Apple ordered to loosen App Store grip as critics call for reform

A U.S. federal judge stopped shortof labelling Apple Inc. an illegal monopolyonFriday, but in a closely watched rulingstruck down a corepart of its App Store rules, forcingthe company to allow developers to send their users to otherpayment systems.

The ruling marks awin for Fortnitecreator Epic Games andother app makers and provides a roadmap forsimilar claims against the iPhone maker in the future, legalexperts said.

But Judge YvonneGonzalez Rogers did not require Apple to let app makers usetheir own in-app payment systems, one of Epic's top requests,and allowed Apple to continue to charge commissions of 15 per centto30 per cent for its own in-app payment system.

Epic said it would appeal the ruling, with CEO Tim Sweeneytweeting that the ruling "isn't a win for developers or forconsumers."

Ruling on an antitrust case brought by Epic Games, creatorof the online game FortniteU.S. District Judge YvonneGonzalez Rogers said Epic did not present sufficient evidence ofApple having unlawful monopoly power in the relevant market,which she defined as "digital mobile gaming transactions."

But the California judge made clear that the decision waslimited to the facts before her.

"While the Court finds that Apple enjoys considerable marketshare of over 55 per cent and extraordinarily high profit margins, thesefactors alone do not show antitrust conduct," Gonzalez Rogerssaid. "The Court does not find that it is impossible; only thatEpic Games failed in its burden to demonstrate Apple is anillegal monopolist."

The judge did find that Apple's rules on its lucrative AppStore business violated California state competition laws.

Questions unsettled

The question of whether Apple abused monopoly power "remainsvery much unsettled," said Joshua Paul Davis, a professor ofantitrust law at the University of San Francisco School of Law.

"Given how controversial these issues are right now, I wouldexpect this not to be the final say," he said.

In her ruling, Gonzalez Rogers noted that Epic Games had"overreached" in a trial earlier this year by trying to define
the relevant market as all app distribution and in-app paymentson iPhones.

"As a consequence, the trial record was not as fulsome withrespect to antitrust conduct in the relevant market as it couldhave been," Gonzalez Rogers said.

Apple's legal team said it was still reviewing whether toappeal the decision.

"We're extremely pleased with this decision," Apple'sGeneral Counsel Katherine L. Adams told reporters. "Itunderscores the merit of our business, both as an economic andcompetitive engine."

Valarie Williams, a partner at law firm Alston & Bird,called Gonzalez Rogers' decision a "road map" to futureplaintiffs pursuing monopoly claims against Apple.

Future plaintiffs could bring a case that adopts GonzalezRogers's market definition and introduces additional evidence,Williams said.

Sam Weinstein, a professor of antitrust law at CardozoSchool of Law, agreed the judge's ruling could encourage othermarket participants to learn from Epic's case and try to launcha stronger blow against Apple.

Investor fears

Apple shares dropped on news of the ruling and closed more than three per cent down at $148.97 US on Friday, reflecting investor fears that the ruling would siphon away billions of dollars in annual revenue from the company.

The legal battle targeted commissions of up to 30 per centthat Apple charges on digital transactions within apps. Such transactions can include everything from Netflix or Spotify subscriptions to the sale of digital item such as songs, movies or virtual tchotchkes for video games.

Epic cast that highly lucrative fee as a price-gouging tactic that wouldn't be possible if competing stores were allowed to offer iPhone apps.

Gonzalez Rogers also dealt Epic a blow by ruling that the game maker breached its contract with Apple when Fortnite added a non-Apple payment system to its app. That defiance prompted Apple to oust Fortnite from its app store 13 months ago, triggering Epic's lawsuit.

She ordered Epic to pay Apple nearly $3.7 million US, or 30 per cent of the revenue it collected while violating Apple's commissions.

Epic, a privately held company based in Cary, N.C., didn't immediately respond to a request for comment. But Epic CEO Tim Sweeney denounced the ruling in a tweet, writing that it "isn't a win for developers or for consumers."

He said Fortnite will return to Apple's app store once it can offer competitive in-app payments.

"We will fight on," he added in a subsequent tweet.

FACTBOX: Highlightsfrom the case

Epic CEOTim Sweeney said Apple exercised "total control over" allsoftware on iOS when he testified in May, and that he knew hewas breaking Apple's App Store rules by putting Epic's ownin-app payment system into the game. Apple countered it wassimply trying to protect the security and privacy of its onebillion iPhone users.

Experts battle

Experts make the case that Apple's iPhone users are so loyalthat the device constitutes a single-brand market. Apple haslong argued that it is a minority player in thriving markets,but a decision otherwise could have far reaching implicationsfor its business.

Apple made at least $100 million and likely more fromFortnitein just two years, showing how lucrative the AppStore model can be for the iPhone maker.