Editor’s Note: I hope you enjoy this first piece from Dexter K. White from this month’s newsletter. We are bringing new voices in as we enter our fourth year here.

by Dexter K. White

On August 6th, 2020 President Trump issued an executive order
barring transactions with WeChat or its parent company Tencent
Holdings, Ltd. See here.

Tencent owns 48% of Epic Games, from a $330M investment in
2012, with the rest being largely owned by company founder and
CEO, Tim Sweeney.

On August 13, 2020, Epic Games chose to take a provocative
action by offering a direct payment option in its Fortnite app, in
clear violation of Apple’s App Store and Google’s Google Play
Store policies.

Epic did this not in an app update, but by changing code that had
already been approved in the app stores. Epic has since been
expelled from both app stores and has filed suit against Apple and
Google for anticompetitive behavior.

Sweeney & Epic have provoked a battle royale with Apple &
Google. Is it really a David & Goliath quest to benefit the
consumer, undertaken selflessly by Epic? There is a lot more to
the story.

Developers, Romans, Countrymen

Some of you may remember a sweaty Steve Ballmer, then COO of
Microsoft, galloping around a conference stage screaming
“Developers, developers, developers!” If you don’t, you can see a
clip here (Warning: not for the faint of heart).

This took place at a Microsoft Developers Conference and Ballmer
was trying to entice programmers in the audience to begin
developing for the soon to be released Windows 2000.

Software development requires division and coordination of labor.
If every programmer had to write their entire program from
scratch, there would be much less software in the world. Modern
software is a collage of many people’s work. How that work is
monetized is dependent on its function and who wrote it.

When you use a program on your computer or phone, a lot of the
functionality actually comes from the operating system vendor.
The developer(s) of the app you’re using can easily include the
familiar elements of the OS by using vendor-provided tools from
a Software Development Kit (SDK).

Large operating system vendors like Microsoft, Google and Apple
make these SDKs available along with integrated development
environments. From their point of view, anything that
encourages people to write for their platform is a loss leader that
supports their overall OS platform business.

A lot of this actually dates back to the days of the monkeyboy
dance, as Ballmer’s soggy terpsichorean spectacle is commonly
known in the industry.

Beyond ways to include basic UI elements like windows and text
boxes, SDKs include specialty APIs and libraries are available to
support things like graphics performance improvements that
would be too labor intensive for the individual developer to
tackle.

SDKs and APIs bring functionality that is ready to use. It is work
the developer doesn’t have to do. They can instead focus on
writing code to support the unique purpose of their application.
In the broader software world, vendors often charge other
developers for access to APIs, as the features they provide can
really speed development or provide a high level of functionality
or compatibility.

In mobile game development, developers use these tools to create
the apps you use, which are then submitted to Apple or Google
for publishing in their respective app stores. Before the app
bundle is made available to you, it is scanned for known malware
or for the use of restricted methods that could constitute a
security risk.

Mobile OS vendors have a unique role to play in stopping the
proliferation of mobile malware and exploits, but the current
mood is hostile towards them due to the pricing models they have
used. Both Google and Apple take 30% of the revenue from the
price chosen by the developer.

The iPhone Has Landed

So, how did we get here?

When the iPhone was first introduced, there was no app store.
Apple knew it wanted to encourage an app ecosystem, but also
knew the risks of allowing unrestricted applications on a device
that could monitor phone calls and the user’s location.

Mobile phone malware was already in existence and then
market leader Blackberry’s competitive advantage was its
platform security. So Apple made device security a key product
focus of the iPhone.

The initial product positioning of iPhone was a mobile phone
that doubled as an iPod and had a web browser. Initially, the
only way developers could reach the iPhone user base was with
a sort of web application called a “web clip,” basically what we
call a mobile-optimized website today.

A year and a half later brought the App Store, which launched
as part of iTunes, drawing on Apple’s immense installed base of
iPod users. This decision made marketing an app similar to
marketing a song which brought pricing of applications way
down.

