Google’s epic legal defeat threatens $300 billion app store industry

The battle began in 2020, when Fortnite was kicked off the Apple and Google Play app stores because the game developer installed its own payment system. The idea was to bypass the up-to-30 per cent revenue share that the two tech giants take from in-app purchases and subscriptions on their platforms. In response, Epic sued both companies.

Google also has drawn criticism for making side deals with big developers such as Spotify Technology where it offers lower commissions. In Monday’s decision, the jury found that Google shouldn’t require Android app developers to use its billing system for software sold through its store — and that it shouldn’t offer custom agreements to certain developers.

“The immediate aftereffect is we will see a shift in the marketplace where big tech companies will have to make accommodations — whether it is more access, better terms, more options for developers — to stave off legal exposure,” said Paul Swanson, a partner at Holland & Hart who specialises in technology and antitrust law.

The case also underscores a sentiment among many consumers that major technology companies have gained too much power. Google also faced scrutiny from a Justice Department judge this fall over its power in search, though the outcome of that trial won’t be clear for months.

Epic’s Sweeney predicted that — as Google starts making changes to its operations and public pressure mounts — its app store peer will be forced to act as well. “The same thing will start happening with Apple,” he said.

And that will ultimately help consumers, Sweeney said. “The economics is real,” he said. “When you remove a 30 per cent tax from an ecosystem, consumer prices will get better. Or quality will get better and selection will increase.”

The case also underscores a sentiment among many consumers that major technology companies have gained too much power.

There’s a fortune at stake for Apple and Google. In-app spending is forecast to reach $US182 billion next year and $US207 billion in 2025, according to research firm Sensor Tower. Google will get about $US10.3 billion in revenue from app sales and in-app purchases from the Play Store in 2023, according to analysts at Wells Fargo. For every five points that the Play Store fee rate decreases, Google loses about $US1.3 billion in operating income or US9¢ of earnings per share, the analysts wrote.

Already, the Digital Markets Act in the European Union will spur changes. For the first time, Apple will need to allow third-party app stores and billing systems in the region. A ruling against Apple or requirements imposed by the EU’s DMA “represent more meaningful potential changes for the industry,” than the Google ruling alone, the KeyBanc analysts said.

Even before the DMA takes effect next year, the two companies have been making adjustments. Apple now lets so-called reader apps — such as software for cloud storage, watching video and reading books — link to outside websites to let users pay. That bypasses Apple’s revenue cut.

Both Apple and Google also have changed their policies to take a commission on subscription apps. And Apple has been forced to let dating apps in the Netherlands bypass its billing system.

Apple’s and Google’s aren’t even the only app stores that Sweeney has targeted. He has used Fortnite’s popularity to take aim at Valve Corp’s Steam, the dominant video game marketplace, which also takes a 30 per cent cut of sales. In 2018, Epic launched its own game store, offering exclusives to draw in audiences. Five years later, Epic’s game store isn’t profitable, according to Steve Allison, who runs the store, and Steam remains the market leader for video game apps. Valve is facing its own antitrust lawsuit from game developers angry about the 30 per cent revenue split.

“In the long run, the cat’s out of the bag,” said Joost Van Dreunen, an entrepreneur and lecturer at NYU Stern School of Business who has expertise in video games. “The unanimous verdict from a jury — which took only a short term to decide — has the potential to cascade across other ecosystems considering how blatantly Google sought to optimise its interests.”

The Epic win against Google has the potential to bring major changes to the companies’ home country. That includes shifting internet software back to a more open environment, rather than the app stores’ closed ecosystems, according to Stanford Law professor Mark Lemley.

“The last two decades have seen a profound shift away from the open internet towards walled gardens,” Lemley said. “That is one of the things that has kept the internet market so concentrated. This verdict just knocked a big hole in the garden wall.”

Though Apple won nine out of 10 counts against Epic when that decision was made in 2021, one issue is still up in the air: whether Apple should let all third-party developers point customers to websites to pay for purchases, bypassing Apple’s fees. It may now be harder for the iPhone maker to avoid that fate.

Google, which plans to appeal its verdict, said it “will continue to defend the Android business model and remain deeply committed to our users, partners and the broader Android ecosystem”. Apple didn’t respond to a request for comment.

Apple has said it doesn’t have any side deals with developers, though it offers discounted rates to some video streaming partners like Amazon.com. During the trial, Epic’s lawyers said Google also didn’t properly retain some internal records relevant to the case.

“I don’t think there’s much of a debate that the monopoly finding with Google holds true with Apple too,” said Jason Kint, CEO of Digital Content Next, a trade association for digital content companies. “The distinction that will be pored over is whether or not Apple abused that.”

Bloomberg

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