. Given such enormous concentration of power in parts of the economy that have become essential to most people's daily lives, it is small wonder that these platforms have spawned a whole new school of antitrust scholarship.

Then a unicorn hammer was thrown through the placid, controlling message of Big Apple. The perpetrator was Epic Games, a relatively nondescript maker of games – including Fortnite – from North Carolina. According to Epic’s founder, Tim Sweeney, the 30% cut that Apple seeks (“app tax”) from Epic and other developers is just too large, especially given Apple’s prohibition on selling developer products outside of the Apple portal, so Epic offered an indirect discount to persons purchasing Fortnite directly. In response, Apple threw Fortnite out of the App Store, blocked its use on iOS and threatened to close down Epic’s developer engine (the “Unreal Engine”), which it also leases to third party developers. After hearing Epic’s request for a temporary restraining order against these Apple actions, the District Court for the Northern District of California found:

"With respect to [the exclusion of Fortnite from Apple devices] that during these coronavirus pandemic (COVID-19) times, virtual escapes may assist in connecting people and providing a space that is otherwise unavailable. However, the showing is not sufficient to conclude that these considerations outweigh the general public interest in requiring private parties to adhere to their contractual agreements…. With respect to the Unreal Engine and the developer tools, the … record shows potential significant damage to both the Unreal Engine platform itself, and to the gaming industry generally …. not only has the underlying agreement not been breached, but the economy is in dire need of increasing avenues for creativity and innovation, not eliminating them. Epic Games and Apple are at liberty to litigate against each other, but their dispute should not create havoc to bystanders. Certainly, during the period of a temporary restraining order, the status quo in this regard should be maintained."

This Epic rebellion, together with Cameron, et. al. v. Apple Inc., 4:19-cv-03074-YGR now makes two pending lawsuits against Apple’s very profitable closed system, and in the current awakening of interest about the network power of platform firms, they could lead to change. Although this push for change appears purely domestic, it is worth noting that Tencent, the giant Chinese maker of WeChat, an app being banned from the US market under Executive Order, is reported to be a large shareholder in Epic Games, although Tencent’s 2019 annual report does not list Epic as a “principal subsidiary” pursuant to Hong Kong listing rules.

It has been a long while since Microsoft destroyed the NetScape browser by writing a FUD (fear, uncertainty and doubt) protocol into its Windows program, so that whenever a user chose NetScape rather than Windows Internet Explorer as their browser, Windows spewed danger warnings regarding the foreign browser for which Microsoft could give no guarantees of safety. Those were early days in the growing dominance of networked platforms in the US economy. Perhaps Epic’s allegation that Apple’s restrictions on software development for its devices create “monopoly power in the [iOS] market … [and] Apple’s anti-competitive acts to maintain its monopoly in the market … [cause] harm to competition, including to would-be competing app distributors, app developers, and consumers,” will be heard. On the other hand, it could be that the reality distortion field famously employed by Apple’s founder, will continue to keep the problems of today’s dominant platforms hidden to both the public and the government, particularly when the challenging firm has a major Chinese shareholder.

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