Apple (AAPL 3.21%) recently scored a court victory against Epic Games, which sued the tech giant over its App Store. Epic did get one small win, though, and Epic's battle against big tech isn't over. Other companies could have to make changes as a result of the ruling. In this Motley Fool Live "The 5" segment recorded on Sept. 15, Motley Fool contributors Jason Hall, Toby Bordelon, and Nicholas Rossolillo discuss which tech giants could come under fire next.
Jason Hall: Toby, I know you've been dying to talk about this, Apple versus Epic. We got the ruling. Was it Thursday or Friday last week that are dropped? Anyway, you couldn't talk about it because we're talking about other stuff for three days.
Toby Bordelon: Yeah, it was Friday. It's actually Friday after market close. I think it was after market close. I'm ready for the weekend and boom, we get this decision dropped on us, which is pretty substantial. We got a decision in the Apple-Epic lawsuit. Now, remember, Epic sued Apple for various antitrust violations for anti-competitive practices related to the App Store, specifically Fortnite. They had disputes over the payment mechanisms for in-app purchases at Fortnite that led to Fortnite being ejected from the App Store, totally kicked off the iOS platform. Epic ended up suing. There were a lot of issues raised in this case, a lot of interesting issues. We don't have time to go into all the details now, but functionally, what happened for the most part is Apple won. Epic made 10 claims and Apple basically won on nine counts, 9 out of 10. The biggest one I think was that the judge explicitly said Apple is not a monopoly in the mobile gaming space. That was a nice ruling for Apple. But the point that Epic did win on, which is interesting and actually, when you think of the implications seems relatively minor, but there's going to be a change because of this. What Apple had done is they had told the developers, "You can't tell your customers about other options to pay for your goods and services outside of the ad." For instance, think about a company like Netflix (NFLX +14.03%). I think actually Netflix is a separate deal. But in theory, according to those rules, Netflix would not be able to say, "Go to our website and sign up, and then just watch on the app."
Hall: Without explicit permission from Apple to do so.
Bordelon: Yeah, exactly. The judge basically said, "You can't do that." You can't stop developers from saying that. You can't even stop them from linking out to the alternative payment mechanism. But also the judge said Apple's not actually required to allow developers to put a separate in-app payment mechanism and they can still require developers to use their own in-app payment system. The way things look, I understand, Apple can say, "You must use our system for in-app payments, but you are of course allowed to tell people they can go outside the app to pay for stuff, if they want to." Clearly, that's the change Apple has to make. They had to allow that to happen. But if you're a user, you've got your iPhone, you click on your app, you said, "Oh, you can either click on this button to buy now through Apple system or you can go out to this other website and process the payment," I mean, it's real easy.
Hall: There's only two ways to do this. Either you create some kind of financial incentive for the customer and on these micro-transactions, is it big enough to soak up that 15 or 30 percent? It's should go to Apple anyway.
Bordelon: You have to counteract the laziness.
Hall: Right. Or you create a bad customer experience by forcing them to do it. Those are your only two choices and it's not ideal.
Bordelon: Right. I'm not sure how big of a blow to Apple's bottom line this is really going to be. If it holds up, Epic is going to appeal.
Hall: Oh, it's not done. That's the thing.
Bordelon: Yeah. Epic is going to appeal. This could go on for a way. But with that as a background, given where we are now, Apple is going to have to make a tweak of some sort to the App Store. Here's the question, guys. What's the next big tech company not named Apple that's going to have to make changes to their products or services because of an antitrust lawsuit or changes in the law? Think about Congress might come in and do something because they don't like what the courts are doing. What big company you think is going to have to make changes because of antitrust issues or related legal requirements that may be coming down the pipe? What do you think, Nick?
Nicholas Rossolillo: I think [Alphabet's (GOOGL +1.50%)(GOOG +1.49%)] Google absolutely is the next one. Interestingly, I think this gets overlooked. Epic filed a lawsuit against Google as well, against the Google Play store. Their angle was a little bit different, basically, where they were accusing Apple of that 30 percent take that Apple gets every time someone makes a purchase on the store or an in-app purchase, they weren't really going that route with Google. They were accusing Google basically of trying to prevent the Epic Store from getting on Android devices. A different angle, but still a potential issue where it appears that Google was trying to use its duopoly with Apple in controlling the world's smartphone market and mobile market to keep a potential competitor off of its platform. One of the accusations Epic even made was that Google at one point attempted a hostile takeover in order to keep the Epic Store at bay. That's still a pending lawsuit, that's going to work through the courts, but I think that's the most obvious business that is going to have to make some adjustments next, after Apple does.
