Apple must ease App Store rules, U.S. judge orders, in a blow to iPhone maker

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By Stephen Nellis

(Reuters) -A U.S. federal judge struck down a core part of Apple Inc’s App Store rules on Friday, forcing the company to allow developers to send their users to other payment systems in a win for “Fortnite” creator Epic Games and other app makers.

The ruling vastly expands a concession that Apple made with Japanese regulators last week to encompass game developers, who are the biggest cash generators for Apple’s App Store, which itself is the foundation of its $53.8 billion services segment.

However, the judge did allow Apple to continue to charge commissions of 15% to 30% for in-app payments, which is the simplest way for customers to pay.

Relative to the sweeping shakeup that Epic was seeking, the ruling amounts to what the judge herself called a “measured” change to Apple’s rules. Analysts said the impact may depend heavily on how the iPhone maker chooses to implement the decision.

Epic plans to appeal, a spokesperson told Reuters. The Epic lawsuit suit began after the game maker inserted its own in-app payments system in “Fortnite.”

The decision orders Apple to stop barring developers from providing buttons or links in their apps that direct customers to other ways to pay outside of Apple’s own in-app purchase system, which charges developers commissions of up to 30%. The ruling also said Apple cannot ban developers from communicating with customers via contact information obtained by the developers when customers signed up within the app.

The ruling comes after a three-week trial in May before Judge Yvonne Gonzalez Rogers of the U.S. District Court for the Northern District of California.

Apple shares were down 2.5% on Friday afternoon, shaving $63 billion off the company’s market value.

The decision strikes down a core part of Apple’s App Store rules, which prohibit developers from telling users about other places they can go to pay the developer directly rather than using Apple’s payment mechanisms. Gonzalez Rogers issued a nationwide order that allows developers to put into their apps “buttons, external links, or other calls to action that direct customers to purchasing mechanisms.”

But Gonzalez Rogers stopped short of granting Epic some of its other wishes, such as forcing Apple to open the iPhone up to third-party app stores.

Apple said in a statement: “As the Court recognized ‘success is not illegal. Apple faces rigorous competition in every segment in which we do business, and we believe customers and developers choose us because our products and services are the best in the world.”

In a media briefing, Apple’s legal team said it does not believe the ruling requires it to allow developers to implement their own in-app purchase systems. Apple officials said the company is still debating how it will implement the requirements of the ruling.

The judge sided with Apple on key questions such as defining the relevant antitrust market as gaming transactions, rejecting Epic’s argument that the iPhone is its own app market over which Apple is a monopolist.

“Today’s ruling isn’t a win for developers or for consumers. Epic is fighting for fair competition among in-app payment methods and app stores for a billion consumers,” Epic’s chief executive, Tim Sweeney, said on Twitter. “We will fight on.”

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Challenges to Apple’s App Store rules are far from over. Lawmakers in the United States and Europe are drafting bills that would change them, and while Gonzalez Rogers did not find that Apple is a monopolist, she did find that the trial showed Apple was violating California state competition laws with its “anti-steering” rules around payments.

“When coupled with Apple’s incipient antitrust violations, these anti-steering provisions are anticompetitive and a nationwide remedy to eliminate those provisions is warranted,” Gonzalez Rogers wrote.

John Newman, a law professor at the University of Miami, said the ruling leaves open avenues for U.S. regulators to challenge Apple in court. Reuters has previously reported that the U.S. Department of Justice is probing the iPhone maker.

“You can violate the antitrust laws without being a monopolist,” Newman told Reuters.

The orders are similar to a move that Apple made last week to conclude an investigation by the Japan Fair Trade Commission. Under that agreement, Apple eased its rules for “reader” apps like Netflix Inc to provide a link to customers to sign up for a paid account outside of the app.

Last week, analysts estimated that the JFTC settlement would shave off only 1% to 2% of Apple’s profit because “reader” apps are a small part of the company’s App Store revenue. But games are a much larger portion.

“While reader apps collectively make up just 14% of (the past 12 months’) App Store developer revenue, Gaming apps are the App Store cash cow, accounting for 63% of developer revenue” over the past year, Morgan Stanley analyst Katy Huberty wrote in a note.

But the precise financial impact to Apple is difficult to gauge immediately. On the one hand, only game makers like Epic with a well-known brand such as “Fortnite” can entice users to go through the extra steps of signing up to pay outside an app. At the same time, those large brands bring in the majority of Apple’s game-related revenue.

“There’s only a handful of games that can pull this off,” said Ben Bajarin, head of consumer technologies at Creative Strategies. “To some degree, Apple could make it so that its in-app payments are still the easiest to use. It comes down to the implementation.”

Shares of Alphabet Inc, whose Google unit operates an app store for Android smartphones, reversed an earlier gain and were down 1% on Friday. Epic also is suing Google over rules blocking alternative payment systems, and the Play Store’s restrictions against apps promoting those other options are now under greater threat. Google declined to comment.

Shares of videogame makers that offer their games on Apple’s app store rallied. Zynga Inc surged 9.4%, while Electronic Arts Inc and Activision Blizzard both rose more than 3%.

(Reporting by Nivedita Balu in Bengaluru, Stephen Nellis in San Francisco, Diane Bartz in Washington, Jan Wolfe in New York, Paresh Dave in Oakland, Calif., and Noel Randewich in San Francisco;Editing by Patrick Graham, Peter Henderson and Matthew Lewis)

 

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