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Judge Recommends Jury Trial in Epic vs. Apple Fight

Sep.28 -- The federal judge overseeing Epic Games Inc.’s antitrust lawsuit against Apple Inc. said a jury trial might be a better option to resolve the case. Laura Martin, analyst at Needham & Co., discusses the case on "Bloomberg Technology."

Video Transcript

- The judge in court this morning said that she believes that this should be taken to a jury. If a jury decides who's right, Apple or Epic, it's less likely for that ruling to be appealed. Who do you think is in the right, Apple or Epic?

LAURA MARTIN: --add a lot of value. So for example, Epic Games launched in June of '17. And within 12 months, there were 78 million users, because Apple and Android put that app into everyone's hand at no cost to it virtually overnight. They had great content. And Apple and Android basically allowed that content to be viewable.

The marketing expenses here are far more in any other world than if Apple and Android didn't have those what I would call free-to-use platforms. OK, two years later "Fortnite" is making $2 billion a year. 30% of that is going to the platforms. So they're writing $600 million checks to Apple and to Google, and they're mad about that.

And what they really want is a volume discount, like we used to have in the cable business. That is anti-competitive to the next would-be startup, called "Fortnite 2" by a different company, that wants to displace "Fortnite." The reason "Fortnite" had no competitive disadvantage over existing game-players is it paid the same fee, and it was little.

Now it's big, and somebody has got to cover these $40 billion of costs to run the App Store. And Epic's like, we're too big. We don't like $600 million payouts, so we want a break on the price-- which is anti-competitive to the small guy that wants to start, because somebody's got to pay the $40 billion.

- That said, there are-- you know, there's a rising chorus of big companies and smaller companies that say that Apple's cut is unfair, companies like Facebook with its gaming products, Spotify, Match Group. You know, smaller new email startups are saying this isn't fair. What about their argument?

LAURA MARTIN: So I think this is a contractual debate, just like we had in cable, right? Disney would get mad that Comcast was charging too much. Comcast-- and so they dropped coverage. This is a contractual, negotiated economic problem.

And of course, of course you should be, you know, arguing that you're overpaying. Because what's the downside of that? Everybody wins, except for not Apple shareholders.

So I think these are contracts. I think that both Apple and Google will win. It is their platform. I think it is really important that for actually the future of consumers, that these platforms be allowed to charge and cover their costs or they're not incented to upgrade their platforms for consumers.

- What about the proclamation that Apple and Google are monopolies and that these are incredibly important platforms for any developer, or any gaming company, and that a 30% cut just is too steep?

LAURA MARTIN: Right. So again, economic difference of opinion. This requires hundreds of millions of consumers to adopt them. So the reason there was an oligopoly, two competitors, down from seven is consumers have decided that these two platforms are the best.

So now, what's great for developers is they only have to do-- like for iOS, you can reach all 950 million of their phones with one set of app designs. You've got to get it approved by Apple, but that's it. And now you reach 950 million consumers, because Apple has made a product that consumers care about. So don't underestimate the time-to-market advantage that has versus the old world where there were seven competitors, because that would have been costing app developers a lot more money, as they had to have seven separate teams to develop apps.

- Now, let's talk about the gaming sector in particular, because Epic CEO Tim Sweeney has been very complimentary of, for example, how Microsoft has handled Xbox and the content that is allowed to run on Xbox. We've got this new Amazon gaming service, Luna. Are there enough alternative platforms that a gaming company could be as successful without having to rely on Apple or Google?

LAURA MARTIN: So-- so the Apple ecosystem, 950 million people, monetizes two times higher than the Android ecosystem. So I would say it would be nearly impossible for a game company to actually economically work without the Apple iOS ecosystem, because of the demographic-- and mobile games are where all the growth is. And the best mobile games are done for the Apple Store, because Apple sends it back until it's good enough-- the best product for a consumer.

So there's a lot of quality control and R&D being done for all of these apps to make sure they are best practices on Apple phones. And as you know, consoles are a rich person's niche. The console is expensive. The superfast screen is expensive. The games are $60 each.

So it's lovely that Epic thinks Xbox is doing good work. Talk about the richest of the rich. OK, I just don't think that's relevant to most consumers in the world today. Apple reaches a billion consumers.

- I love how you don't sugarcoat anything, Laura. Always appreciate your opinions here on this show. I do want to get your thoughts on Amazon's new gaming service, given that you cover the gaming sector as well. Gaming has been such a huge-- we've seen so many people flood to videogames in the midst of this pandemic.

We're coming into the holiday season. People sheltering in place with nothing to do, they're going to want to play even more games. What is your outlook for Amazon's platform in, as we've discussed, an already crowded market?

LAURA MARTIN: Yeah, so I really like what Amazon is doing in the videogame space. And I think it-- so I really like this notion that streaming types of sensibilities that we see in the, I'm going to call it the streaming world, are actually coming to the game space.

So we have a number of existing streaming services-- EA Origin Access, I think, is the most interesting one myself. But Microsoft has an entry. Stadia is Google's. So here's another one. Amazon has one.

Content, I would say, is suboptimal. It doesn't really compare to the more entrenched streaming services. But it's $6, and the other ones are sort of $10 to $15. And I fully expect Amazon to iterate over time and catch up on the content side.

The important point for Amazon is that it owns Twitch, which is the dominant viewing platform for videogames. And it owns AWS, which is the dominant server farm that allows speed of play for its new streaming service. So when it gets more content and closes the content gap, it will have two structural advantages over every other streaming game service, which is Twitch users who spend three hours a day can get lower customer acquisition costs. And server farm could be faster for AWS.