The DeanBeat: Epic pulls out its real case against Google in antitrust lawsuit

On Thursday, Epic Games revealed its fully unredacted antitrust lawsuit against Google, and the nature of the allegations and the evidence to back them up is finally coming into focus.

Last summer, Epic Games tried to bypass the Google Play store on Android and the Apple App Store on iOS by enabling users to get better deals for in-game purchases in Fortnite on Epic’s own store. Google and Apple both kicked Fortnite out of their stores, and Epic filed a monumental antitrust lawsuit against them. We summed up a lot of the legal battle with Apple here.

The case against Apple proceeded more quickly. The trial has ended, and we’re awaiting a verdict from the federal judge. But the case against Google moved more slowly, and this week the federal court judge James Donato in San Francisco ruled that the allegations could be completely unsealed.

And so it finally became clear what Epic’s beef with Google is, how this case will be very different from Apple’s, and the actions that Google allegedly took to try to buy off or buy out Epic. Just like the Apple case, this lawsuit is going to teach us a lot of things we didn’t know about gaming and the negotiations between big platform companies and powerful game developers and publishers.

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In a statement, Peter Schottenfels, a spokesman for Google said, “Google Play competes with other app stores on Android devices and on rival operating systems for developer attention and business. We’ve long had programs in place that support best-in-class developers with enhanced resources and investments to help them reach more customers across Google Play. These programs are a sign of healthy competition between operating systems and app stores and benefit developers tremendously.”

I have also asked Google for additional comment.

Epic allegations

Above: Epic alleges Google has illegally blocked its store promotions.

Image Credit: Epic Games/court records

Epic’s allegations go pretty deep into matters such as contracts that Google allegedly tried to use to keep smartphone makers such as Samsung, LG, and OnePlus to avoid preinstalling the Epic Games Store in favor of keeping Google Plus. The suit alleges Google created “Project Hug” to give various kinds of kickbacks to game companies such as Activision Blizzard, which became a big supporter of Google Cloud and YouTube, from defecting to the Epic Games Store. And it reportedly even tried to buy Epic Games and considered buying shares from Epic Games shareholder Tencent to shut down competition from Epic.

Google’s Schottenfels commented, “As we have stated previously, Epic’s lawsuit is baseless and mischaracterizes our business conversations. Android provides more choices in mobile devices for developers and consumers.”

Both Google and Apple charge 30% fees for in-app purchases for games, which is the main source of revenue for mobile game makers. Epic charges a 12% fee, but Apple and Google have blocked Epic from getting its store on their platforms. Epic noted that the 30% fee is 10 times that charged by other payment processors such as PayPal (2.9% fee) and Stripe (2.9%).

Epic Games Tim Sweeney offered running commentary as the evidence, some of which surprised him and his company, spilled out of the court.

The difference between Google and Apple

With this evidence in hand, we can now consider the differences between the Apple case and the Google case, which are winding their way through the courts separately. With Apple, Epic contended the 30% commissions the big companies take from every game transaction is unfair and that Epic should be able to directly sell its in-app goods to players for lower prices. It argued that app distribution and payment could be as open on Apple’s iOS platform as it is on personal computers. As noted, Apple and Google responded by kicking Epic’s Fortnite — which has more than 400 million registered players — out of their stores.

And here’s where I should explain the “relevant market.” In an antitrust case, companies that have monopoly power and use it to control a relevant market can be found guilty of abusing that monopoly power. Apple argued the overall game market is very competitive, and Epic can easily hawk Fortnite items on other app stores as well as the consoles and the PC. Epic said that Apple had a virtual lock on a billion wealthy players who spend a lot of money, and those players can’t easily switch to another smartphone ecosystem.

Epic made this argument against Apple even though Android has a larger number of users around the world. Epic’s lawyers argued that Apple’s users were the ones that mattered. On iOS, Epic had 88 million downloads and $631 million in revenue. But on Android, Fortnite had only 21 million downloads and $47 million in revenue. It’s clear where the real money lay.

Then why did Epic sue Google, as its argument in the Apple case seems to undermine its case against Google? After all, Google allows sideloading of apps on Android, whereas Apple doesn’t. And Google contends that Android is open in contrast to the closed iOS platform. Epic still argued that Google put 15 difficult steps in the way of users who wanted to bypass the Google Play store and buy items directly from Epic.

Project Hug

The Call of Duty League Championshp is coming on August 19 to August 22.

Above: The Call of Duty League is a YouTube exclusive.

Image Credit: Activision

But the difference here is in Google’s behavior, as above allegations cite. Epic alleged that Google gave a good side deal to Activision Blizzard on YouTube sponsorships and Google Cloud services. That’s part of the allegations about Project Hug (formally referred to as Apps and Games Velocity Programs). Epic also said that Google offered to placate Epic by “offering it preferential terms on side deals, such as YouTube sponsorships and cloud services, if Epic agreed to distribute Fortnite in the Google Play Store and acceded to Google’s 30% tax.”

Epic’s lawyers wrote, “These deals allow Google to keep its monopolistic behavior publicly unchallenged. But Epic is not interested in any side deals that might benefit Epic alone while leaving Google’s anti-competitive restraints intact; instead, Epic is focused on opening up the Android ecosystem for the benefit of all developers and consumers.”

Epic, notably, isn’t asking for monetary relief in the case. It’s asking for relief from the monopolistic practices for the whole industry.

