Epic, Apple and Fortnite on The Future, This Week

Intro We'd like to advise that the following program may contain real news, occasional philosophy and ideas that may offend some listeners.

Kai So, week two of Season 8, lots happening. Where do we start?

Sandra Anywhere but Neuralink, I think just literally any story other than Neuralink.

Kai Well, fashion then.

Sandra Fashion, yes one of my favourite topics. It's emerged that a couple of the big fashion houses are the most resilient during the pandemic. And interestingly, the one that's considered most resilient is not one that necessarily you would think that's very innovative, and that seems to fly in the face of conventional wisdom. So fashion house Hermes has been declared one of the most resilient brands in the luxury market. During the Great Recession it was one of the few brands that fared well even as the entire market fell by more than 10%. It had a year on year growth of 8.5%. And it seems that now they're on track to do the same. The brand generated about 2.7 million in sales in a single day after they reopened in Guangzhou province, in one store alone.

Kai While this could be a story about the luxury segment being somewhat insulated from the recession, there's also I think, another angle there. You would think that fast fashion companies, those who are really agile and responsive could adjust best to how, you know, consumer sentiment might change during a pandemic. But maybe it's not always all about innovation and being fast. Sometimes being resilient, being traditional and offering something that doesn't change as much might actually play well with consumers who in times of rapid environmental change that is imposed on them, might actually flock to things that are a bit more persistent, a bit more tried and tested.

Sandra And that certainly holds true for Hermes, which did not slash prices did not follow fashion trends, they produce extremely expensive but timeless classic, the same bags they’ve been producing for almost the past hundred years, to a large extent. They haven't gone down-market and produced cheaper things. And they also haven't relied on any of the government help to keep their staff on hand. They vowed to maintain their basic salary for its 15,000 Global employees without relying on funding from governments like the French government.

Kai I think it's time now to go to 'It's a Musk', because Elon Musk has been added again, this time under the label of Neuralink.

Sandra Yeah, you're gonna make me do that one, aren't you?

Kai I am.

Sandra Elon Musk's Neuralink. This was of course the live stream pig brain implant event of last week that promises to play music in your head and help you see with superhuman vision. Or awaken to the nature of consciousness and cure blindness, deafness, paralysis.

Kai Oh and world peace. Now, MIT Tech Review called it neuroscience theatre. It's full of promise, very light on science really. So the promise is, of course, that Neuralink will embed in your brain a chip or lays a layer of electrodes that touches the brain surface, and then connect your brain to computing. The idea is that we will merge with artificial intelligence to create superhuman intelligence or it will allow us to do all kinds of things directly from the brain without needing, you know, the body for input into computing. And while there are some serious applications with this type of technology that is already in existence, like the ability to move artificial limbs, what Elon Musk is presenting is largely science fiction and will probably remain so for a while.

Sandra It is. Musk did not give any timelines, committed to anything, even when asked about testing it in human subjects and so on. And some of the claims are very, very difficult to deliver on like curing depression, we could first find out what causes it in the first place, then we might have a shot at curing it. But to be fair, probably the whole point of this exercise was not the actual technology but rather to stir excitement, make sure that people who are visionaries, engineers who are keen to change the world will want to work in one of the Elon Musk companies, and also obviously helped push up the stock price of other Musk ventures.

Kai Yeah, we could call it bullshit but we call it neuroscience theatre for the moment, notwithstanding serious applications in helping people with disability, the promises that Elon Musk makes are rather outlandish.

Sandra But there was another story that caught my eye which was the one around a Airbnb extending employee work from home until August 2021. This is currently the latest of any tech companies that are setting deadlines for coming back. Famously, Twitter has said that its employees can work from home pretty much forever. Facebook wants them back in July next year. Google wants them back in June next year. Now Airbnb is going a bit further, but there's a very interesting conversation to be had around working from home and return to the office. But we've covered this fairly extensively in a couple of our Corona Business Insights episodes, which we'll of course link in the shownotes.

Kai And they're by no means the only company with announcements in that space, Pinterest has just announced they are cancelling the lease on an as yet unbilled office building project in San Francisco which was supposed to be one of their new headquarters, citing as well the move to working from home.

Sandra And we discussed in our CBI episode what could happen to many of these empty buildings that will remain in the various CBDs.

Kai And there's been an update on the unfolding TikTok story.

Sandra This is our big story from last week.

Kai Yeah, absolutely. And Walmart seems to be the front runner in the bid to acquire TikTok having teamed up with Microsoft.

Sandra Why would Walmart want TikTok?

