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Written By: Hunter A. Milliman
Member, American Journal of Trial Advocacy
During the COVID-19 pandemic, amidst working from home and adjusting to prolonged periods of minimal human interaction, many people have found their need for social interaction can be satisfied through video games. The video games industry is booming during the pandemic,[1] and that’s certainly the case for Epic Games’ smash hit—the online multiplayer game Fortnite.[2] Among this industry success, however, Epic Games took a hit when Apple removed Fortnite from the App Store in August of 2020.[3] Epic Games subsequently filed a lawsuit against Apple, alleging, among other things, that Apple had violated the Sherman Act for its monopolistic control over apps.[4] This blog post argues that in this case the “relevant market” is the iOS App Distribution Market[5] for purposes of Section 2 of the Sherman Act.[6]
I. Case Background
The dispute started when Epic Games decided to circumvent Apple’s in-app purchase (“IAP”) system, which gives Apple 30% of the sale from IAPs.[7] Epic Games implemented its own IAP system in Fortnite which “allow[ed] Epic Games to collect IAPs directly.”[8] Apple then removed Fortnite from the App Store for Epic Games’ breach of contract in doing so, and Epic Games filed the suit against Apple.[9]
While the case is still ongoing, Epic Games filed a motion in late September for preliminary injunction to require Apple put Fortnite back on the App Store.[10] To grant the motion, the District Court had to determine Epic Games’ likelihood of success on the merits.[11] More specifically, the court was required to analyze two of Epic Games’ claims against Apple for alleged violations of Sections 1 and 2 of the Sherman Act.[12] While the court determines it “cannot conclude that Epic Games will likely succeed on the merits,” it does concede that Epic Games “raise[d] serious questions on the merits.”[13]
In analyzing the Section 2 violation, the court indicates three elements necessary for Epic Games to prevail: “(a) the possession of monopoly power in the relevant market; (b) the willful acquisition or maintenance of that power; and (c) causal antitrust injury.”[14] In this analysis, the court only thoroughly discusses the first element regarding the relevant market, concluding that neither Epic Games nor Apple provide sufficient facts to determine the relevant market, so no further analysis on the second and third elements is necessary.[15]
Epic Games argues that the relevant market is the “market for distribution of apps on the iOS software platform, which it refers to as the ‘iOS App Distribution Market.’”[16] Apple argues the relevant market “must include competing platforms on which Fortnite is distributed and monetized.”[17] The District Court, after performing a relevant market analysis, concludes that both approaches are plausible.[18]
II. Determining the Relevant Market
The outcome of this case largely hinges on the determination of the relevant market.[19] The relevant market is the “area of effective competition,”[20] and “must include both a geographic market and a product market.”[21] The product market is what is at issue in the court’s analysis. The product market refers to “the product at issue as well as all economic substitutes for the product.”[22] In rare cases, a single brand of a product can be a separate market altogether.[23] Moreover, it is permissible for antitrust allegations to be premised on submarkets or aftermarkets.[24] Submarkets are “economically distinct from the general product market,”[25] whereas aftermarkets are entirely “derivative from and dependent on the primary market.”[26]
III. Apple’s Argued Relevant Market
As mentioned previously, Apple argues that the relevant market in this case should include any platform that Fortnite is accessible—from competing smartphone brands, to gaming computers and laptops, dedicated game consoles, and tablets.[27] This definition of the relevant market has two glaring flaws: (1) it ignores the rest of the app market in its entirety, limiting it only to Fortnite, and (2) it avoids some reasonable inferences from those people who were playing Fortnite on iOS devices.
Certainly, it’s easy for Apple in this case to shift the focus to Fortnite exclusively, but that avoids the reality that to download any sort of application onto an iOS device, you must do it from the Apple App Store. This ranges from games such as Fortnite to social media apps, shopping apps, utility apps, and any other number of categories. Those apps are all subjected to the same unilateral control Apple subjects Fortnite to. Such control cannot be avoided if they want their apps on iOS devices.