With this move, Apple forced a new pricing model on the
software industry, which also allowed for massive scale of
distribution. This had the potential to open the market to
individual developers like never before. But first Apple had to
solve a major problem.

Small software developers, often individuals not companies,
would have to maintain a website, a code repository to track
versions and apply and qualify for a credit card merchant
account. Further, due to credit card industry pricing models,
each sale would be subject to per transaction fees. A $1 app
would rack up close to $.39 in merchant fees, before the costs of
maintaining a website, active user database or the opportunity
cost of management time were even considered.

As a value proposition, 30% was a reasonable fee for apps in the
$1-3 range that Apple was trying to focus development. This
allowed a way to sell cheap software and remove the immense
management hassle for small developers. It also made many
small developers rich and eventually paid out billions in
revenue.

The App Store also created a curated model for software
distribution that would prevent malicious developers from
installing malware on a user’s phone.

Google would copy most of Apple’s approach in its creation of
the competing Google Play Store for Android.

Epic Nonsense

Today many app developers, such as subscription streaming
services, are balking at paying 30% to access their customer
bases on mobile, especially if those customers are adding
already existing accounts to a new mobile device.

Epic CEO Sweeney may certainly have a point that 30% is too
high a cut for Apple and Google. But what is the right price to
host apps, validate they don’t contain malware, provide massive
bandwidth, stand up a Content Delivery Network (CDN) to
deliver the application bundles on demand to millions of users,
charge the user’s credit card, manage chargebacks and maintain
a versioned repository? It’s hard to determine the right rate for
what an app store provides, but that service is worth something.
Sweeney is on record saying that he thinks app stores could
charge as little as 8% and still make a profit.

If there is an antitrust case to be made against Apple and Google
for maintaining “control” of their mobile app stores, where
developers can pick any price they want, it is not likely to be
won by Epic.

This is because Epic agreed to be contractually bound by the
terms & conditions of the app stores and then pulled a stunt
designed to provoke a legal action. It did this by deploying a
“hotfix” to the code, avoiding review by Apple or Google, who
would have rejected its changes as against the license terms.

Where Epic made its biggest error was in how it changed the
selling price of its in-app currency for Fortnite, V-Bucks.
Previously, 1,000 V-Bucks were $9.99, which after Apple or
Google’s 30% cut, yields $6.99 to Epic. Courageous Epic, in
dogged defense of its aggrieved userbase, reduced the price to
$7.99.

And they took that payment directly, yielding an extra dollar of
revenue to Epic. Somehow this fact has been left out of the
coverage. All of this noise in the tech press and no one notices
that Epic was trying to squeeze an extra 14% out of Fortnite
players.

So not only does Epic value Apple & Google’s hosting and access
to millions of customers at zero, it decides to take another buck
for good measure.

This is going to bite them in their court case because it
completely undermines the whole presentation of facts. It is
stupefying they didn’t just cut out the Apple and Google fees and
claim they were just trying to benefit the consumer. By going
after an extra dollar, Epic destroys its own argument before the
case even begins.

Not only is their presumably competent counsel simultaneously
suing Apple and Google for the same “monopoly” behavior but
now they have to justify how Epic taking money from the
monopolists helps the consumer.

As Mona Lisa Vito (Marisa Tomei) said in My Cousin Vinny,
“Wait, there’s moah!”

It’s relevant to bring up that Epic already runs an app store for
PC and Mac games (The Epic Games Store). It uses the exact
same business model, copied from Apple and Google.
Game developers make use of libraries and APIs that govern the
physics and motion of the characters, ships, etc. Epic developed
a game engine in 1998 for a game called Unreal and then
released the underlying Unreal Engine for other game
developers to use. Epic monetizes and charges game developers
5% of their revenues for using it.

It’s obvious that Epic wants to have all its games, as well as all
games developed using its Unreal Engine, on all platforms, in its
app store.