Kai Well, apparently Walmart has studied the ways in which commerce has evolved in China, and we have previously covered on The Future, This Week, how online streaming, for example, is used to sell just about everything. So Walmart is apparently making a big bet on the ability to import certain social platform commerce practices into the Western context into the US by way of monetising TikTok through that.

Sandra So really, it remains to be seen whether Walmart can actually import social practices from China and whether this is something where the US and the West can be looking at very different practices that have emerged in a different ecosystem. That is the Chinese Internet, and we've discussed this as well in our previous podcasts, or whether this is just wishful thinking. And there's another story that we really wanted to cover, and we're doing this as part of our Corona Business Insights series, which is the interesting news that companies like UPS are building enormous soccer field-sized freezer farms in the US in Europe to extend the supply chain capabilities that are needed to accommodate the new types of vaccines that might emerge for COVID-19.

Kai So this is really fascinating. The world is focused on the development of vaccines, but in the background, companies are getting ready to actually do the logistics the business sides of getting this vaccine into the hands of hundreds of millions or really billions of people globally, and especially newer kinds of vaccines, the genetic vaccines, they need deep freezing when shipped around the world. And so the world is now scrambling to build this massive capability of deep frozen shipment of hundreds of millions of these vials of vaccine so really fascinating.

Sandra But the big story for today has to be the epic...

Kai Epic...

Sandra Apple...

Kai battle.

Sandra This is The Future, This Week from Sydney Business Insights. I'm Sandra Peter.

Kai And I'm Kai Riemer. Every week we sit down to rethink and unlearn trends and technology and business.

Sandra We discuss the news of the week, question the obvious, explore the weird and the wonderful and things that change the world.

Kai So Sandra, what happened in the future this week?

Sandra It's gonna be one of the many, many stories that we've had over the past fortnight.

Kai Yeah, it has been an epic fortnight in Apple land.

Sandra Around the epic battle between Apple and Epic. So our main story for today will be Apple and Epic. One such story has been in The Verge titled "Apple and Epic have to win over more than just a judge - The important jury is in the court of public opinion". But before we get to the story, we do need to tell the story that's been unfolding over the past couple of weeks. It all started on a dark and stormy fortnight on August 13. When a well-prepared Epic Games forced Apple into booting its hit game Fortnite from the Apple App Store. It was the start of an epic Epic/Apple fight.

Kai Epic's provocation was to offer Fortnite players a way to purchase in-app currency, the so called V-Bucks outside of Apple's payment system at a cheaper rate, thereby hinting at the 30% cut that Apple takes from any in-app purchases, which was so clearly in violation of Apple's App Store policy that it was pretty clear that it was premeditated to have the game banned from the App Store.

Sandra Lo and behold, the very same day Fortnite was removed from the App Store. It was also removed from Google's Play Store, which serves Android phone, for the very same reason. And within an hour of being kicked out of Apple's App Store, Epic launched an anti-trust lawsuit against Apple in the American courts.

Kai And against Google, but it was pretty clear that the beef of Epic is with Apple because shortly thereafter, released an advertisement inside its Fortnite game, turning the tables on Apple with its famous 1984 commercial where Apple at the time took the sledgehammer to big blue IBM as the dominant computing player at the time, now finding itself at the receiving end of the sledgehammer, Epic insinuating that Apple has become the big monopolist ruling the world that now needs to change its ways.

Sandra So before we start unpacking this, and this is a really interesting story about business models about ecosystems around competition and how that changes. It's worth spending a little bit more time on how the two companies actually see this upcoming battle. And to do this, it's worth just listening to the Epic CEO Tim Sweeney, and he wrote this in an email to Apple. He says: "We chose to follow this path in the firm belief that history and law are on our side. Smartphones are essential computing devices that people use to live their lives and conduct their business. Apple's position that its manufacture of a device gives it free rein to control, restrict and tax commerce by consumers, and creative expression by developers, is repugnant to the principles of free society. Ending these restrictions will benefit consumers in the form of lower prices, increased product selection, and business model innovation. We hope that Apple will reflect on its platform restrictions and begin to make historic changes".

Kai So this is really interesting. He's basically making the infrastructure argument. Apple's phones are now so essential to living our lives and they're so prevalent and so widely diffused into society, that they have become an essential infrastructure, and access to the platform to do commerce should therefore be less regulated and much cheaper than is currently the case. So that's the Epic argument. And it is pretty clear that they're really after change to how the App Store, how the platform operates, because while they highlight the 30% cuts that Apple famously takes for every transaction on the App Store, the so-called Apple tax, it doesn't seem to really be about this. Because first of all, Google is taking the same cut and Epic isn't really going after Google, in the public arena at least. And, they are not actually seeking any financial damages in their lawsuit. So it's really about change.

