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Why Apple Will Likely Win This Video Game Battle

The legal battle between Apple (NASDAQ: AAPL) and Epic Games isn't looking good for the Fortnite creator, which might be regretting its decision to do an end run around the tech giant's payment system for transactions made from apps downloaded through its App Store.

The judge hearing the case recently said Fortnite can be kept off the App Store until a trial commences next summer, and even then the chance of getting reinstated looks bleak.

The main game in town

Epic objects to Apple taking a 30% cut from sales made from in-app purchases via apps downloaded from the App Store. While many developers have railed against the fee, no one before Epic attempted to actually challenge Apple for fear of losing out on access to the App Store's hundreds of millions of users.

The game designer implemented a workaround to allow users to pay it directly rather than go through the App Store, which resulted in Apple immediately banning Epic and its Unreal Engine game-graphics platform, which underpins some of the most successful video games, movies, and TV shows.

While players can access Fortnite via Microsoft's Xbox game console, Nintendo's PlayStation and Switch, as well as computers, fully one-third of the 350 million registered users of Fortnite, or 116 million players, access it through Apple's iOS.

Epic sued Apple saying it will "suffer irreparable harm" if it's kept off the platform, and asked the court to force Apple to restore both Fortnite and the Unreal Engine to the App Store.

In a Solomon-like ruling, the judge issued a temporary restraining order last month permitting Apple to keep Fortnite out of the App Store, but reinstating Epic's Unreal Engine because it was not involved in the fee dispute. She put the order in place until she holds the trial, meaning the earliest Fortnite might be allowed back on the platform would be next summer. Yet if her recent comments are any guide, it's not looking good for Epic Games.

Image source: Getty Images.

Not buying it

U.S. District Court Judge Yvonne Gonzalez Rogers said Apple had the right to keep Fortnite off the platform and told the game maker its "predicament appears of its own making."

She also upbraided Epic. When the game maker tried to minimize Apple's argument that the fee system helped create an ecosystem safe from security risks and malware by saying Epic was a longtime participant on the platform and posed no security threat, CNN reports, the judge was adamant.

She reportedly indicated Epic knew it was violating its agreement with Apple when it created the payment workaround. "You did something, you lied about it by omission, by not being forthcoming," she said. "That's the security issue. That's the security issue! There are a lot of people in the public who consider you guys heroes for what you guys did, but it's still not honest."

A bleak outlook

The harsh commentary does not bode well for Epic when the case finally goes to trial, where Gonzalez Rogers will be presiding, and in the meantime, Epic will continue to bleed.

Last week's ruling means the game maker can't distribute Fortnite through the App Store until the trial concludes, and it won't be able to publish any new games on Apple's iOS either -- unless, of course, it acquiesces and complies with Apple's rules and pays the 30% fee.

If Epic stays the course, it could be an expensive proposition. Epic says the number of iPhone users playing the game plunged 60% following its removal from the platform, and one estimate suggests Epic is losing almost $27 million a month due to the ban. All for a position that seemingly has little chance of prevailing.

In her decision, Gonzalez Rogers noted the App Store fee was not a one-off situation unheard of in the industry. In fact, it is commonplace. She told Epic, "Walled gardens have existed for decades. Nintendo has had a walled garden. Sony has had a walled garden. Microsoft has had a walled garden. What Apple's doing is not much different ... It's hard to ignore the economics of the industry, which is what you're asking me to do."

The tenor of those comments suggests she favors Apple's position in this and is opposed to having the courts overturn an industry norm.

Having to pay the fee may cause developers to chafe, and Epic has a number of high-profile backers, including music-streaming service Spotify and online-dating site Match., which support its position. Yet just because Epic's stance is popular with app developers doesn't mean it will prevail in court, and Epic Games looks poised to run straight into that reality.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Match Group, Inc., Microsoft, and Spotify Technology. The Motley Fool recommends Nintendo and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.


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