Epic’s Battle With Apple and Google Actually Dates Back to Pac-Man

(Bloomberg Businessweek) -- Epic Games Inc. is out to prove it’s worthy of its name. It’s in a massive fight with Apple Inc. and Google over the 30% cut that both companies take from game revenues on their platforms. Epic contends that the fee is both outdated and unfair. The revenue split has its roots in 1980s Japan and the era of chunky cartridges and primitive consoles. Now it’s being questioned by game makers such as Epic across the global developer community.

The so-called platform “tax” dictates the distribution of vast sums of money. Epic’s own Fortnite is estimated to generate in excess of $1 billion annually from in-game cosmetics and extras. The company’s protest against the giants escalated when it gave Fortnite users the option to buy the add-ons directly—which would cut Apple and Alphabet Inc.-run Google out of the transaction. That prompted Fortnite’s removal from both the iPhone’s App Store and the Android Play Store.

Epic then sued both Silicon Valley titans separately, saying each company was using its market dominance—a clear reference to antitrust pressures on Apple and Alphabet—to impose the charge. Epic also issued a parody of Apple’s iconic “1984” Mac commercial that symbolized the Cupertino, Calif., company’s once-rebellious spirit. This time, a game character charges up into the auditorium to smash the screen where a dictatorial apple is imposing its will. The tag line is: “Stop 2020 from becoming ‘1984.’” And of course there’s a hashtag: #FreeFortnite.

Apple says it won’t make an exception for Epic and that the matter could be easily resolved if the company updates Fortnite to bring it back within Apple’s established App Store guidelines. Google spokesman Dan Jackson said that in contrast to the App Store, Android allowed users to access apps paid-for outside its Play Store, without requiring developers to include an in-app purchase option that is subject to the 30% fee.

Steve Jobs, Apple’s co-founder and original rebel, handed down the 30% rule for app purchases and subscriptions to the App Store team, according to Phillip Shoemaker, who was in charge of app reviews at Apple until 2016. The only evolution since Jobs has been a reduction in the fee for developers to 15% per user who has subscribed to an app for at least a year. Google’s Android has matched Apple’s pricing structure.

But what was the 30% supposed to pay for in the first place? It was the Nintendo Entertainment System that first introduced the platform fee in the early 1980s. It began when Namco Ltd., the creator of Pac-Man and a major provider of arcade games at the time, wanted to expand its distribution via Nintendo’s nascent console—called the Famicom when it was released in 1983 in Japan. Namco got together with another game maker, Hudson Soft Co. (creator of Bomberman), to persuade Nintendo Co. to open its platform to outside software makers, according to Hisakazu Hirabayashi, an independent industry consultant.

Both were eager to be on Nintendo’s popular console, but Hudson couldn’t make its own cartridges, according to Hirabayashi. And so Namco proposed paying Nintendo a 10% licensing fee to be able to be on the console while Hudson paid an additional 20% for Nintendo to make its game cartridges. Nintendo agreed—and that two-component fee, licensing and manufacturing, became the basis of today’s 30% “tax.”

After fluctuating up and then back down as cartridges were superseded by discs, the fee has been imposed on generations of consoles and onto other platforms without much debate, in spite of radical change in the way games are distributed. Apple, Google, Nintendo, Sony, Valve, and Microsoft all charge software makers a 30% revenue cut, regardless of whether game purchases are delivered via physical format or digital download. Not all of these platforms publicize their share, but it’s become a well-known industry standard.

Sony Corp. has told software makers that its revenue slice on digital goods consists of transaction fees, server maintenance costs, and licensing payments. Apple Chief Executive Officer Tim Cook has argued that his company provides security, development support, and the ability for small companies to reach an audience of a billion users for an annual $99 fee to participate in its developer program.

For years, Epic Games CEO Tim Sweeney bristled against such arguments, insisting software developers deserve a bigger share of the pie. In 2018 his company launched the Epic Games Store—as a rival to Valve Corp.’s Steam on Windows PCs—where creators can keep 88% of their game income instead of 70%. His argument is that the rationale underpinning big platform fees on consoles—where the platform owner is closely involved and invested—is absent on broader platforms such as PC and mobile.

Japanese game publishers, having originated the 70/30 revenue split, are less worried about the pie distribution. However, the recent change of direction with the Apple Arcade subscription—which led to a number of contracts for games being canceled—has led to a distrust of Apple’s stewardship. Still, none of the Japanese game publishers were willing to voice support for the Epic #FreeFortnite campaign for fear of reprimand from the iPhone maker. “I don’t think developers in Japan are necessarily hoping Apple will cut the fee, but there must be better services to make them think it’s worth paying the 30% revenue fee,” Hirabayashi says.

At an extreme, the battle between Epic and the mobile duopoly of Apple and Google could result in the creation of a new platform. A similar thing happened when the cost of making Nintendo software cartridges ballooned—which led to fees higher than 30%—after which Sony launched PlayStation with the cheaper-to-manufacture discs, attracting game developers with a return to the “lower” fee. Nintendo’s recent success with the portable Switch console has proved there’s a mobile gaming market beyond smartphones: Its sales during the Covid-19 pandemic were described by one analyst as Christmas in summer.

Gaming industry profits have never been bigger, so the decision on how they’re portioned out has never been more important. Apple and Google face the loss of one of their most profitable titles in the form of Fortnite while they confront greater antitrust scrutiny from legislators. That may finally get them to give up their insistence on a fee with roots in ancient game cartridges.
 
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