Sandra And indeed, the lawsuit itself says that "Epic does not seek monetary compensation from this court for injuries it has suffered and likewise does not seek a deal favourable for itself. Instead, it seeks this for everybody".

Kai So they are seeking an institutional change of the App Store on behalf of developers. So what's Apple say?

Sandra Apple argues from a completely different position. They also make the freedom argument. But they talk about freedom for the Apple users to have an excellent user experience. So freedom from having to make all the decisions or having to trust all the players on the platform. And indeed, it's worth seeing Apple's declaration in court, which says that "the App Store's monetisation model is rooted in Apple's overall philosophy of putting the user and the user experience first. This focus on user experience is reflected in Apple's overall business model and offerings to consumers, which prioritises quality, distinctive design, innovative technology, security and privacy. This philosophy can also be seen in Apple's strategy of integrating its proprietary hardware, software and services across the range of products to ensure a high-quality user experience. In contrast to many of its competitors."

Kai So Apple really takes the other side. And so what this hints at is that in order to understand this issue more fully, we need to look at the nature of these platforms as two-sided marketplaces, but also at the nature of competition, how it unfolds between and on these platforms, and matters of user experience. And those are the two big points that we're going to unpack. But before we do this, let's take a look at what's actually happening. How does this App Store work, and what are the controversies around this?

Sandra So just to remind ourselves, the App Store first of all organises how things are monetised in the Apple ecosystem. That means that any app that you download has to be downloaded to the App Store. Apple takes a 30% cut the moment you buy the app and download it. And then Apple manages how things can be monetised within the app. If your app sells anything digital, then Apple picks a 30% cut.

Kai That is true for any, you know, in games, any virtual currencies. It's true for any paid upgrades of the app, extra features in the app, and it is also true for subscription. There's a 15% cut on any renewals after the first year, which is really the only concession to this. Anything else pretty much incurs 30%.

Sandra If however your app is linked to something in the real world, for instance on Airbnb accommodation or an Uber ride, or buying a thing on Amazon, then Apple will allow you to monetise that however you want.

Kai Yeah. And Amazon is actually a good example because if you go to the Amazon app and you buy a book, have it shipped to home, Apple doesn't take a cut, but it would take a cut for any purchase of Kindle books and this is why Amazon has disabled that feature. You can search for Kindle books but you can't see the prices, you can't purchase the Kindle book and have it downloaded onto your Kindle app on the iPhone even, you have to go outside of the iOS platform to your computer and purchase your Kindle books, they're all from a Kindle device.

Sandra But there are two more functions that the App Store actually performs for Apple. And the first one is that it is the only point of access onto the phone. So Apple controls every installation that happens on the user's iPhone. So companies have no other way of getting onto the phone other than through Apple.

Kai And Apple's argument for this is of course that a) we want to guarantee a consistent user experience. So all these apps have to comply with certain design guidelines and they're being vetted for that. And b) apps have to comply with certain privacy and security guidelines because Apple's business model, Apple's value proposition vis-à-vis users these days very much rests on being the good guys who do not invade privacy, who provide a safe and secure mobile computing experience.

Sandra And last but not least and following on from these two functions of the App Store is that of managing the customer relationship. So what is also frustrating for many of these companies is the fact that because Apple controls both the installation and the payment processing through its App Store, it means that they also manage really the customer relationship. Any functionality, any upgrades, any pricing changes, everything has to go through Apple, which means that the real value proposition for Apple is the trust that it can develop and the relationship that it can establish with its customers. And so let's be clear, once again, at this point that Epic is currently not only going after the payment system and the 30% cut, but it's going after all of these functions that the App Store provides. That means a cut of the pay, installation and access to the phone, but also being able to have a more direct relationship with the customers.

Kai And so it has long been a beef with developers the way in which Apple controls what gets onto the App Store, but also what developers can actually do on the App Store, the kind of access that apps have to the features of the operating system, but generally, restrictions around what can happen inside apps. And so if you look at the kind of things that Apple does not allow onto the App Store, we find in particular applications that try to build their own ecosystems, their own platforms in their apps, which would then sit outside of Apple's control. Game streaming services, such as Google Stadia, or Microsoft xCloud are famously not allowed into the App Store. And if we look at Epic and some of the vision that Epic is building towards, most notably what they call the Metaverse, the idea of a persistent virtual space that people can live in sync of a fortnight like space. That is encompasses not just gaming, but commerce, communication, work environments, you can really see how epic takes issue with Apple restricting the building of more comprehensive platform experiences in apps that they launch. So this is really a battle for the future of the internet because of course, epic relies on companies like Google and Apple on Android and iOS, and all the other computing platforms to roll out its services. But this is really a competition between platforms. And that's why we think we need to look at how competition actually unfolds in the world of platforms.

