OAKLAND, Calif. (CN) — In a major blow to Apple’s business model, a federal judge ruled Friday that the technology giant can no longer stop app developers from telling users how to sidestep its App Store and pay developers directly for subscriptions and other services.
The decision by U.S. District Judge Yvonne Gonzalez Rogers comes more than three months after she presided over a three-week bench trial in which Epic Games, maker of the popular game Fortnite, challenged Apple’s policies as illegal and anticompetitive.
Epic Games had argued that Apple was monopolizing the market for iPhone games by preventing users from paying developers directly instead of going through the App Store, for which Apple takes a 30% cut on all purchases.
In a 180-page ruling, Gonzalez Rogers rejected Epic’s definition of the market as one exclusively for iPhone games, but she found that a rule that bans developers from telling users how to pay them directly was a violation of federal antitrust laws.
“The court does not find that Apple is an antitrust monopolist in the submarket for mobile gaming transactions,” Gonzalez Rogers wrote. “However, it does find that Apple’s conduct in enforcing anti-steering restrictions is anticompetitive.”
The judge issued an injunction permanently barring Apple from restricting developers’ ability to add external links and buttons in their apps that can steer users to pay developers directly. She also blocked Apple from prohibiting developers from communicating with users through emails or texts to tell them how to make direct purchases without going through the App Store.
Epic Games had sought broader relief, arguing that consumers should be allowed to download iOS apps outside the App Store. It also asked the judge to let developers include their own payment systems in iOS apps that would let users pay developers directly. The judge found Apple’s controls over app distribution and payments were not illegal, partly based on its argument that such control is necessary to protect users from malicious apps.
In a statement Friday, an Apple spokesperson characterized the decision as favorable for the tech giant, even though some of its policies were struck down as anticompetitive.
“Today the court has affirmed what we’ve known all along: the App Store is not in violation of antitrust law,” an Apple spokesperson said. “As the court recognized ‘success is not illegal.’ Apple faces rigorous competition in every segment in which we do business, and we believe customers and developers choose us because our products and services are the best in the world. We remain committed to ensuring the App Store is a safe and trusted marketplace that supports a thriving developer community and more than 2.1 million U.S. jobs, and where the rules apply equally to everyone.”
Responding to the judge’s decision in a tweet Friday, Epic Games CEO Tim Sweeney said the decision will benefit consumers by making the market for mobile gaming apps more open and competitive.
“Epic is fighting for fair competition among in-app payment methods and app stores for a billion consumers," Sweeney said.
The dispute started in August 2020 when Epic Games introduced a “hotfix” to its Fortnite apps on Apple’s iOS and Google’s Android operating systems, enabling users to pay it directly for in-app purchases. Apple and Google responded by booting Fortnite off the App Store and Google Play Store. Epic Games sued both tech giants in federal court. The company’s lawsuit against Google remains pending.
During a three-week bench trial in May, Sweeney and Apple CEO Tim Cook testified about Apple’s policies and whether the tech giant needs to maintain tight control over iOS apps to protect consumers’ privacy and data.
Gonzalez Rogers acknowledged in her ruling that Apple’s app review process is imperfect, but she concluded that opening up the system for apps to be downloaded from anywhere would likely cause security problems for iOS users.
“The court finds that app distribution restrictions increase security in the 'broad' sense by allowing Apple to filter fraud, objectionable content, and piracy during app review while imposing heightened requirements for privacy,” Gonzalez Rogers wrote.
But the judge’s decision to strike down Apple’s anti-steering provisions could have far-reaching implications for the technology sector and business world, according to Yale University economics professor Florian Ederer. It could lead to "a pretty strong presumption in antitrust law that anti-steering provisions are anticompetitive," he said.
While the ruling is not a total win for Epic Games, Ederer said it’s good news for developers, who will be able make more money by avoiding Apple's 30% fees.
“It also creates more incentives for innovation for developers because they can keep a bigger surplus” of payments that come from users, Ederer added.
At the same time, the court ruling is likely to eat into Apple’s profits, as 70% of its App Store revenue comes from mobile games. The company’s stock price fell more than 3% on Friday after news of the ruling began circulating.
Both sides are expected to appeal the decision, Ederer said.
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