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Epic Wins 1, Loses 1 in Apple Fight

By Evan Niu, CFA – Aug 25, 2020 at 3:30PM

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Fortnite isn't coming back to iOS anytime soon, but Unreal Engine is safe for now.

Epic Games and Apple (AAPL -0.34%) are embroiled in an escalating legal dispute over Fortnite and Epic's efforts to circumvent the App Store's 30% cut of all digital sales. After kicking the massively popular battle royale game out of the App Store earlier this month, Apple retaliated further by threatening to terminate Epic's developer account altogether, depriving it of the tools needed to maintain and develop Unreal Engine.

The ripple effects of such a move cannot be understated, as that could cripple Epic's core business and hurt content creators across numerous industries. Epic requested a restraining order, and the court this week split the difference.

Armed "Fortnite" characters with purple clouds in the background

Image source: Epic Games.

Apple: 1

Federal Judge Yvonne Gonzalez Rogers ruled that Apple can keep Fortnite out of the App Store, a blow to Epic. It was clear from the beginning that Epic was prepared when it launched its assault, and that dinged it in the court's decision. Epic voluntarily turned on the direct payment system at the heart of the dispute, knowing full well that it was in violation of the App Store guidelines.

"The current predicament appears of its own making," Gonzalez Rogers noted, while adding that Epic Games "strategically chose to breach its agreements with Apple." Furthermore, Epic could easily turn off the direct payment system to regain compliance as the case proceeds through the courts. Epic CEO Tim Sweeney recently shared emails addressed to the Cupertino tech giant's senior leadership, giving overt notice of what was coming while acknowledging that Epic would be breaching the guidelines.

"I'm writing to tell you that Epic will no longer adhere to Apple's payment processing restrictions," Sweeney wrote. "Today, Epic is launching Epic direct payments in Fortnite on iOS, offering customers the choice of paying in-app through Epic direct payments or through Apple payments, and passing on the savings of Epic direct payments to customers in the form of lower prices."

Sorry, Fortnite fans, but the game isn't coming back to iOS any time soon.

Epic: 1

Gonzalez Rogers sided with Epic regarding its overall developer account, agreeing that such a termination could devastate Epic. The developer license agreements are distinct from App Store guidelines, and Epic does not appear to have violated those agreements, in the judge's view.

Third-party developers that use Macs to work on Unreal Engine would be caught in the crossfire, jeopardizing projects that are currently being worked on, particularly as Apple is preparing to release major operating system updates within a matter of months.

In a hearing ahead of the formal decision, Epic's lawyers said that developers are already "fleeing the Unreal Engine" over the new risks. That's good news for Epic rival Unity Software, which is preparing its own IPO.

The damage to Unreal Engine would spread to the entire gaming industry, hurting developers and gamers alike. "Epic Games and Apple are at liberty to litigate against each other, but their dispute should not create havoc to bystanders," Gonzalez Rogers concluded.

Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.

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