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Here's What Apple Is Doing to Protect This Lucrative Multibillion-Dollar Revenue Stream

By Jon Quast and Jose Najarro – Oct 21, 2021 at 9:35AM

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The company wants to keep processing all of your in-app payments.

Epic Games is the developer of popular video game Fortnite, and right now it's entangled in a legal battle with Apple (AAPL 2.44%). Apple banned Fortnite from the App Store because Epic Games offered an alternative to Apple's payment option -- a violation of the terms of service. Epic Games then retaliated with a lawsuit against Apple. In September, a judge finally ruled on the case, saying Apple needs to allow payment alternatives.

This ruling has multibillion-dollar implications for Apple, and the company isn't taking it lying down. In this video clip from Motley Fool Backstage Pass, recorded on Oct. 11, Fool contributors Jose Najarro and Jon Quast discuss why Apple is now appealing the judge's ruling.

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Jose Najarro: One interesting news that came out today was Apple decides it's victory against Epic wasn't enough. For those not familiar, Apple recently, Apple and Epic Games. Epic games, you guys might know them for the creator of Fortnite. They were in some legal fight.

Epic Games, Apple if you have an application on their Apple Store, it's pretty much against their terms of conditions for you to push your customers to go to an external link to make digital purchases. The recent Apple does that is hey, they want to monitor what purchases are done through their applications and they also want to take on nice percentage of their revenue. So Epic Games said, hey, this is unfair. I don't care what your terms of agreement does. I'm going to put an external link. Then from there on, Apple went and I think removed Fortnite from Apple Store and then they've been in the legal battle.

Recently, I think it was a few weeks ago or maybe a month ago, a judge ruled and said that, hey, yes, what Epic Games did was bad. You can't do that. You signed the terms of agreement. You can't do what you did. You got to pay Apple back some money. But on the other hand, the judge also says, "But Apple, you can't really be forcing not allowing other apps to use external links." They judge was like, hey, in the next few months, you need to come out and you need to allow applications to allow these application developers to allow that external link.

It was bad for Apple because, in theory, would mean that you might see a reduced in revenue from the Apple Store. It was good for gaming companies because in theory, they don't have to give that extra revenue to Apple and they collect a little bit more profits there.

But today, Apple decided to appeal this case and said that, hey, we don't want to go with it that way. We actually want to key external links out. Obviously, this is I want to say more of a timely matter now that they appeal, things are going to take longer than expected. So Apple right now is still going to be able to collect that revenue. It's more like a stalling game it seems for them, before things need to be changed or if things are going to be changed. But that came out today, which was pretty interesting.

Jon Quast: What's interesting about this, Jose, is that when the initial ruling was made by the judge, it was really a complete loss for Epic if you want to look at it that way. Because at the end of the day, we're still banned from the App Store. It was a complete loss for Epic in that regard. But like you pointed out and to summarize what Jose just said, of all the accusations that Epic Games levied against Apple, Apple won everything except for one, and that was that they had to allow these external links to competing payment options. Even though that doesn't benefit Epic, because they're still banned, there's thousands of apps that could take advantage of this new, if you want to call it a loophole, this new provision, and they were talking multibillion-dollar revenue for Apple.

Not necessarily that everyone would go to an external link and pay that way but that they could. And so Apple is looking at this and they are saying and this is basically a pure profit for Apple too. I mean, the payment solutions that they offer, the take rate that they have of 30%. This is a very, very good business for Apple and it's understandable why they want to protect this at all costs.

Najarro: Jon, I like something you mentioned there, that just because customers or consumers have this option, doesn't mean they're going to do. I'm pretty sure most people would rather just pay that extra buck or something in the App Store because they just have to do a click, they just have to sign in with your thumbnail instead of signing into an external site, putting in your credit card and doing all that.

So sometimes for a company, let's say if it was Fortnite, to bring those customers over, they're going to have to give some form of discount to really drive new consumers. But if you're going to get that discount, you might as well just going to keep it there and just let Apple take that revenue because that's pretty much the discount itself. I don't think it's game over for Apple if they do that, because I do believe more consumers just like the ease of fingerprinting and just clicking "Okay" instead of going through new external links.

Jose Najarro has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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