Tim Sweeney testimony and new documents shed light on Epic and Apple’s game businesses

The Apple v. Epic antitrust trial that began Monday is digging into some of the secrets of the business of gaming, as documents and testimony are surfacing some of the key numbers behind each titan’s business practices.

Epic has sued Apple in federal court in the Northern District of California in Oakland, alleging that Apple’s control of its App Store and payment restrictions for mobile games and apps amount to an illegal monopoly. Apple responded with an opening statement that painted Epic Games as a big corporation that is overplaying the victim role and is threatening the security of the App Store.

The lawsuit started last August after Epic Games, the maker of the popular Fortnite battle royale blockbuster game, tried to circumvent Apple’s payment system and implement a discount for consumers that avoided Apple’s 30% fee for App Store’s transactions. Apple kicked Epic’s game out of the App Store, and Epic sued Apple for antitrust violations. (Epic Games also sued Google for similar reasons).

The trial started hilariously as the court accidentally left microphones open for all public callers, allowing gamers to profess their support for Epic and to get their favorite game back up on the iOS App Store. But eventually, outside counsels Katherine Forrest for Epic Games and Karen Dunn for Apple gave their opening statements.

Email evidence

Above: Epic Games’ opening statement slides make its case against Apple.

Image Credit: Epic Games

Epic pulled out statements going back to former Apple CEO Steve Jobs about his intentions to “lock in” consumers into Apple’s ecosystem in opposition to rivals such as Google. Apple, meanwhile, noted that Epic CEO Tim Sweeney tried to enlist the help of Apple competitor Microsoft in a scheme to call out Apple on its alleged anti-competitive practices, even while he was saying in the allegations that Apple was far more powerful than all competitors.

Much of the case will focus on a couple of issues. Epic has accused Apple of controlling app distribution with draconian policies on its App Store, including its high 30% fee on all transactions. Epic compared this to Apple getting a share of the purchase price of a car and then getting a 30% share of money paid for gas for the car every time the driver buys gas. Epic has also said Apple controls payments through its own payment system, even though rival payment systems work perfectly well. And it noted Apple does not uniformly enforce its policies, as it allows Uber to use a different payment system because it is in a different app category than Epic.

Epic argued the “relevant market” for evaluating anticompetitive behavior is the App Store, as Apple has a lock on a billion wealthy gamers who spend a lot of money and face a lot of switching costs when it comes to defecting to another platform. But Apple contends that the relevant market is far broader, as Apple has less than 50% of the global smartphone market and Android is more dominant. On top of that, it noted that it only accounts for 7% of global Fortnite revenue, while rivals such as Sony account for 46.8%.

Epic said Apple should allow it to sideload apps and use alternative payment systems. But Apple said allowing sideloading to let developers put untested apps into their App Store apps would circumvent security. Apple noted that its iOS devices accounted for only 1.72% of all malware infections, compared to 26.6% for Android and 38.9% for Windows. Epic pointed out that Apple allows sideloading on the Mac, without being as restrictive as it is on security for the iPhone.

Dunn said that evidence shows that platform-switching does happen, sometimes as much as 26% of the time when people buy new phones. There are also many alternatives to Apple for digital game transactions, Dunn said. Apple said 95% of its customers can use alternatives to iOS in the home, based on a survey.

Sweeney’s testimony

Above: Epic’s argument about its antitrust case.

Image Credit: Epic Games

Epic Games CEO Tim Sweeney testified on Monday, the first day of an estimated three-week trial, but many of the questions were dull inquiries like “What is a console?” and “What is an avatar?” Sweeney answered those questions patiently. Occasionally, Judge Yvette Gonzalez Rogers, who is presiding over a bench trial, asked her own questions.

But the documents released through the court turned up more interesting information. Simon Carless of GameDiscoverCo found documents that mentioned the details of Epic’s game giveaways in 2018 and 2019. Subnautica had more than 804,000 users when Epic Games gave away the game on its then-new Epic Games Store. Epic gave the developers $1.4 million, and roughly 17% of the players were new to the Epic store. That means the giveaways were a relatively inexpensive way to acquire new users.