When looking into the substitute goods, they should have a “‘reasonable interchangeability of use’ or ‘sufficient cross elasticity of demand with the relevant product.’”[28] iOS devices have incredible mobility compared to many of the aforementioned substitutes where people could access the game. This is something Epic Games brought up,[29] which prompted the court to discuss the reasonable substitutes, namely other smartphones, gaming laptops, tablets, and the Nintendo Switch—“all of which can be played in a mobile fashion.”[30]
The court fails to consider some important factors, such as mobility and practicality. The first, and possibly most significant point to make, is that iPhones are almost always connected to the internet via cell service, whereas most of the other substitutes are not. Speaking solely to Fortnite, the game requires a constant connection to the internet because of its multiplayer aspect, which is not a feature that the substitutes offer in nearly the same capacity. Beyond this, multitudes of other apps require internet connection to be useable—when’s the last time you checked your Facebook feed on your laptop with no WiFi?
Looking beyond the difference in regular connectivity, it’s true that the substitutes the court mentions are more mobile than other items. Even still, it should consider that mobility in its full capacity as opposed to simply labeling something as mobile. For example, it’s true that a gaming laptop is incredibly mobile compared to an Xbox One. However, a gaming laptop is also considerably less mobile than an iPhone. The small, handheld nature of a smartphone that can access these apps makes it a multiuse tool that supersedes many of the other substitute devices. If someone is commuting to work, chances are they are not going to pull out a Nintendo Switch or gaming laptop on the train to play a round of Fortnite, check their Facebook, or watch something on YouTube.
It’s simply impractical to believe that a gaming laptop or Nintendo Switch is reasonably interchangeable with a smartphone. The case could be made that tablets are more interchangeable than the aforementioned substitutes, but tablets still present similar issues, such as internet connection and size comparison.
IV. Epic Games’ Argued Relevant Market
Epic Games contends that the relevant market should be the “market for distribution of apps on the iOS software platform.”[31] In framing the relevant market in this manner, Epic Games argues that this is an aftermarket “of the smartphone [operating system] market.”[32] The court considers this entirely plausible, and in a footnote even indicates that Apple did not adequately respond to this theory.[33] The court asserts that if Apple does not explain why switching and information costs fails to “render the iOS app distribution market distinct . . . [s]ilence can be interpreted as an admission.”[34]
The court does caution against a definition as narrow as the one Epic Games proposes, but narrow definitions of relevant markets have been found by courts before.[35] What matters is that the aftermarket be “wholly derivative from and dependent on the primary market.”[36] Comparing this case with the situations in Kodak and Newcal, the app marketplace on iOS devices is wholly created by the iOS software. Apple only permits consumers to download apps from the App Store, and for developers to put their apps on iOS devices, they must consent exclusively to the App Store guidelines.[37]
Competing smartphone brands do not necessarily matter in this regard because Android devices have access to multiple stores where consumers can download apps.[38] Consumers who purchase iOS devices are therein trapped to only go through the App Store to acquire apps for their devices. Changing to a different smartphone is not a cheap undertaking. Changing phones requires learning a new operating system, going through the hassle of new phone setup, and watching an iPhone gather dust. All of this can set an individual back by approximately $1,000.00.
This definition of the relevant market, while narrow, is legally permissible and justifiable under the facts of the case. iOS users are trapped into Apple’s monopolistic App Store. This allows Apple to be more lucrative in operating its App Store, such as taking 30% of IAPs.[39] Even further, Apple’s consumer base will likely not switch an Android smartphone, with Apple having a consumer retention rate of over 80%.[40] Looking at this reality alone, Epic Games will likely not see the 2.5 million daily iOS users change to a different phone operating software just to play Fortnite.
V. Conclusion
Determining a relevant market is not an easy task for the court to do, and Epic Games and Apple both have serious hurdles to overcome in defining that market. Even so, the court has full reason to go with the narrow definition floated by Epic Games, and even seems to be leaning towards supporting it. Apple has been able to trap its users into an Apple-owned aftermarket, one that is not easily escaped. It’s not the 30% cut for Apple that’s the issue, it’s the anticompetitive aftermarket Apple itself created. In the words of Teddy Roosevelt, “We draw the line against misconduct, not against wealth.”
