Apple ecosystem challenges: Epic v. Apple, IDFA, privacy, and payments

Apple has one of the world’s biggest gaming ecosystems with $47 billion of spending in 2020, according to measurement firm Sensor Tower. And while it doesn’t have a game business, its share of gaming revenues thanks to its 30% take was $14.7 billion last year.

That’s one of the reasons Epic Games sued Apple for antitrust reasons. Add to that controversies around the Identifier for Advertising (IDFA) and alternative payments and it has presented a challenging platform for game companies to navigate.

Our panel at GamesBeat Summit Next examined those challenges, and we gathered a group of outspoken game leaders to talk about it. Joseph Kim, CEO of Lila games and frequent podcaster, moderated the session and the speakers included Chris Hewish, president of game monetization firm Xsolla; Brian Bowman, CEO of Consumer Acquisition; and Rick Hoeg,  a Michigan attorney at Hoeg Law and creator of the YouTube show Virtual Legality.

While Apple created a giant platform for mobile games, its relationship with game companies has never been easy. In the past year, the cracks in the relationship became huge fissures as Epic Games sued Apple (and Google) for antitrust. With the IDFA changes, Apple’s emphasis on privacy over targeted advertising was directed at rivals like Facebook, but game developers got caught in the crossfire. But thanks to part of a judge’s verdict in the Epic antitrust case, some openings like alternative payments and off-store promotion are now possible. Navigating Apple is all about dangers and opportunities. Apple did not respond to our request to appear on the panel

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Epic vs. Apple

Epic Games is launching the Free Fortnite Cup. Guess who the villain is?

Above: Epic Games launched the Free Fortnite Cup with Apple as the villain.

Image Credit: Epic Games

Hoeg started the discussion.

“For those of you that haven’t followed the story, Epic put a specific link and or button in the Fortnite application on both the iOS and Google Play stores in order to get people to pay them directly instead of paying through the in-app processing on Apple and Google,” Hoeg said. “As you might have suspected, Apple and Google both made moves to get Epic off of their store as soon as that happened and Epic was ready with a federal lawsuit, basically accusing both for different reasons that we can get into if you want of antitrust violations under the United States Sherman Antitrust Act.”

That led to preliminary injunctions, temporary restraining orders, and a trial that was held in May. The federal court decided mostly in Apple’s favor, finding that Apple wasn’t a monopoly, that it didn’t have illegally restraint trade, and went down the line, basically talking about how a walled garden was mostly permissible under United States law, Hoeg said.

“There was one major exception to that, however, and that was with respect to what we call anti-steering rules,” Hoeg said. “Apple had a provision in its app developer contracts that said you aren’t allowed to put a call to action link a metadata button in your app description that will send people off platform Apple wants the money that it wants going through an app payment processing.”

He added that the court said that went too far, and the judge, Yvonne Gonzalez Rogers in Oakland, California, used California’s unfair competition laws to make that case. As of that trial order in September 10, Apple had about 90 days to incorporate that to change whatever it needed its terms and conditions to be enjoined from doing. It made those changes to its developer contract, and both companies have appealed the decision to the federal Ninth Circuit Court of Appeals. Apple asked for a stay on the order, and it has refused to reinstate Fortnite in the app store while the litigation is still going on.

Hoeg said it isn’t clear if Apple will have to do anything in the near term, particularly while the case is pending. And the case could be in litigation for years.

Asked if game companies can enable off-App-Store payments now, Hoeg said that another class-action lawsuit is in process against Apple, (primarily called Cameron for purposes of conversation). And in that lawsuit, under very similar premises that Epic brought, Apple agreed to settle. And when Apple agreed to settle, it allowed certain things like emails to be sent to users who were otherwise going through their app store to give their contact information to these developers, Hoeg said.

And so Apple has been making moves with changes to their app development guidelines to allow things like those emails. But in respect to Apple versus Epic specifically, we haven’t seen a change to Section 3.1 in their app developer guidelines that prohibits that metadata, those links, and those calls to action, Hoeg said.

“We’re still in an amorphous, ambiguous period, where we don’t know whether a stay will be granted,” Hoeg said. “If it isn’t, we don’t know what the Apple contract will look like after they abide by the court’s order. And so you have a lot of developers moving to say we’re going to address this, we’re going to do calls to action and various things, some of which are overly aggressive.”

And so it has turned into a waiting game now.

Alternative payments

Above: Clockwise: Joseph Kim, Brian Bowman, Rick Hoeg, and Chris Hewish.