Hall: I'll hop in here next. From what I've seen, I've been reading and paying attention a little bit more to this with Nvidia's (NVDA 4.17%) bid to acquire ARM. It seemed like initially when it was first announced, it's like, "Whoa, that's a big deal. Is it going to happen?" Then it was like, "Yeah, OK. This is going to happen." Now, more recently, I think there is substantial risk to UK regulators because ARM Holdings is a UK-based company and it's not just domicile there. That's where a large percentage of its staff is, it's truly headquartered in the UK. It could get blown up. UK regulators could stop it. I mean, this might not even necessarily end up in the court. The regulators could disapprove it and keep it from happening. Now, with that said, I think that as an Nvidia investor and Nvidia shareholder, yeah, it's a big win to own ARM, to bring that in, and that could really supercharge a company started growing at a very high rate. But Nvidia doesn't need to own ARM to continue to be a big winner. It's incredibly innovative, the things that they are involved in are really powerful. They don't need to add that ARM architecture, and the importance that ARM architecture has to so many other companies that do all of their own design work for semiconductors, they don't have to have that to continue to be a big winner. I think there's a lot more say for ARM investors remaining a separate company. I think somebody maybe in The Wall Street Journal that said, if not Nvidia then who? It's almost inevitable that ARM becomes part of a larger company. But as an Nvidia shareholder, I'm not particularly concerned that this deal looks like it very well. I think at this point it's maybe 50/50. Toby.
Bordelon: Yeah. I'd even go further than that, Jason. If I had to guess right now, my gut says this deal doesn't happen.
Hall: Yeah. If you're investing manager, you have to invest with that assumption.
Bordelon: Yeah, I'm leaning toward, and you have an issue too, is China taking a look at this, and it seems from what I can tell Nvidia didn't bother to file the paperwork for trying to review until just recently, and now they're listing "We have to get this done by the next year." China's not going to be rushed. But if anything, they're going to use to make an example, if you think we are last in line and you're going to push us off like everyone else well, we're just going to make you wait eight, nine months before we begin to open up your file. That's an issue. I could see ARM is independent for some time. I could see SoftBank (SFTBF 3.25%) just spinning them off as a separate publicly traded company potentially. But I don't know how sustainable that is, long term. To your question, if not Nvidia then who? I'm not sure I have an answer. I can't think of anyone that doesn't have issues. I can't think of an obvious buyer that wouldn't have any trust issues.
Hall: If you're not going to let Nvidia, you're not going to let Intel (INTC +0.33%).
Bordelon: There's no way.
Hall: No way.
Rossolillo: I know Qualcomm (QCOM 2.23%) said they promise to invest in ARM if it was spun-off as an independent company.
Hall: That's true.
Bordelon: Yes. You can see that. You can see maybe Qualcomm, if not buying and taking a minority stake, which could make some sense on that. But yes, issuing, and I also agree with you, Nick, on the Google thing and I think that lawsuit almost looks like it could come down a lot harder on Alphabet than Apple's ended for them. There are some issues there that are very interesting so we'll have to see how that plays out. I'm afraid I want a different one too. I'm just going to throw out Facebook (FB 1.29%) here. A couple of weeks ago, they got sued again by the FTC trying to force a sale of Instagram and WhatsApp. They had done it before, and this case was dismissed and now they're back trying a different angle. I'm skeptical at this point that a breakup will be the net result of this. But I do think something's going to happen with them. I think it's inevitable that either, of course, Congress are going to impose some restrictions. You could see things like restrictions on daily use between divisions saying, "Well, you don't have to break it off, but you're limited on what you can do between sharing info between Facebook and Instagram and WhatsApp, potentially." Maybe more privacy protections, maybe some rules on how they enforce their terms of service because that's come out recently about is it done equally across all people or do they have rules that actually don't necessarily apply to some people and what does that mean? Facebook's in a bad place. I think they've irritated a lot of people and a lot of different regulators and Congress have taken a look. I feel like something is probably going to happen but I don't know that it'll be an actual breakup of the company, but definitely a field to watch. There is a lot of action here right now. Politically, I think a lot of people in Congress can get some traction by saying, "I'm protecting my constituents from the big, bad tech companies." That's something to watch.
Hall: Well, in fairness, I think what's happening with ARM, UK regulatory bodies are looking at a UK-based company with UK-based employees being acquired by a foreign company. What happens to those jobs? What happens to that intellectual property and assets [laughs] that was built and created there.
Bordelon: We do that all the time here in United States.
Hall: Oh yeah, of course we do.
Bordelon: Through national security layers over antitrust review all the time.
