A.I. Kung Fu: Fortnite maker Epic Games just set an antitrust trap for Apple, and Tim Cook walked right into it (AAPL)

Fortnite Apple ad parody

Apple on Thursday removed the popular game Fortnite from its App Store, and in doing so, fell right into the trap set by Fortnite's maker, Epic Games.
Epic set its snare by intentionally breaking one of Apple's rules, offering Fortnite players an alternative way to pay for its virtual currency than through the App Store.
Apple's response of banning Fortnite is likely to help Epic win public relations battle — and served as a case in point for the lawsuit it immediately filed charging the iPhone maker with anticompetitive behavior.
The way Apple runs the App Store has come under increasing scrutiny, but Epic's suit, which lays out a damning case against the company, could be its biggest challenge yet.
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Tim Sweeney just led Apple right into an, ahem, epic trap — one that just might cause the iPhone maker some serious harm.

Epic Games, Sweeney's company and the maker of the popular Fortnite game, is accusing Apple of anticompetitive conduct. And on Thursday, Epic showed the world how. By deliberately breaking one of Apple's App Store rules, Epic provoked Apple into flexing its unchecked power, providing Exhibit A in the lawsuit that Epic had ready to go.

Now, the other Tim — Apple CEO Tim Cook — has got to be shaking his head in wonder at how easily his company fell right into Epic's snare.

The dispute between the two companies centers around Apple's control over the distribution of apps on iPhones and iPads. Apple device owners can only download apps from the company's App Store. If developers charge consumers for their apps, Apple takes a 30% cut. The company also gets a 30% cut off of sales of most digital goods — subscriptions, digital movies or books, virtual clothing for video game characters — that developers sell through their apps.

Apple preloads its App Store on all iPhones and iPads and forbids any alternative methods of downloading apps. It also requires developers who offer in-app goods to use its payment mechanism and forbids them not only from using alternatives but, essentially, from even mentioning in their apps that users could buy the same products elsewhere for less money.

Developers are unhappy, but feel they don't have a choice

Developers have been grousing about such rules for years. Apple's 30% tax is exorbitantly high, they argue. And developers who already have payment processing services that they use on their websites or in other venues feel like they shouldn't have to pay for Apple's.

But many developers feel they have no choice. Although more people use Android devices than Apple iOS devices, there are still some 1.5 billion Apple gadgets in use around the world — a huge market that developers would forfeit if they abandoned the App Store. And users of Apple device collectively spend nearly twice as much on apps as do owners of Android gadgets.

Apple has long argued that it bars other App Stores and payment services as a security measure and that it applies such rules even-handedly across all developers. Unlike other tech giants which dominate their primary markets — Google in search, Facebook in social networking, and Amazon in ecommerce — Apple has largely flown under the radar because it doesn't dominate its primary market, smartphones.

But the company's iron-clad grip over the App Store has started to garner increasing attention. Last year, Spotify filed a complaint against Apple with the European Commission charging the iPhone maker with anticompetitive behavior related in part to the commissions it charges on purchases made through the App Store. Last month, members of Congress zeroed in on such conduct in a hearing focused on Apple and the other tech giants. Additionally, the US Department of Justice and a collection of states attorneys general are reportedly preparing to launch an investigation the company.

Epic could prove dangerous for Apple

But Epic could prove to be the most dangerous antagonist to date for Apple. Epic is a powerful company in and of itself, and one of the few that could potentially thrive without Apple. But it's also a dangerous foe for the iPhone maker because it showed in a series of moves on Thursday just how cunning it can be.

Earlier on Thursday, Epic lured Apple into a trap by deliberately violating Apple's App Store rules. Epic gave iPhone users a way to purchase V-bucks, the virtual currency in Fortnite, directly from Epic rather than through Apple's App Store. The move directly violated Apple's rules against offering alternative methods for users to pay for in-app purchases.

Hours after Epic included the option, Apple removed Fortnite from the App Store, arguing that Epic was violating its rules and seeking special treatment. That move in and of itself could hurt Apple by infuriating the millions of Fortnite players who will no longer be able to download or update it on their Apple devices. There's a good chance they'll turn their ire on Apple, rather than Epic, when they find out why they can no longer get the game.

But the bigger problem for Apple is what came next. Epic was obviously expecting Apple's decision to eject Fortnight, because shortly thereafter, the company sprung the final part of its snare. It filed a lawsuit charging Apple with trying to illegally block competition in the markets for app distribution and in-app purchases on iPhones and iPads — and cited Apple's response to its discounted V-buck offer as a primary case in point.

"Rather than tolerate this healthy competition and compete on the merits of its offering, Apple responded by removing Fortnite from sale on the App Store," Epic said in its legal complaint. "Apple's removal of Fortnite," it continued, "is yet another example of Apple flexing its enormous power in order to impose unreasonable restraints and unlawfully maintain its 100% monopoly over the iOS In-App Payment Processing Market."

Epic anticipated Apple's argument

Epic's lawsuit also anticipated Apple's argument that the company was seeking special treatment. Although the lawsuit notes numerous times that it's been harmed financially by Apple's rules, Epic chose not to seek compensation from Apple for itself. Nor is it seeking that Apple be barred from enforcing rules just against it.

Instead Epic is asking the US District Court for Northern California to declare Apple's rules "unlawful and unenforceable" in general and to issue an injunction barring its allegedly anticompetitive conduct being directed against any developer. In other words, Epic is painting itself as the champion of all app makers.

It even did that just about literally in a video parodying Apple's famous 1984 ad. Only in Epic's recasting of the dystopian TV commercial, Apple's no longer the upstart but has instead taken over IBM's role of Big Brother.

But Epic's lawsuit isn't just a public-relations move. The complaint lays out a well-reasoned and damning argument about Apple's power, about how little ability developers or consumers have to challenge that power, and what Apple's essentially unchallengeable rules are costing developers and consumers alike.

"By imposing its 30% tax, Apple necessarily forces developers to suffer lower profits, reduce the quantity or quality of their apps, raise prices to consumers, or some combination of the three," Epic said in its suit.

It smartly buttresses that argument by contrasting the cost of payment processing through other vendors — as little as 2.6% in some cases — with Apple's rate. And it reinforces its case with documents that were recently released by the House of Representatives in connection with that body's investigation into the tech giant's alleged anti-competitive conduct, such as an email from Steve Jobs that frankly acknowledged that its 30% commission would be "prohibitive for many things."

The suit has got to be worrisome for Apple not just because of the case Epic makes, but because of the risks. Much of Apple's growth in recent years — and its surging stock price — has been sparked by its services business. Although its services business includes a lot of disparate offerings, a big portion of its revenue comes from the App Store. Were Apple's App Store business upturned, the company might not have such a great story to sell Wall Street.

But Apple — just as Sweeney seemed to expect — fell right into Epic's trap. It now has to find its own way out.

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