On May 3 in California, Epic Games, creator of the video game Fortnite, challenged Apple (NASDAQ: AAPL) in federal court regarding what it calls "the Apple tax." The court battle between the giant companies is expected to last for several weeks and reportedly represents the biggest legal threat that Apple has faced in decades.
Epic is accusing Apple of what it calls monopolistic practices, relating to the company's commissions on in-app purchases. Currently, Apple usually charges a 30% commission on every purchase made on their phones, with every payment being processed by Apple's own system. Based on the last fiscal year, the total of these commissions equates to several if not tens of billions of dollars.
For context, Apple is a $2 trillion company, and Epic is a $29 billion company. Due to the fact that iPhone sales peaked years ago, analysts believe the commission is a key revenue stream for Apple.
Apple argues that the commission is in place in order to cover the cost of safeguarding the security and privacy of apps on their store. However, at a Senate hearing on antitrust violations last month, committee chair Amy Klobuchar pointed out that while Apple reportedly spends just $100 million per year to run the App Store, it brings in $18 billion per year from the platform.
"Those look like monopoly profits," Klobuchar said regarding the fee.
Apple's chief compliance officer, Kyle Andeer, answered Klobuchar's observation by claiming that "Apple's invested significant sums in technologies, resources, tools, to allow developers to build their apps, far in excess of this $100 million figure."
Meanwhile, Epic says that the fee, "the Apple tax" as it is called by critics, creates an unfair disadvantage for smaller developers while favoring Apple's own apps. Last August, in the midst of Epic and Apple's high-stakes dispute, Apple announced that Epic's latest version of Fortnite would not be available on the App Store.
While Epic's case is apparently strong enough to warrant a full bench trial, U.S. laws tend to favor large corporations in antitrust matters. It isn't enough to show that Apple is a monopoly, which isn't illegal, but rather that the company is wrongfully using its monopolistic power to hurt competitors.
This isn't the first time Apple has faced antitrust legal pressure. At the Senate antitrust subcommittee hearing last month, several app developers testified regarding the veiled threats and bullying they had allegedly suffered at the hands of Apple and its lawyers. Developers like Match (NASDAQ: MTCH), Tile, and Spotify (NYSE: SPOT) spoke about the unilateral and unexplained decisions that Apple is allegedly able to make due to the power they hold.
Spotify in particular pointed to the 30% commission as a sign of Apple's allegedly monopolistic tendencies. After Spotify changed its subscription price from $9.99 to $12.99 ostensibly to account for the fee, the company claims that Apple launched its own music listening platform at $9.99 per month.
The U.S. antitrust investigation of Apple has been underway for nearly two years. Last year, the Department of Justice began scrutinizing the same 30% commission and restriction on payments systems.
In the European Union, Apple has already faced antitrust charges regarding its use of its power to regulate the distribution of music streaming apps. The charges were brought last month after Spotify complained that Apple was using its dominance to prevent potential customers from going through other avenues to pay for their subscription.
In response, Apple argued that Spotify actually doesn't pay the commission fee for 99% of its users.
"Once again, they want all the benefits of the App Store but don't think they should have to pay anything for that," Apple said in a statement. "The Commission's argument on Spotify's behalf is the opposite of fair competition."
However, Spotify pointed out that it wasn't their own success that was at issue, but rather the success of relatively smaller platforms like Deezer and Soundcloud.