- On August 13th,

one of the biggest games in the world

disappeared from the App Store.

Fortnite had implemented its own in-app payment system,

bypassing Apples in house payment network

and violating the App Store's rules.

But when Apple followed through on its policies

and kicked Fortnight off the store,

the company got a big surprise.

Fortnight had a 65 page lawsuit

set to file as soon as they got banned,

complete with an extended video

parodying Apple's iconic 1984 commercial.

- [Announcer] Ooh yes,

they have given us their songs,

their labor,

their dreams.

- Epic set a trap,

and Apple walked right into it.

Epic pulled the same trick on Google too.

So, it's gonna be taken on both major App Stores at once,

but there's way more at stake here

than just Fortnight.

With the App Store,

Apple revolutionized the way we distribute software

to mobile devices.

Google followed that model on Android.

And the two companies have been at the center

of mobile software distribution ever since.

It's an incredibly powerful position to be in

maybe too powerful.

But to really understand how that power works,

you gotta look at the big picture.

25 years ago,

if you want to buy this hot new game called Doom,

you had to go to the mall

and get a physical cardboard box

with the game inside it.

You got it at a regular store that looked like this.

And that store was probably charging

a regular retail markup of around 50%.

Add in the cost of physically fabricating the boxes

and shipping them out to all the malls all across America.

And the share that was going to developers

was actually pretty small.

Fast forward to 2020,

and if you wanna buy this hot new game called Doom,

you go to an online portal like Steam

or the PlayStation store,

which will usually take 30% of whatever you're paying.

The way those portals see it,

it's a great deal compared to how we used to do things.

They're taking a smaller cut

and because it's all digital

publishers have to spend a lot less money

getting out their prop.

Apple basically made this shift happen,

and it's a huge part of the legacy of Steve Jobs.

- What we're gonna solve that problem for every developer,

big to small,

and the way we're gonna do it

is what we call the App Store.

- It's made it easier and cheaper for developers

to get their work out

and resulted in tons of new options for iPhone users,

as Apple sees it that's well worth the 30%

and Tim Cook made this exact point

at the Tech Antitrust hearing in July,

when he was asked about the so-called Apple tax.

- So to zoom out and to give you some historical context

on this,

when we entered the App Store market,

the cost of distributing software was 50 to 70%.

And so we took the rate in half

and to 30% and we've held it

in that same level over time or lowered it.

- But what are these stores actually doing

to earn their 30%.

Back in 1995,

electronics boutique had to cover rent,

employee salaries and inventory management.

But the only real expense for the App Store

is vetting the games and keeping the servers running.

There were $50 billion in App Store sales in 2019,

which means Apple brought in around $15 billion in revenue,

just from the App Store,

maintaining the digital store only costs a fraction of that.

It gets even trickier,

now that most software isn't a onetime purchase,

instead of buying Photoshop once

you're paying a little bit each month.

Free to play games like Fortnite

have become hugely popular,

making money off a virtual items sold within the app.

Apple takes its 30% on subscriptions

and in app purchases too.

But with so many services existing

across multiple platforms,

it leads to some really strange situations.

Right now you can't buy a book on the Kindle app.

You have to buy it on the web

and then read it on the app

just because they don't wanna pay Apple's extra slice.

The same goes for Spotify,

which you used to allow purchases from within the app,

but would charge an extra $3 just to cover Apple's cut.

Wherever they can,

developers are moving the point of sale off of Apple devices

just to avoid Apple's transaction fee.

Suddenly that 30% starts to look an awful lot like attacks

paid to Apple for the privilege

of distributing software to Apple devices.

Apple controls the platform,

you can't put software on an iPhone without them.

So, if you wanna play on their platform,

you gotta pay the tax.

At least with portals like Steam or the Epic games app,

you can shop around between stores,

but for iOS devices,

the App Store is the only game in town.

There's no jail breaking,

no side loading,

you pay the 30% or you can't be on the iPhone.

This is where Epic's lawsuit comes in.

Epic is accusing Apple of violating the Sherman Act

saying the company unlawfully maintains

a total monopoly in the iOS app distribution market.

That might sound weird.

Of course, Apple has a monopoly over Apple products.

But there are enough third party developers on the App Store

that it's a serious charge.

The way Epic paints it,

you can't make iOS software,

if you're not on the App Store

and you can't be on the App Store,

if you don't use Apple's in-app payment system.

The payment system is important

because that's where the 30% tax gets collected.

So, if Epic were able to use its own payment system,

like it tried to do,

it would be able to get around the tax.

Crucially Epic isn't asking for any money here.

Instead, they're asking for the judge to enjoin Apple

from continuing to impose its anti-competitive restrictions

on the iOS ecosystem.

In short, they want the court

to break up the App Store monopoly.

Spotify is already weighed into uproar the lawsuit,

saying, Apple's unfair practices

have disadvantaged competitors and deprived consumers

for far too long.

The interesting thing is,

Apple already makes exceptions to that rule

when it wants to.

In April Amazon's video apps started to allow Prime rentals

through its own payment system,

that is without paying the Apple tax.

It was the exact same thing Fortnite had tried to do,

but this time Apple let it happen.

At the time the company said

it was because of a program for premium video rentals,

but really it was just that Amazon was powerful enough

to set its own terms.

There were enough Prime Video members

with iPhones and iPads and Apple TVs

that Apple is willing to bend the rules a little bit.

Android is supposed to be more open than that,

but Epic says they had the same problem,

Epic actually to make a go of it outside the Play Store,

offering a side load only version of Fortnite for Android,

but in practice almost all Android downloads in the US

still come through the Google Play Store.

Not even Fortnite was enough to convince Android users

to look outside the Play Store.

It's not a coincidence

that Android ended up running on one big App Store

controlled by Google.

Google makes it hard to compete,

bundling the Play Store alongside must have Android apps

like Gmail,

Search and YouTube.

We actually got to see those agreements firsthand

when regulators in the EU tried to unbundle Android

from the rest of Google.

But even when you peel apart Android,

Google make sure that manufacturers

can't pre-install Gmail or Google Search

without making Google Play the default App Store,

bundling everything together as Google Play Service.

The only way to avoid that bundle

is to build a whole new ecosystem

on top of the open source Android code,

like Amazon's Fire OS,

but for the most part,

the dominance of Google services on Android is unchallenged.

Regulators have been where have these problems for a while,

and Apple in particular

is already kind of trouble over it.

There's a case about this headed

to the Supreme Court right now,

and an ongoing antitrust inquiry in the EU.

But Epic is putting pressure on Apple

in a way that regulators just can't.

It's a sign of things to

not just for Apple,

but for the whole industry.

Tech companies are used to being able

to set their own rules,

whether it's Google Search,

Amazon Marketplace

or the Facebook Newsfeed.

And it's so surprised when those rules

end up benefiting the companies themselves,

but with antitrust pressure mounting

the folks on the losing side of those rules

finally have a chance to fight back.

Epic was the first one to take its shot,

but it probably won't be the last.

Thanks for watching

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