Sandra So what we most often hear is Apple being accused of being a monopoly, especially in terms of the power it has to restrict access to their platform or configuring the channels to reach people access their ecosystem, and in turn them basically forcing users to accept the configuration is put forward.

Kai And Apple, in the same vein, would deflect this criticism and say, 'we're by no means a monopoly, we have competition', most notably in the other device manufacturers, in Android as the other big platform, which incidentally has many more users worldwide than iOS. So we need to actually look at how competition plays out in and around these platforms. Because with the advent of platforms, competition has become way more complicated than it used to be in traditional markets.

Sandra And we'll flag here quickly and we'll put this in the shownotes. We've done two episodes on breaking up big tech, where we take issue at length with this idea of platform competition, not only for Apple, but for the other big tech companies as well. And we spent quite a bit of time unpacking this. In this case, we'll just look at competition for Apple.

Kai So in a nutshell, we need to distinguish between platform competition and on platform competition. Between platform competition refers to how Apple competes with Android, both for users, both for customers at the front end were both have built compelling ecosystems. So you're not just competing with the software, of course, but with devices, with all kinds of content that you have on the platform. And at the back end, of course, you're competing for developers who develop apps and software for the platform, which in turn makes the platform more attractive at the user end, which in turn makes it more attractive at the developer. And so this is what we call a two-sided marketplace. But there's another form of competition which happens on the platform. There's the competition between the developers inside the App Store, for example. And that competition can be quite fierce, because there's many developers who compete in the same categories on the App Store, but there can also be a competition between channels on the platform. And that's the one that everyone takes issue with with Apple, because Apple only has one channel that it itself controls, which is the App Store. Whereas on Android, you have the Google Play Store, but you have different ways to actually sideload apps. There's other app stores that also exist on Android. And so as a developer, for example, you're able to put your app into the Google Play Store or into other channels that you can reach users through. And so the monopoly claim in the Apple context really refers to Apple not allowing any other ways for developers to market their apps other than through their App Store.

Sandra So whilst there might be just one way into the user's iPhone, this has nonetheless created an extremely successful offering both for the consumer and for the developer. For the consumer, it currently offers the most seamless experience and full disclosure here. both of us are Apple users, but it offers is a seamless, beautiful experience. But also delivers for developers, and there's little being said about the actual numbers behind the App Store.

Kai And so we will put a link in the shownotes with data around how successful the Apple App Store is vis-à-vis the Google Play store when it comes to generating revenue for developers. And this is for the top 100 earning mobile apps in different categories. And so data from 2019, the average revenue of the top 100 publishers on Apple is more than 80 million, while it bottoms out at 50 million on the Google Play Store, a premium of 65% on Apple over Google. It's a little bit less only 48% more when it comes to games, but a staggering 232% in non-gaming apps, meaning productivity apps, work-related apps. So it is much more lucrative for developers to publish through the Apple App Store, especially when it comes to professional apps, non-gaming apps. So Apple's argument is that 'what we have built is actually very successful, customers are willing to pay because they know that they get quality in our App Store. And so we have built this platform, this ecosystem that benefits the developers tremendously as a successful business model.'

Sandra So while this is a very lucrative proposition for most developers in financial terms, it does nonetheless really limit what developers can do. Everything has to be approved by Apple, and it has to go through the App Store. And there is no way to innovate beyond what is considered acceptable or approved by Apple, such as developing new platforms within the Apple ecosystem, as you've mentioned before.

Kai And so what developers want, what Epic wants is to break up the monopoly of the Apple App Store and instate what we refer to as 'between channel competition'. So basically open up alternative App Stores, alternative channels to market to users and reach users with your offerings.

Sandra So this would result pretty much in what you have on an Android phone where you might have the Google Play Store. And even as Google has banned Fortnite, there are other ways to get Fortnite onto an Android system. And this is where it becomes really important to understand Apple's position in this. And Apple's position is really focused around user experience.

Kai And it's embodied in an early quote by Steve Jobs, who pointed out the basic strategy of what Apple tries to achieve with the App Store.