Image Credit: GamesBeat

Hewish from Xsolla, which provides alternative payment platforms, said his company is seeing a lot of developers and publishers spinning up web shops that are stores for their own games or a version of their game that runs on the web.

It may link back into the app itself in the App Store on the back end. And they’re driving users to that web shop and monetizing them there, Hewish said.

“And in that way, they’re avoiding having to pay that 30% fee to Apple doing it this way,” Hewish said. “At least from our perspective, they’re paying anywhere from 7% to 10%, versus the 30% fee. There’s also something called top agents that you see developers doing. Supercell has been doing the top of page companies like Scopely. They’re doing more of a web shop or web version of your game. And this is something that has been going on for a little while. And some of the larger companies were doing this and they were reaching out to their players through Discord or online in other ways and directing them over to these stores.”

Hewish said a lot of companies are sitting on the sidelines, as they’re not sure if these actions would amount to a violation of the App Store guidelines or not. Apple removed one guideline, which prohibited developers from using information or contacting players based on information they found at the app, and it removed a guideline which restricted how developers used the data. Those things have changed, Hewish said.

“Mobile developers can actually collect information about the players in-app emails,” Hewish said. “nd then they can use that to contact the players and direct them to these alternative stores. And with those things happening, we’ve seen a big coming off the sidelines of a lot of mobile publishers and developers who realize they’re seeing Supercell and others already doing it. And now it seems to be more acceptable with Apple. So let’s jump into it. What we’re not seeing yet is people that are actually putting new payment systems into an app, or creating ads in an app that drives them outside of the App Store. That is still, from our perspective, a no go zone.”

Hewish said that driving the users to the alternative stores to make purchases is an improvement because, rather than paying 30%, developers are paying more like 10%. Xsolla charges a 5% fee for its services.

“That’s a huge, huge savings,” Hewish said.

Hoeg said that the courts don’t want to be in the business of second-guessing legit business decisions, only that monopolistic practices don’t become anticompetitive in the face of excessive profits. But he noted the percentages are coming down, as Google knocked down its subscription rates in certain cases.

“You see this pressure, whether it’s not solely from litigation, or political pressure, or otherwise,” he said. “I definitely think that number is below 30%, which is the standard that we have seen. It is the 12% standard that Tim Sweeney set in the Epic Games Store? I have my doubts, and I think the court had its doubts. And so far Epic hasn’t shown a profit” in the Epic Games Store.

“One of the questions is what is Apple going to be asked to do by the law to move it in that direction,” Hoeg said. “The court was pretty adamant about the fact that Apple has a right to get some amount of money for using its intellectual property.”

Bowman said he thinks 5% or less is where it will settle in terms of Apple’s take. Hewish also couldn’t put a number on an exact appropriate fee for Apple or other store providers to take.

“Whoever is actually handling those payments, they have to remember that there’s going to be a big cost around customer support,” he said. “Handling taxes, that compliance, customer support chargebacks, all of that stuff. So as much as we like to talk about the percentage of the fee, it has to be paid for somewhere. And then there’s just the platform fee itself running the servers operating all of that. I agree that somewhere in that middle range seems to be shifting out is a fair fee.”

Hoeg thinks it will be years before the courts finish with the case, and he thinks that the core part of the ruling on the federal side — which favored Apple, and the California law — which favored Epic — will likely be upheld. But he’s not positive about that.

“It wouldn’t surprise, me to be honest, because the wheels of law grind so slowly, to actually see legislatures, whether it’s in South Korea or other jurisdictions, move faster and start pushing this harder than just the legal system,” Hoeg said.

Regardless, Hewish said, “What’s happening is people are now opening up their eyes to other ways to monetize their apps and their games. I see this as a situation where new business models may grow up around the App Store that actually diminish the importance of the App Store itself, on the bottom line of these companies. For me, the exciting thing is, whatever happens to the app stores, eventually they will open up. The walls are crumbling, but there are immediate opportunities to catch up to the reality that there’s a bigger world out there that we can do business in.”

IDFA deprecation

IDFA could be Armageddon for game advertisers, says Consumer Acquisition.

Above: IDFA could be Armageddon for game advertisers, says Consumer Acquisition.

Image Credit: Consumer Acquisition

Bowman’s firm has managed over $3 billion in paid user-acquisition spending on social.

Kim said that the alternative payment revenues is a kind of “gravy” to recover some of the loss that game makers are experiencing from the IDFA changes, which makes privacy a bigger matter by asking users upfront (in the 14.5 update from the spring) whether they want to be tracked for ad purposes.