Android users can install apps on their phones from anywhere,
while Apple protects its users within its “walled garden.” Apple,
who has close to 60% market share in mobile in the US, also
prevents developers from leaving a sandbox and prevents them
from having root access on your iPhone.

It’s possible that notoriously demanding Epic thinks it can force
a special deal out of Apple and then Google will follow suit.
Then Fortnite can rejoin the mobile app stores and Epic could
conceivably extract licensing revenue from its Unreal Engine
licensees after they paid their app store fees to Apple and
Google.

But it sure seems like Epic is trying to set up a mobile app store,
for all games using the Unreal Engine, so it can do exactly what
Apple and Google do. To do this, they need to destroy the app
store economy as it currently exists and they want to use the
antitrust provisions of US law to do it.

This will mean that the courts would mandate that phone
vendors, but particularly Apple, would have to allow sideloading
of any app from any source. This seems like consumer freedom,
but actually brings a lot of risk, far beyond just to the individual app user.

The most charitable interpretation of Epic’s actions is that it
wants to start a competing mobile app store without
supervision by Apple & Google. It wants to do this because of
the incredible number of games that are developed using its
Unreal Engine.

Since being kicked out of the app stores, Epic has begun
offering direct downloads of the Android version of Fortnite
from its website. Epic may be willing to forego all revenue
from Apple customers on iOS and macOS in pursuit of its larger
goals.

The problem is that Epic didn’t have to do what it did, and its
stunt is unlikely to prevail in court. More troublesome is that it
appears that Epic is willing to harm Apple for no real benefit to
itself. It’s almost like forcing open iOS to software installation
outside the App Store is the actual goal, not an economic
leveling.

It’s also interesting that Sweeney, with an estimated net worth
between $5-12B, feels a need to extract an extra 14% from his
Fortnite customer base. Notably, Sweeney owns over 50% of
Epic’s equity, with the rest held by Tencent. This means that an
increase in privately held Epic earnings largely flows directly to
Sweeney and Tencent as dividends.

Perhaps Sweeney is less Don Quixote than he portrays, and
more Scrooge McDuck.

The China Shop

In the world of COVID-19, Apple and Google have implemented
a set of interoperable COVID-19 contact tracking APIs. These
are now running on basically every phone in the United States.
It is especially concerning to imagine how focused the Chinese
Communist Party will be on implementing malware that can
exploit these private APIs to track individuals or groups.
Google and Apple will tell you it is impossible for an
unauthorized app to access your private location and contact
tracing data but the nature of exploits is that workarounds are
always found.

Simply put, if the code running on your phone has never been
audited by Apple or Google, there is no realistic way to know if it is accessing their private API calls, such as the COVID
tracking functionality.

The inclusion of rogue code in a game engine, for instance,
would create a profound threat to millions of users. Coupled
with personnel data stolen by a hostile actor, it would create a
realtime target tracking system.

This is exactly what Trump’s executive order is meant to
prevent.

China’s People’s Liberation Army (PLA) breached four million
records in the United States Office of Personnel Management in
2015, 145 million records of American citizens from Equifax in
2017 and constantly targets US military service records.

While Android malware is prevalent if the user installs an app
from an untrusted source, 60% of US mobile users are on iOS
and thus can only download software from Apple’s App Store.

Making it easier to install unaudited software on iOS devices
would make the PLA very happy, especially in conjunction with
all the stolen private details of Americans they already have.

We leave it to the reader to decide if it is interesting, or
worrying, that a company half owned by Tencent Holdings, Ltd.
(which works closely with the CCP & PLA), is choosing to lead a
battle to destroy the app store economy. Epic took this action
almost immediately after the Trump administration named its
largest investor as a threat to national security.

The business case for a third mobile app store may be harder to
make when it requires opening so many Americans to Chinese
malware.

Now the clock is ticking, and it may soon be sweaty Sweeney’s
turn to dance.

Tik Tok.

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