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Apple's Fortnite Battle Could Trigger a Slippery Slope

Epic's well-orchestrated legal challenge raises the risk that more developers will pile on the pressure for Apple to change its platform fees.

Epic Games is aiming to hit Apple where it hurts: the App Store, the crown jewel of Apple's services business.

Fortnite maker Epic Games served up a high-stakes lawsuit against Apple this week, accusing the tech giant of violating antitrust laws with its App Store fees. And it even released a video mocking Apple's famous "1984" Macintosh ad, implying that the company has betrayed its former ideals and become an oppressive force in the tech ecosystem.

"It's a risky bet for Epic, but a calculated one," Wedbush analyst Dan Ives told TheStreet. "Given the antitrust issues swirling, they're trying to strike while the iron is hot." 

Epic has some leverage in the scenario. Fortnite is among the most heavily-played games in the world, and generated an estimated $1.8 billion in revenue in 2019, according to research firm SuperData, largely through selling add-ons and in-app purchases. And it's a worldwide cultural phenomenon that recently drew 27 million people to watch a virtual concert by rapper Travis Scott. 

Epic exercised that leverage on Thursday by offering a discount on V-Bucks, a virtual digital currency used to buy items in Fortnite, and directing users to buy them directly from Epic rather than through Apple's platform. Apple yanked the game for violating its App Store terms, and Epic responded by filing the antitrust lawsuit. (Fortnite was also banned by Alphabet's  (GOOGL) - Get Alphabet Inc. Class A Report Google Play, which has similar terms, and Epic sued Google as well.) 

Although Epic isn't seeking any monetary damages in the lawsuits, a significant amount of money is at stake. 

"Most of Fortnite’s users access the game on iPhones and Androids," noted Maven tech columnist Jon Markman. "Under the terms of service, the App Store and Google Play are entitled to scrape 30% of all in-app generated fees. Since Epic has made a big business out of selling virtual stuff, that works out to be a huge number."

However, the main risks for Apple aren't necessarily any financial loss associated with Fortnite's absence from the App Store. It may lie in a slippery slope of other developers siding with Epic amid tighter regulatory scrutiny of Apple. 

"Other developers are watching this extremely carefully, because if any ruling in the courts goes against Apple it would be a Pandora's Box situation," added Ives. 

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Other developers are already coming out of the woodwork to pile on the criticism of the App Store. On Friday, Facebook wrote in a blog post that Apple refused to reduce its 30% App Store fee for Facebook Pay, calling it a "tax" and implying that the fee is damaging struggling small businesses. 

Apple doesn't break out its App Store revenue, but it's believed to be a major contributor of revenue to its Services segment. 

The company told investors in January that it had paid out $155 billion to App Store developers since 2008, $35 billion more than a figure it reported a year earlier. Accounting for Apple's own 30% cut, that would imply App Store revenue in the ballpark of $15 billion in calendar 2019. Apple's total services revenue in the most recent quarter was $13.16 billion. 

Apple's court fight with Epic is likely to drag on for years, and ultimately, investors don't seem at all fazed by Epic's legal challenge. Apple shares didn't take much of a hit on news of the lawsuit, with shares closing roughly flat on Friday. 

The scrutiny by lawmakers is potentially another story, with a tightening up of antitrust rules somewhat more likely if Democrats take the Presidency and the Senate in the fall, in the eyes of analysts. Still, a fundamental change to the App Store business model remains a remote possibility according to Ives. 

The risk "is more around fines than other major business model changes," he said. 

Apple shares are up 53% year to date.