Apple, Epic, and the App Store
Most of the discussion on this topic has been around who is <i>morally</i> right, but I&#x27;ve been curious to find out how strong Epic&#x27;s <i>legal</i> case is.<p>Epic&#x27;s lawsuit alleges antitrust violations in two different markets: 1) the &quot;iOS App Distribution Market&quot; and 2) the &quot;iOS In-App Payment Processing Market&quot;. Proving a violation in one of these markets may be a lot more challenging than the other.<p>A. Monopoly Power<p>The first step in proving a monopolization offense under the Sherman Act is proving the company possesses &quot;monopoly power in the relevant market&quot;. In determining monopoly power, the courts start by examining market share, but &quot;but typically do not find monopoly power if the firm (or a group of firms acting in concert) has less than 50 percent of the sales of a particular product or service within a certain geographic area.&quot; [1]<p>Obviously, with Apple&#x27;s current market share of 46% [2] in the United States, they are unlikely to be considered possessing monopoly power in the smartphone market.<p>B. The &quot;iOS App Distribution&quot; Market and Aftermarkets<p>Since proving Apple&#x27;s monopoly power in the smartphone market seems unlikely, Epic instead alleges Apple has monopoly power over a different market: &quot;iOS App Distribution&quot;. Since Apple has complete control over iOS App Distribution, problem solved, right? Not so fast.<p>Much like razor blades and razors or printers and ink, &quot;app distribution&quot; would be considered an aftermarket of the smartphone market. Aftermarkets are very common in antitrust cases, and in general, the US legal system does not allow you to define an aftermarket in the context of a single brand&#x27;s product unless very specific rules are met:<p>&gt; <i>Because it would be inappropriate to punish a firm for its natural monopoly in its own products, courts embraced a sweeping prohibition against analyzing alleged anticompetitive activity by focusing on single-brand relevant markets: &quot;[A]bsent exceptional market conditions, one brand in a market of competing brands cannot constitute a relevant product market.&quot;</i> [3]<p>A good summary on antitrust issues in aftermarkets can be found here. [4] Of particular relevance is that an aftermarket monopoly based on a customer&#x27;s voluntary agreement to a contract is not considered a &quot;relevant market&quot; for antitrust purposes.<p>In <i>Blizzard Entertainment Inc. v. Ceiling Fan Software LLC</i> [5], Ceiling Fan Software attempted to argue that Blizzard held monopoly power in the market of &quot;add-on software for WoW&quot;, and preventing them from releasing their own WoW add-on was a violation of antitrust law. Blizzard argued (successfully) that the &quot;WoW add-on&quot; market was not the relevant market because WoW users voluntarily agreed to a EULA stipulating they would only used Blizzard authorized add-ons when they initially purchased the game, and if they wanted to use third-party add-ons they could have purchased another game instead.<p>In <i>Apple Inc. v. Psystar Corp.</i> [6], Psystar Corp attempted to argue that Apple held monopoly power in the &quot;Mac OS&quot; market and used it to unfairly block competition in the &quot;hardware that runs Mac OS&quot; aftermarket. The court ruled that Apple&#x27;s monopoly power in the &quot;hardware that runs Mac OS&quot; aftermarket was based on the EULA that customers of Mac OS agreed when they purchased Mac OS, and was again not a relevant market for antitrust purposes, because <i>&quot;customers knowingly agree to the challenged restraint&quot;</i>. In other words, if they didn&#x27;t like the restriction of not being able to install Mac OS on non-Apple hardware, they could have purchased an alternative operating system instead.<p>Circling back to the iPhone and its app distribution aftermarket, it seems the same reasoning would apply here. If the iPhone EULA specifically states that customers can only install apps via the App Store, and the customer knowingly purchases the product knowing such limitations are in place, it seems very unlikely that a court would agree that &quot;iOS App Distribution&quot; is actually a relevant market for antitrust purposes.<p>C. The &quot;iOS In-App Payment Processing Market&quot;<p>On the other hand, the antitrust claims Epic makes regarding this market are much more compelling because unlike the app distribution market, customers have no information about the restrictions in the relationship between the developer and Apple, and they certainly did not agree to any such restrictions when they purchased their phones. Without a contractual restriction in place, the determination of whether the &quot;iOS In-App Payment Processing Market&quot; is a relevant market depends on multiple factors which I won&#x27;t go into too much detail here or this post will be even longer than it already is, but suffice to say they have a much higher chance of successfully making this argument.<p>Epic also has a strong argument here that Apple requiring in-app payments to go through the App Store and taking a 30% cut of each payment directly harms consumers by increasing prices, and lacks any justification other than to hurt competition. And the rebuttal that you can buy a different product without this restriction falls flat because the other major product on the market also charges the same cut.<p>The upshot of all of this is it seems unlikely that Epic will be able to compel Apple to permit third-party app installation on the iPhone, but they may be able to successfully argue against the restriction that all in-app purchasing must go through the App Store.<p>[1] <a href="https:&#x2F;&#x2F;www.ftc.gov&#x2F;tips-advice&#x2F;competition-guidance&#x2F;guide-antitrust-laws&#x2F;single-firm-conduct&#x2F;monopolization-defined" rel="nofollow">https:&#x2F;&#x2F;www.ftc.gov&#x2F;tips-advice&#x2F;competition-guidance&#x2F;guide-a...</a><p>[2] <a href="https:&#x2F;&#x2F;www.counterpointresearch.com&#x2F;us-market-smartphone-share&#x2F;" rel="nofollow">https:&#x2F;&#x2F;www.counterpointresearch.com&#x2F;us-market-smartphone-sh...</a><p>[3] <a href="https:&#x2F;&#x2F;casetext.com&#x2F;case&#x2F;metzler-v-bear-automotive-service-equipment-co" rel="nofollow">https:&#x2F;&#x2F;casetext.com&#x2F;case&#x2F;metzler-v-bear-automotive-service-...</a><p>[4] <a href="https:&#x2F;&#x2F;www.ftc.gov&#x2F;system&#x2F;files&#x2F;attachments&#x2F;us-submissions-oecd-2010-present-other-international-competition-fora&#x2F;aftermarkets.pdf" rel="nofollow">https:&#x2F;&#x2F;www.ftc.gov&#x2F;system&#x2F;files&#x2F;attachments&#x2F;us-submissions-...</a><p>[5] <a href="https:&#x2F;&#x2F;casetext.com&#x2F;case&#x2F;blizzard-entmt-inc-v-ceiling-fan-software-llc" rel="nofollow">https:&#x2F;&#x2F;casetext.com&#x2F;case&#x2F;blizzard-entmt-inc-v-ceiling-fan-s...</a><p>[6] <a href="https:&#x2F;&#x2F;casetext.com&#x2F;case&#x2F;apple-2" rel="nofollow">https:&#x2F;&#x2F;casetext.com&#x2F;case&#x2F;apple-2</a>