Apple & Epic: The state of intervention

Most will have seen the news about Apple and Epic’s showdown over platforms, distribution and billing. Other articles by journalists will do a far better job than I will of explaining the details but suffice to say, Apple was not found to be a monopoly but its approach of demanding developers only use Apple’s payment system, and not be allowed to point to their own, was determined to be anti-competitive and in breach of the law.

It’s my position that what looks like a short term gain for developers won’t be good for them or the market in the long run. While most will feel happy about gaining more choice within an enclosed platform, attacking the platforms' revenue stream will likely lead to many unintended consequences,

As a quick note, I’m not a lawyer and I’m far more interested in the way this affects behavior and interactions between parties and its effect on the future of markets.

Developers

Most developers will welcome the news as it opens their apps to other payment instruments which will, in theory, open up completion in payments and reduce the share that they will pay which is currently 30% of all IAP revenue, or less in some cases around subscriptions.

Epic Games hasn’t come out of this unscathed, the judgement was in Apple's favor in all but this one case. Perhaps more worryingly for Epic, Apple are no longer prohibited from ceasing to allow Epic’s products on their platforms and systems.

Apple's potential loss of their 30% ‘app tax’ may lead to some unintended consequences. It’s not unforeseeable that Apple begin to charge Developers much larger fees in general, not to mention charge for hosting store content, downloads and many other associated platform costs – all things that presumably wouldn’t even be subject to only covering the ‘cost’ of such things.

There is an argument that the competition will mean that Apple have to do more for those who stick with their payment platform. For instance, perhaps they would give developers free access to analytics and insights which may become a paid for feature.

Players

Most players are unlikely to see much difference as most are not spenders in the first place. Those who do spend may have to go through a more cumbersome process. The user experience of signing into another payment system, and if it's not a well recognized third party may lead to some hesitancy.

I wouldn't be surprised to see some targeted promotions aimed at the bigger spenders without the In-App Purchase limits Apple currently implements. There may also be a risk of more fraud and getting refunds may become a trickier issue.

Platforms

While this is a victory for Apple and similar closed systems like Xbox and PlayStation, the impact of having to forego revenue is a bit of a daunting prospect. While I suspect that not all revenue will move away from Apple's systems, a lot of free-to-play developers are likely to open up preferred payments to their biggest spenders, Epic showed the way with their own discounts. As most free-to-play games have a Lorenz curve that would make the US blush, there’s a lot of upside in not having to pay that 30% 'app tax', and convincing a relatively small amount of big spenders to go with another payment provider may well be worth it for many developers.

It’s in the platforms’ interests to discourage this, though presumably they aren’t allowed to do anything nefarious like kick apps off the store for using third party payment systems. They could certainly refuse to surface apps that do this through their promotion opportunities like highlighting an app in a ‘Game of the Day’ feature or similar. Or as mentioned above, charging for things like submission testing, analytics services and so on.

The Market at Hand

The introduction of the iPhone and the App Store led to an explosion of games development. The universality of touch controls and ubiquity of smartphones opened games to so many more people than the traditional console and PC audience.

There are over one million games on the App Store today, and a lot of developers are employed making these games. The games themselves are wildly popular, the infamous Candy Crush has had over 2.7 billion downloads, and who hasn't played Angry Birds?

With so many developers and so many consumers benefiting from the innovation of the iPhone, the App Store, Android and the Google Play Store, as well as third part stores on Android, I fail to see any kind of market failure. Could it be more favorable to developers? Of course, and we have seen platforms respond to this in a small way. Were the levels of revenue keeping new entrants out of the market or making it impossible to operate, not as far as I can see.

In terms of free markets and contractualism, this market seemed to be functioning perfectly well without need for much intervention outside of regular consumer protections. The market had arrived at an equilibrium with a competitive standard where platforms take a 30% cut of all IAP sales in exchange for use of the platform, hosting, some operations tools and the chance for store featuring. The intervention we have seen here was essentially kicked off by Epic taking umbrage with Apple’s approach to games on its mobile platform.

Having the state come into this market, which I accept are applying the law, and essentially forcing a change in payments and this equilibrium. Do we really expect these platforms to do all that they currently do while opening themselves to potentially losing all of their revenue? Games and apps form a part of the selling point of an iPhone but they may well need to develop entirely new ways of monetizing their end of things.

There are further ramifications too; if the well-established free market approach that was naturally arrived at isn’t acceptable, if platforms are expected to forego some amount of revenue, what will the long term impact be? Will there be another mobile operating system if the most effective and easiest to implement revenue streams become unviable? As with so much ‘protectionist’ law, I mean that in a market sense and not a national one, the biggest risk is that we create permanent incumbents. After all Apple can soak up these losses, the next new competitor that would have been maybe can’t. I feel this is a case of, be careful what you wish for.

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