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Konvoy Ventures is a thesis driven venture capital firm focused on the video gaming industry. We invest in infrastructure technology, tools, and platforms.

Korea Takes a Bite Out of Apple

An update on the contentious Epic v. Apple litigation

The Epic v. Apple Saga Takes a Turn

The Epic Games v. Apple court case is one of the most significant gaming-related legal actions in recent history with widespread implications for the future of mobile content distribution. Just as a reminder, the legal challenge was initiated by Epic Games in August 2020 when its battle royale title Fortnite was removed from Apple’s App Store (along with the Google Play Store) for violating payment policies. Essentially, Epic was attempting to circumvent the marketplace’s 30% commission on in-app spending by reducing the price of Fortnite’s game currency for users that used Epic direct payment instead of Apple Pay. During the three-week trial that commenced in May 2021, Epic framed Apple as having a harmful monopolistic hold over the iOS mobile market.  

While the media buzz has generally subsided while a federal judge reaches a decision, Apple made waves last week by addressing some of the key accusations they faced during the trial (The Verge). It’s important to note that the statement was not proactive, but rather part of a proposed settlement for a class-action lawsuit (Cameron et al v. Apple) launched by a group of developers in response to allegedly monopolistic practices. Three of the most notable concessions include:

  1. $100m payout to developers that made less than $1m per year from the App Store
  2. Increased flexibility around the price points developers can charge for subscriptions, in-app purchases, and paid downloads
  3. Policy clarification that iOS developers are allowed to contact their customers outside the app (i.e., via email) to communicate alternative purchase options that are unaffiliated with the in-app payment system (i.e., logging into the account on a web browser and buying an item)

Of the settlements, #3 is the most notable. If the process of making developers collect user data and reach out independently from the app sounds unnecessarily complicated and burdensome, that’s because it’s fundamentally intended to discourage users from pursuing direct payments. Despite Apple’s press release (Apple) spinning this decision as a benevolent gesture to app developers, this is ultimately an attempt to mitigate future legal action without actually changing the status quo. If we think about the key constituents of this decision, nobody is meaningfully impacted by the changes.

  • Apple: Considering app developers are still not allowed to communicate alternative purchase methods within the app itself, Apple is still able to discourage buying items outside their walled garden. At best, the policy change can be viewed as relinquishing a minimal amount of control over spending within apps. On the flip side, this could also give credibility to Epic’s argument that their existing practices were oppressive to developers.
  • Large Developers: App Store guidelines were already updated in June to allow developers to communicate with customers outside of the app. While communicating alternative payment opportunities was still prohibited while using contact information obtained from inside the app, larger developers are more likely to have access to user phone numbers and emails from other sources. As a result, this is unlikely to be a meaningful change.
  • Small Developers: Although the new terms will allow smaller developers to have the same user outreach capabilities as their larger counterparts, users are likely less willing to jump through extra hoops to make purchases directly from lesser known titles.
  • International Developers: These new rules only apply to U.S. developers. No changes were made for international developers.
  • Consumers: App users are likely to continue choosing the path of least resistance when it comes to in-app purchases. As a result, from a consumer perspective this will likely not be a noticeable development.

Because the changes are so inconsequential, critics of Apple’s tactics are unsurprisingly dissatisfied with the proposal. According to Meghan DiMuzio, Executive Director of the Coalition for App Fairness, “Apple’s sham settlement offer is nothing more than a desperate attempt to avoid the judgment of courts, regulators, and legislators worldwide” (Washington Post).

Ironically, Apple’s legal challenges grew over the past few days. Earlier this week, South Korea’s parliament approved legislation that will prevent app marketplace owners from forcing developers to use their payment systems within apps (CNBC). Failure to comply with the new policy could be punished through fines as high as 3% of the parent company’s revenue within South Korea. Although Apple and Google have objected on the grounds that opening up apps to alternative payment systems could result in less security for consumers, the bill is expected to be signed since President Moon Jae-in’s party has championed this effort.

Beyond South Korea, Apple will likely continue pursuing favorable compromises in the face of legal challenges. One small concession that was made this week in light of an investigation by the Japan Fair Trade Commission (JFTC) was Apple’s decision to allow developers of “reader” apps (includes the likes of Netflix, Spotify, Kindle) to embed in-app links to their website for users to set up an account and subscribe (Apple). Previously, these apps featured messages that simply told a user they couldn’t sign up within the app.

All of this has admittedly been very critical of Apple. However, while we can wish that they operated differently, it’s tough to argue against Apple’s free market right to charge what they view as their fair share for a valuable distribution platform. Regardless of the debate over what is fair or unfair, the key issue at hand is whether or not Apple’s decision to a) make its App Store the only marketplace on iPhone hardware and b) require developers to integrate Apple’s payment system into their apps is monopolistic. That will be up to the legislators and courts.

Takeaway: These “concessions” by Apple seem like a preemptive move to hopefully sway legislators as they know that the 30% tax has a low chance of surviving. They’ve already moved towards a lower rate with a 15% tax for developers that join Apple News as well as only taking 15% for developers making under $1m ($1.3m in gross revenue) a year. We are clearly seeing a paradigm shift in terms of gatekeeping online access and distribution, and these next few legal decisions will have a comparable impact that United States v. Microsoft Corp had on antitrust.