Recently, Apple and Epic have gotten into major disagreement regarding the availability of offering Fortnite on the App Store. The key issue is the fees that Apple requires for in-app transactions. Fortnite is one of the most popular freemium games. It is estimated that the game generates billions of dollars in fees for different customizations. The core of the argument is what is a fair percentage for Apple to earn and Epic to give up. Apple’s position is that all publishers must pay the 30% fee. Epic’s position is that 30% is really high when we have built up a huge customer base and are continuing to innovate on a very popular game.
Apple developed the 1st iteration of the iPhone in 2007. Since then, the company has gone on to sell billions of devices. These devices create the leading ecosystem for publishers of digital content. To satisfy this demand, Apple introduced the App Store in 2011. The company recognized that in order for their platform to continue to grow in value, customers would want to download a wide variety of applications to increase the utility of their devices.
Nearly all applications are free to download. And, there are an increasing number of applications that monetize their development efforts through in-app purchases. Not only has Apple created the hardware and the software. But, they have also created an easy way for applications to be discovered and downloaded securely.
Epic 1st developed Fortnite in 2015. The key insight for this game was having up to 100 players be able to simultaneously compete with only 1 winner. In essence, a Battle Royale. While this concept wasn’t new, the way that Epic executed on this game earned them millions of downloads and billions of dollars.
In order for their game, Fortnite, to be be accessible on the iPhone publishers have to follow a certain set of rules. Any charges that are generated must go through the iPhone platform vs. a separate payment option.
Apple makes the case that this creates a more consistent and secure customer experience. However, in return for this convenience, publishers must accept a 30% fee. Over the years, publishers have tried to find work arounds to paying this fee and have universally been met with the same response - removal from the App Store.
There is a predictable playbook - Apple’s fees are unfair, innovation is stifled, and please regulate this multi-trillion dollar company. Publishers are hoping that the outrage will increase their negotiating leverage since there are really only 2 platforms worth publishing on - Android & iPhone.
While most customers may think this issue doesn’t matter to them as the platform and the publisher are splitting the revenue, the reality is that most publishers increase the pricing to counterbalance the platform fee.
Although the increase is not anywhere near 30%, publishers have established what they think the value of their in-app purchases are and have adjusted accordingly. So, why is Epic making such a big deal and trying to generate customer support?
In economics, there is supply and demand. For a super successful publisher like Epic, they are likely feeling like the totality of the payment well exceeds the benefits. Keep in mind that Epic has generated billions of dollars in revenue with Fortnite on Apple devices. Their payments may be one of the highest that Apple receives on an annual basis. So, they may feel like it is only reasonable that their fees be adjusted.
However, Apple will likely argue that where it not for the iPhone, the App Store and their simple process of downloading and utilizing applications, Fortnite would not be as successful. While that is a difficult question to answer, there is no doubt that it is the customers best interest to advocate for a mutually agreeable solution to be reached.
Unless you had already downloaded Fortnite, you can’t easily get the application onto your phone. And the dynamics of Fortnite are such that you want a growing number of players to join so that you can be matched with 99 others during the games. Also, if you’ve enjoyed the in-app purchases, Epic must continue to be motivated to invest in product development to develop desirable customizations.
Although this is playing out in the public space, it is in both Epic & Apple’s best interest to make sure that they are both standing at the end. In any negotiation, you have what is requested and what will ultimately be accepted. Fortnite on iPhones is a net positive. Both companies need to figure out a way to save face and agree to terms that will enable the Fortnite game to return to the iPhone. Let’s hope that cooler heads prevail and that any corresponding savings result in better product development for Epic and increased cost savings for in-app purchases for consumers.