[1] Noah Smith, The giants of the video game industry have thrived in the pandemic. Can the success continue?, Wash. Post (May 12, 2020), https://www.washingtonpost.com/video-games/2020/05/12/video-game-industry-coronavirus/.
[2] James Davenport, The state of Fortnite in 2021, PC Gamer (January 25, 2021), https://www.pcgamer.com/the-state-of-fortnite-in-2021/.
[3] See Epic Games, Inc. v. Apple Inc., No. 4:20-CV-05640-YGR, 2020 WL 5993222, at *3 (N.D. Cal. Oct. 9, 2020) (nearly 2.5 million iOS users played Fortnite every day).
[4] Id. at *5.
[5] Id. at *9 (“Epic Games avers that the relevant product market is the market for distribution of apps on the iOS software platform, which it refers to as the ‘iOS App Distribution Market”).
[6] The Sherman Act. See 15 U.S.C. § 2 (2004).
[7] Epic Games, 2020 WL 5993222, at *3.
[8] Id. at *5.
[9] Id.
[10] Epic Games, 2020 WL 5993222, at *5.
[11] Id. at *6.
[12] Id. (the District Court reviews the sections in reverse order); 15 USC §§ 1 & 2.
[13] Epic Games, 2020 WL 5993222, at *6.
[14] Id. at *7 (quoting Fed. Trade Comm’n v. Qualcomm Inc., 969 F.3d 974, 990 (9th Cir. 2020)).
[15] Epic Games, 2020 WL 5993222, at *12.
[16] Id. at *9.
[17] Id.
[18] Id. at *10.
[19] See id. at *7.
[20] Id. at *7 (quoting Fed. Trade Comm’n, 969 F.3d at 992).
[21] Epic Games, 2020 WL 5993222, at *7 (quoting Newcal Indus., Inc. v. Ikon Office Sol., 513 F.3d 1038, 1045 (9th Cir. 2008)).
[22] Newcal, 513 F.3d at 1045.
[23] Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 482 (1992); Epic Games, 2020 WL 5993222, at *8; Newcal, 513 F.3d at 1048.
[24] Epic Games, 2020 WL 5993222, at *8.
[25] Id. (quoting Newcal, 513 F.3d at 1045 (stating several practical indicia of a submarket include “industry or public recognition of the submarket as a separate economic entity, the product’s peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.” (internal quotes omitted)).
[26] Newcal, 513 F.3d at 1049; Epic Games, 2020 WL 5993222, at *8 (stating “[a]n aftermarket may constitute the relevant market where market imperfections, such as information and switching costs, prevent consumers from realizing that their choice in the initial market will impact their freedom to shop in the aftermarket.” (internal quotes omitted)).
[27] Epic Games, 2020 WL 5993222, at *10.
[28] Id. at *7 (quoting Hicks v. PGA Tour, Inc. 897 F.3d 1109, 1120 (9th Cir. 2018)).
[29] Id. at *11.
[30] Id.
[31] Id. at *9.
[32] Epic Games, 2020 WL 5993222, at *10.
[33] Id. at *10 n.16.
[34] Id.
[35] Id. at *10.
[36] Newcal, 513 F.3d at 1049.
[37] In Kodak, 504 US 451, the Court determined a relevant market can be a single brand where the purchase of a product does not create a contractual agreement to the monopoly; in Newcal, 513 F.3d 1038, the Ninth Circuit found that while the definition of the relevant market was not “intuitively obvious” it was significant and existed because the aftermarket was wholly created by the main product.
[38] Ultimate Mobile App Stores List (2021), buildfire (December 28, 2020), https://buildfire.com/mobile-app-stores-list/.
[39] Jack Nicas, How Apple’s 30% App Store Cut Becaome a Boon and a Headache, N.Y. Times (August 14, 2020), https://www.nytimes.com/2020/08/14/technology/apple-app-store-epic-games-fortnite.html (indicating how Apple pioneered the 30% cut in online marketplaces).
[40] VentureDNA, Apple Ecosystem Leads User Retention (November 26, 2020), https://www.venturedna.com/apple-ecosystem-helps-iphone-lead-user-retention/#:~:text=A%20new%20study%20finds%20that,retention%20rate%20for%20the%20device.
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