Battle Royale Between Apple & Epic Games
Apple

Battle Royale Between Apple & Epic Games

Apple Inc. (Nasdaq: AAPL, Rated “B”) and the company behind the popular online video game “Fortnite” are in the middle of an epic public relations battle about platforms and monopoly power.

Monday saw the first big loss for Apple.

Epic Games, the maker of Fortnite, is asking a federal judge to prevent Apple from killing its developer tools for iPhones and Mac computers, a move managers say would be existential.

It’s a big escalation of the dispute, and a really bad look for Apple.

The Cupertino, Calif.-based company doesn’t make many PR blunders. That’s why this development is so surprising. If what Epic managers allege is true, Apple is essentially being a corporate bully.

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To recap, Epic has been itching for a legal fight with Apple for the better part of two years. That’s about the time Fortnite — its multiplayer, free-to-play, battle royale video game — became really popular. Today, the platform has 350 million registered players, and has generated revenues of $1.8 billion in 2019.

A good portion of those sales come from players buying virtual trinkets, like avatar outfits and extra lives for gameplay. Since all these purchases happen inside the application, Apple, under its terms of service agreement, gets a 30% cut. Epic wants to cut them out of the loop.

Last week, the company began encouraging registered users to buy virtual coins directly from the Epic store, bypassing Apple, and violating the terms of service. Apple removed Fortnite from its app store immediately. Then, Epic filed a lawsuit.

For all intents and purposes, the public-facing part of this should have ended there.

However, for some strange reason, Apple managers decided to involve Epic’s Unreal Engine, a game developer tool that automatically generates code for 3D graphics and game physics.

Apple wants to break the application programming interfaces for iOS and MacOS, its mobile and desktop computer operating systems. Without these APIs, all games using the Unreal Engine will eventually stop working, and Epic would be deprived of income.

Epic charges developers 5% of revenues exceeding $1,000,000, according to a Monday report in the Wall Street Journal.

If Apple managers are trying to prove the company does not have a monopoly, this is not the way to go about it. Beyond this, though, it’s simply really bad business.

Forget that iPhone users now can’t download Fortnite. If Apple kills the APIs, that wildly popular game — and every other game built with the Unreal Engine — will stop working with future iterations. When these upgrades happen, hundreds of other iPhone games will be killed overnight. Perhaps thousands of innocent developers will become collateral damage.

The Apple move is unfriendly to users and the developer community.

So far, none this is having any impact in the stock market. Apple shares are on a mission to reach the $464.50 level. That would put the company at a $2 trillion valuation.

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Most big stock market moves are about building a compelling narrative. Any business with Epic Games is simply too small to have a material impact on Apple’s larger business. It’s also doubtful iPhone buyers will give up their beloved devices for Fortnite.

However, losing the support of the developer community, or worse, attracting more attention from regulators, might change the narrative.

Investors should be extremely careful with Apple shares at this level.

Best wishes,

Jon D. Markman

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