For Borderlands 3, Epic paid $146 million in advances to have the game as an exclusive on the PC. Epic recouped the $80 million minimum guaranteed fee of $80 million for marketing, bundle deals, and fees. And it got more than 1.56 million players. Of those, half were new to the store.

Some of the case will depend on which company is better at handling security. Epic said that Apple uses security as a reason for denying Epic’s desire to permit other ways of handling purchases on the iOS platform. But Epic said it is good at handling security and Apple hasn’t been over the years, citing evidence of numerous security breaches that have affected millions of users. There is evidence in the court of both sides being weak on security.

In one email, an Epic executive Daniel Vogel said that “payment fraud is an existential threat to our store.” In another email entered as evidence, Sweeney had to apologize to Ubisoft CEO Yves Guillemot because 70% of the downloads of Ubisoft’s The Division 2 were fraudulent purchases, and Epic had to temporarily halt the downloads for all Ubisoft games in the Epic Games Store at one point in 2019. Apple will likely point to this as evidence that Epic isn’t capable of providing app security in a store.

Sweeney said that Epic generated gross revenue of $5.1 billion in 2020, compared to a plan (in chart below) for $3.8 billion in 2020 revenue. That compares with our own discovery that in 2019, Epic Games reported $4.2 billion in revenue and $730 million in earnings before interest, taxes, depreciation, and amortization (EBITDA, a key measure of profitability). Sweeney said Epic has more than 3,200 employees. The documents also show Fortnite’s budget in 2017, as well as how much Epic paid various vendors for outsourcing tasks. There’s also a redacted copy of Epic’s agreement with Microsoft to publish Fortnite on the Xbox One game console.

Since its launch on iOS on March 16, 2018, Fortnite has generated 88 million downloads and $631 million in revenue. On Android, Fortnite has generated 80 million downloads and $47 million in revenue since August 13, 2018. That is a huge difference in how willing iOS users are to spend money compared to Android. According to a presentation in June 2020, Fortnite had 81 million monthly active users, the Epic Games Store had 45 million monthly active users, and Epic’s Unreal Engine had 540,000 monthly active users.

Big profits

Above: Epic’s once-secret revenues have been disclosed in court papers.

Image Credit: Epic Games

In an opening statement, Apple’s outside legal counsel Dunn reminded the court that Epic Games isn’t a small David fighting a Goliath, as Epic is valued at $28 billion. She also reminded the court that Apple’s App Store has 1.8 million developers who have generated more than 180 billion downloads from the store. Epic pointed out that Apple’s profit margin on the App Store is 78%. Dunn noted that before Apple came along, publishers typically charged a 70% royalty fee for games and apps, while many companies in the industry are now standardized on 30%, while Epic alone and Microsoft (as of last week) charge only 12%.

Asked why it took 10 years for Epic Games to file a lawsuit against Apple, Sweeney testified, “Epic didn’t initially take a critical view of Apple’s policies. It took a very long time for me to come to the realization of all the negative impacts of Apple’s policy.”

Above: Apple says there is plenty of competition to its App Store.

Image Credit: Apple

Sweeney said in his testimony that Sony requires Epic Games to pay a royalty to Sony for enabling crossplay, or the capability to play Fortnite on PlayStation and to team up with other players on other platforms such as Nintendo or Xbox.

Sweeney said he wanted the world to see the consequence of Apple’s policies when he decided to take the action that led to Apple removing Fortnite from the App Store. He said he had hoped Apple would not take that action but wasn’t sure exactly what it would do. Still, anticipating action from both Apple and Google, Epic had “Project Liberty” ready to go — an antitrust lawsuit against both Apple and Google.

Above: Apple argues its store has been great for developers.

Image Credit: Apple

Apple even tried to take away Apple tools from Epic’s Unreal Engine, but the judge quashed that motion, as that would have had a big impact on Epic’s game engine customers.

He said that Fortnite transcends gaming, with special entertainment features such as concerts and films, and he believes it is a contender to be a metaverse, the universe of virtual worlds that are all interconnected, like in novels such as Snow Crash and Ready Player One.

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