Sandra This is going back to 2007, an interview that then Apple CEO Steve Jobs gave to the New York Times, and he said "we define everything that is on the phone. You don't want your phone to be like a PC. The last thing you want is to have loaded three apps on your phone and then go make a call and it doesn't work anymore. These are devices that need to work. That doesn't mean that there is not going to be software to buy that you can load on them coming from us, it doesn't mean that we have to write it all. But it does mean that it has to be a more controlled environment. And that control allowed Apple to build a business model that really rides on popularity with its customers. And that popularity is both in terms of the trust convenience and the privacy that Apple sells."

Kai Yeah, and the reduction of complexity. So my point here would be that for me as a customer personally, for example, I really like that I can just go to one place, I find well-curated high quality apps, I don't have to think about where would I get this app from? Who's the publisher, what App Store is this? It really reduces the complexity, cognitive load and the time of the individual user. And I just want to point here as a counter example to the world of video streaming where things have panned out the other way. And we have previously discussed this on the podcast the way in which there's fragmentation across different platforms, Netflix, Apple TV, Disney+, HBO, in Australia Foxtel, you name it. Has really led to a situation where it's often unclear where a popular TV show is streaming.

Sandra Is this you're struggling to figure out where to stream Mulan?

Kai We've mentioned that previously on Corona Business Insights in the cinemas, in the movie industry. And so really what this would mean, it would basically be good for developers, but it would compromise the user experience and Apple is very protective of the user experience because this is what Apple's image what its brand, what its business model rests on. So you can see the hesitancy, beyond of course, the lucrative nature of taking the 30% cut, how Apple is protecting its user experience.

Sandra And in that respect, Apple does not see itself as a monopoly. Users are free to choose a phone that offers them a different platform. They can buy a Samsung phone, they can even buy a Pixel phone, even if they have to run around with a battery pack. So the question posed by The Verge article we started out with today as to how this will play out in the court of public opinion, is a really interesting one because most Apple users do not wish for a different experience on the iPhone. And probably if pressed most Fortnite users would not give up everything else Apple has just to be able to download Fortnite again.

Kai No, we also need to keep in mind that the Apple ecosystem user base that plays Fortnite is only a very small percentage of the Fortnite user base. Serious players do not play on mobile devices, they have that gaming setup, so it's really a fringe user group for Epic, nonetheless, considering that Epic is playing a bigger game, that they have higher things in mind, they nonetheless have an interest in effecting change, and being able to roll out bigger platforms, like the Metaverse onto the Apple platform going forward. And that's really what is at stake here.

Sandra So the question is, then where does this leave us? Because most likely, the intended audience for this debate is not really the users of iPhones, or even the developers who, quite frankly, are unlikely to move to Android anytime soon. Because as much as Apple controls what goes on to their platform, there's frankly a lot less money if you go to Android.

Kai

And it might not even be the courts that are the main audience here, given how long these court cases can take. Remember, Spotify launched court action against Apple for a similar reason, quite a while back in Europe.

Sandra We did this actually in March 2019, on an episode of The Future, This Week we spoke about Spotify, basically taking Apple to court on the same grounds. This is still being decided in the European Court. And quite frankly, Epic is quite likely to lose in the American courts because quite consistently, the Supreme Court in the US has sided with companies in this case, saying that these companies do not have a duty to deal with third parties.

Kai And so the main audience might well be legislators and regulators in the US. It is curious the timing at which Epic has launched this campaign in the middle of an election campaign, right before Apple launches its new iPhones, and in the middle of antitrust hearings before Congress.

Sandra And let's remember that both Apple and Google are in front of Congress alongside Facebook, and Amazon, facing antitrust investigations.

Kai And we know that Elizabeth Warren previously has come out with ideas to break up big tech, we've discussed this among other things, ideas around breaking up Apple as well. And so we would think that this is where Epic's battleground really lies.

Sandra And I suspect we'll be back talking about this soon. But that's all we have time for today.

Kai See you next week.

Sandra On The Future, This Week.

Kai Thanks for listening.

Sandra Thanks for listening.

Megan Sandra Peter is the Director of Sydney Business Insights. Kai Riemer is Professor of Information Technology and Organisation here at the University of Sydney Business School.

Outro With us every week is our sound editor Megan Wedge, and our theme music was played live on a set of garden hoses by Linsey Pollak. You can subscribe to The Future, This Week wherever you get your podcasts. If you have any weird and wonderful topics for us, send them to sbi.sydney.edu.au.

Sandra Before we do all that, um

Kai I'm sure you had a finish to that thought in your head.

Sandra Mm hm.

Kai Can you find it?

Sandra Yeah yeah yeah, I can find it.

Kai Our listeners are interested.