Epic-Apple Judge Signals Her Ruling Won’t Please Either Side
(Bloomberg) -- With billions of dollars up for grabs, neither Apple Inc. or Epic Games Inc. will get what they want out of their court fight if the judge’s ruling embraces the concerns she voiced at the end of a three-week trial.
U.S. District Judge Yvonne Gonzalez Rogers said she’s skeptical that the iPhone maker’s App Store allows for any “real competition” -- the issue at the heart of the case -- and also questioned Epic’s motives in suing to upend the App Store business model, implying it could help turn the Fortnite game maker from “a multibillion-dollar company into maybe a multitrillion-dollar company.”
That leaves a lot of middle ground for the judge to shift the power dynamic in the $142 billion market for mobile applications in a way that gives Epic and other app developers a bigger slice of the revenue currently flowing to the world’s most valuable company.
Testimony at the trial revealed the stakes are high for both companies as the judge weighs options that range from leaving the App Store undisturbed to forcing a radical overhaul of its policies that would allow more outside competition. Fortnite, the blockbuster game that Apple removed from its store in August, generated more than $5 billion for Epic last year. The App Store, by some estimates, takes in more than $20 billion a year for Apple with a profit margin north of 75%.
Gonzalez Rogers said Monday after the companies presented closing arguments that she’ll rule as soon as possible while all the issues are fresh in her memory, but didn’t specify a date.
Besides its immediate impact on the companies, the judge’s ruling could potentially spur action from the U.S. Justice Department and other global regulators examining the extent of Apple’s power as a gatekeeper to the digital economy.
Here’s how some outcomes could play out:
- No change to status quo: The judge rejects all of Epic’s claims against Apple, granting the iPhone maker a sweeping victory. This would result in no forced changes to the App Store, allowing Apple to continue to require developers to distribute their software exclusively through its store and ban third-party in-app-purchase systems.
- Tweaks to App Store policies: The judge modifies Apple’s license agreements to allow third-party App Stores on iOS. She could also rule that Apple has to provide ongoing support for third-party stores so that they don’t break from future software updates. The judge will decide whether this exemption to App Store rules applies only to Epic or is required for all developers.
- Sweeping changes: The judge finds the App Store is anticompetitive and issues an injunction, as requested by Epic, that blocks the store from carrying on business as usual. In this scenario she might rule that Apple must make a combination of changes that include providing support for third-party app download stores and permitting in-app transactions through alternative payment systems.
- A compromise: The judge issues a more nuanced decision that mostly retains Apple’s control of the App Store and its in-app-purchase system. But Apple might have to allow to developers to have links, which could be in the form of a button in an app, to lead users away from the App Store to payments systems on the web where they can buy virtual goods at lower rates.
Legal experts gave Apple the advantage heading into the trial. But a complete victory for the iPhone maker looked less certain Friday during the judge’s sharp questioning of Chief Executive Officer Tim Cook, when Gonzalez Rogers voiced skepticism about Apple’s argument that the benefits of its tight controls on how apps are vetted and marketed outweigh Epic’s antitrust claims.
The judge hinted that she was searching for a compromise around the idea that iPhone users should have the option to buy lesser-priced virtual goods and content directly from developers.
If she goes that route, Gonzalez Rogers could frame her ruling “in sufficiently general terms,” implying Apple has to allow all developers selling virtual goods to steer customers to websites to make purchases, according to Joshua Davis, a professor at University of San Francisco’s law school.
“She could go further -- for example, setting a commission at lower than 30% -- but that seems unlikely,” Davis said.
David Kesselman, a Los Angeles-based antitrust litigator who’s not involved in the case, also sees room for a compromise.
Gonzalez Rogers could “fashion something that doesn’t give Epic everything it wants but it could be something that’s less restrictive and gives Epic a partial win,” he said.
Whatever Gonzalez Rogers decides, the legal experts said, an appeal to a higher court is all but certain. The judge said during the trial that she wanted to build out a clear record of all the evidence as she expects an appeal after she rules.
“If Judge Gonzalez ‘splits the baby’ -- coming up with some compromise -- it would not be at all surprising for both sides to seek a more favorable outcome on appeal,” Davis said.
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