But Epic now has the uphill battle of arguing that Google has “massive market share.” It said the European Commission determined that in Europe “more than 90% of Android app downloads through app stores have been done through the Google Play Store.” That’s pretty compelling, but remember that Epic argued Apple was the monopolist in the previous case.

Epic also noted the Google Play Store has three million apps, compared to 700,000 apps offered by Aptoide, the next-largest store. (China has more competition in its app markets because Google doesn’t operate there.) And it repeated its argument about high switching costs, where it’s hard for consumers to get out of either operating system ecosystem because consumer data is locked in.

Manufacturer contracts

OnePlus 8 is the first smartphone that runs Fortnite at 90 frames per second.

Above: OnePlus 8 with Fortnite.

Image Credit: OnePlus

Epic alleged that Android is “open source” in name only because Google has entered into so-called Anti-Fragmentation Agreements, ostensibly to keep Android from forking in too many directions. But Epic said those agreements prevent phone makers from “modifying Android to offer competing app stores without restrictions.”

Moreover, Epic accused Google and Apple of colluding together, even though they’re competitors. Epic cited a 2010 private meeting between former Google CEO Larry Page and former Apple CEO Steve Jobs in which Page reportedly said “there will always be places we compete, and places where we cooperate.”

For over 15 years, Google has an agreement to pay a significant amount of revenue from searches run on iOS devices — $8 billion to $12 billion per year in recent years, according to evidence collected by the U.S. Department of Justice — in exchange for Apple making Google Search the default search engine on the Safari browser and more.

Here’s where Epic makes a very good point.

“Because Google reaps considerable profits from iOS users through its search arrangements with Apple, Google is not incentivized to compete more with Apple at the smartphone OS level and expend more resources attracting users from iOS to Android than it currently does,” Epic said. “If it did not profit significantly from searches on iOS devices, Google might be more incentivized to, among other things, differentiate its
Android platform from Apple with respect to the commissions it charges on app transactions.”

Epic accused Google and Apple of being “cozy duopolists, offering virtually the same terms to developers and changing those terms in tandem, if at all. Google’s efforts to get phone makers to preinstall Google Play on their phones matters because of “friction,” or small obstacles that can stop users from taking an action. Very few users are going to go to the trouble of deleting that store and installing the Epic Games Store.

Since 2019, Google foreclosed on Epic trying to get its Fortnite and store preinstalled on the OnePlus smartphone as well as others, Epic said. Google shares profits from the store back with the phone makers as well as developers in side deals that keep them loyal, Epic alleged.

“OnePlus informed Epic that Google was ‘particularly concerned that the Epic Games app would have ability to potentially install and update multiple games with a silent install bypassing the Google Play Store,’” Epic said.

Google reportedly engaged in Project Banyan, and another program dubbed Project Agave, to similarly lock down Samsung.

“These documents show the many efforts we’ve made to support developers in a highly competitive field,” Google’s Schottenfels said. “They also clearly show that consumers can choose from multiple app stores, and that we support their choice, including the side loading of apps – choices that enable Epic’s business on Android. We’ll continue to defend ourselves against this meritless lawsuit in court.”

Incriminating documents?

Lebron James skin in Fortnite.

Above: Skins such as LeBron James are an important revenue stream in Fortnite.

Image Credit: Epic Games

Epic alleges documents show that Google’s finance director for platforms and ecosystems prepared for the chief financial officer of Alphabet  (Google’s parent company) around the time of Fortnite’s launch on Android showed that Google feared what it termed a “contagion risk” resulting from more and more app developers forgoing Google Play.

Google feared that the “contagion” would spread in this way: first, inspired by Epic’s example, developers such as Blizzard, Valve, Sony, Nintendo — creators of some of the most popular and profitable games — would then go on their own, bypassing the Google Play store by directly distributing their own apps. Then, other major companies like Electronic Arts, King, Supercell, and Ubisoft would take similar actions.

Google allegedly calculated that the revenue at risk from this threatened loss of market share in Android app distribution would have amounted to $3.6 billion, including $550 million lost in 2021. Over time, Google might lose $6 billion in revenue. Presumably, these documents will be presented at the pending trial.

Epic also said that in July 2018, Google executives met to hear a proposal from the Google Play team to offer a partnership with Epic worth up to $208 million in various discounts over three years. Epic said this was an attempt to buy it off because Epic’s threat to the 30% royalty was likely to put the contagion in motion across the broader ecosystem of developers. Google followed through with this offer to Epic, the allegations said.

And as an alternative, a senior Google executive said it should consider approaching Tencent to buy its shares (a large stake within Epic) or to encourage Tencent to buy control of Epic itself.

Google also allegedly engaged in “anticompetitive conduct” with its Premier Device Program for smartphone makers, where the agreements contained restrictions that would preserve Google Play exclusivity.

In exchange for these exclusivity commitments, Google offered smartphone makers various forms of financial incentives, including 4% of Google’s Search revenues earned on the covered devices (on top of the 8% of Search revenues Google already commits to smartphone makers who sign other agreements as well. The restriction? The smartphone can’t have preloads that compete with Google’s store, Epic alleged.

What it means

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

These are pretty specific and damning examples of anticompetitive behavior. But we have yet to see the actual evidence in court. Some may appear in the form of emails, but should the court consider that as evidence if Google didn’t actually take actions, such as attempting to buy Epic or trying to get Tencent to buy Epic? The devil is going to be in the details of the evidence, but Epic has clearly tossed the ball into Google’s court, and the burden is going to be on Google to come up with a credible response.

From what we’ve seen so far, this trial will produce a trove of very useful information on how the game business is actually run.

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