Most users are opting out (perhaps 30% are opting in), and that makes it harder to target user-acquisition ads at users who have been making regular purchases in a game. Kim noted some revenue impacts on mobile game and app companies, with those such as Zynga, Facebook, Snap, and others noting that their revenues have been hurt by the IDFA change.

“It’s pretty clear that Apple’s push is to regain control of merchandising by eliminating the IDFA, and it is really affecting the mobile app advertising industry. But it does it in a unique way. Across the board, it has impacted both targeting and measurement, which has had a pretty major impact now on both ecommerce and user acquisition,” Bowman said. “They’re both less effective. We’re seeing an iOS revenue loss between 15% to 35%, for mobile app and ecommerce advertisers. And the odd part here is CPMs (ad rates, or costs per mille) are up, ad impressions are up. And the quality of impressions are likely down due to less effective audience targeting. And if you look at the earnings reports from Facebook and Twitter, they both said that. Facebook said ad impressions are up 9%, CPMs are 22%.”

He said the more that an advertiser focuses on direct response advertising, the greater the financial loss to the business appears to be, based on the financial earnings reports. The more narrow your audience is, meaning you’re targeting dolphins and whales (spenders), the greater the negative impact on IDFA losses, Bowman said.

Without personalization, you’re seeing more ads and the quality of targeting is worse. In other words, ads are becoming more spammy again, rather than having some kind of quality targeting. The third quarter is where we saw the full IDFA impact, Bowman said. But figuring out the true impact is probably going to take years, he said.

He noted a story in the Wall Street Journal that said that a dozen ecommerce companies have all spent more money on ads to get the same number of sales. And they don’t have enough data to effectively measure the specifics of the targeting.

Google, by contrast, had a huge quarter as more advertising spending moved to Android, Bowman said.

“Over the past decade, we’ve all built our model, or lifetime value model, to analyze and work on things to take into account this kind of deterministic certainty,” Bowman said. “When that gets removed very, very quickly, the whole industry has to spin and figure out how to take advantage of it. To my earlier point, in direct response advertising, Snap is saying that it’s about 50% of their business, so they’re definitely feeling the pinch. And if you look at the big one, Facebook, they had an amazing quarter revenue of $29 billion up 35% year over year.”

But Sheryl Sandberg (Facebook’s president) said that the headwinds were coming. Twitter’s impact wasn’t as severe. Bowman thinks that Apple itself and Unity will have a good chance of growing their ad businesses. More spenders are exploring their solutions as they seek to recover lost efficiency in ad spending.

Predicting outcomes

The Post-IDFA Alliance has evaluated the impact of Apple's privacy push.

Above: The Post-IDFA Alliance has evaluated the impact of Apple’s privacy push.

Image Credit: Post-IDFA Alliance

Kim asked if Apple was deliberately trying to hurt a rival, Facebook, with the IDFA actions.

“I think it has absolutely nothing to do with privacy. It has to do with Apple losing control of merchandising at the App Store,” Bowman said. “If it had to do with privacy, they would have put the app tracking transparency on their own apps when they launched 14.6. It would also make the ad pop-up window say, ‘Do you want to be tracked with Apple products?’ They don’t.”

He added, “It’s Apple exerting monopolistic capabilities because they can. They’re clearly on the path to try and launch another ad network. They failed twice. I would suppose that they’ll fail a third time unless they’re going to build something that’s elegant and allows people to target with efficiency that has been lost. I don’t believe it’s uniquely designed for Facebook.”

Hoeg said that privacy is indeed a buzzword that Apple touted in the lawsuit with Apple.

“That all feeds into whether or not it’s legitimate,” he said. “I think there are perfectly valid reasons to think it may not be. And I certainly agree with those. It certainly presents as something that is a PR when to certain folks that people care about that word, they care about privacy, they care about security. And I think overall, we’re entering into a world where you’re going to have a lot of opportunity. There’s a lot of changes on the horizon, regulatory, legal, or otherwise. And I think that’s always exciting, even if it is sometimes difficult to predict.”

Hewish said his final thought was that it is an exciting time.

“Developers and publishers no longer have to be fearful of living and staying within the walled garden,” Hewish said. They can break through and look out to a bigger world outside of it. And what I mean by that is by getting your game onto the web and driving business there through Google ads, or whatever it may be, they will have more personal relationships with the players and gain access to up to 60% larger audiences, when you start to look at a lot of the other territories around the world.”

Bowman said, “Creative is king. Since the algorithms have changed fundamentally, the last lever you have control over is do better creative.”

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