The Billion Dollar Fight between Fortnite maker Epic Games and Apple

Late July 2020, Democrat and Republican lawmakers confronted Big Tech Chief Executives for wielding their market power to crush competitors, and mine data intrusively, potentially violating privacy laws while accruing sky-high profits during a pandemic. Over the course of six-hours, US congressmen in an anti-trust sub-committee grilled the $4.5 trillion industry’s elite chiefs. The tech sector, it was argued, had become too powerful, wielding its dominance against rivals, occasionally against its very own consumers and now frequently, against democracy itself as algorithms amplified political echo chambers and biases.

“Our goal is (to be) the best, not the most. Apple does not have a dominant share in any market or any product category where we do business” – Tim Cook to US congress

Credit: Visual Capitalist

Indeed, the Big Five Tech companies generate $900 billion, rivalling the Gross Domestic Product (GDP) of countries like Netherlands and even oil-rich Saudi Arabia. Four out of five of Big Tech companies have achieved trillion-dollar market capitalisations, eclipsing Big Oil and other major industry groups to comprise some of the most valuable publicly-traded companies in the world.

With the global coronavirus pandemic, these valuations are set to rocket as digital disruption becomes the new normal. But early Thursday morning, 13 August, the Big Tech cash grab grew heated as Epic Games, maker of the popular billion dollar game- Fortnite, provoked a ban from tech giants Apple and Google in apparent violation of respective App store policies concerning in-app transactions, and in response, a lawsuit from the game developer.

These Fortnite skins are typically priced between $13 and $18 and nothing is known about Nike’s revenue split with Epic Games but what is known, is that Big Tech like Apple and Google want their 30% cut of the sale of digital fashion and accessories via in-app transactions.

In normal times, greater technological adoption is the biggest driver of increased revenues. During a pandemic, in-home quarantine has sent the tech sector into overdrive as people were forced to live in a combination of virtual and physical environments. Pre-pandemic, Epic Games banked a cool $3 billion in 2018 on the back of Fortnite, an online survival video game where 100 players fight against each other in player versus player combat to be the last one standing. Fast-paced, action-packed, and not unlike The Hunger Games, it looks like real life is about to mirror the game’s Battle Royale mode as tech conglomerates find new ways to earn a larger slice of the pie for themselves.

It’s not hyperbole either, if the idea of an in-game Travis Scott concert might seem silly, the 12.3 million Fortnite players who attended the extravaganza in game proves that the game is more than virtual.

Fortnite’s app has been downloaded more than 133 million times on iPhones and iPads and brought in roughly $1.2 billion, and Apple has taken $360 million of that revenue as part of its commission – Sensor Tower on how lucrative Fortnite has been for Epic Games and Apple

Fortnite is free to play but makes money selling digital items like virtual clothing or “skins”. Pre-pandemic, Nike’s Jordan brand teamed with the massively popular online game to show off some of the brand’s signature sneakers. The #FortniteXJumpman collaboration saw two new limited edition skins for characters, wearing streetwear icon Nike Air Force 1s in a variety of colours including the signature black and red Chicago Bull’s colour scheme. These Fortnite skins are typically priced between $13 and $18 and nothing is known about Nike’s revenue split with Epic Games but what is known, is that Big Tech like Apple and Google want their 30% cut of the sale via in-app transactions.

It’s hard to imagine but as late as August 2019, many fashion retailer senior executives were still confused as to why anyone would pay real money for virtual garments and accessories. Speaking with CNBC, Scandinavian fashion retailer Carlings approached Virtue, the creative agency owned by Vice media, to do something that would draw people to its website. Virtue pitched an idea inspired by games like ‘Fortnite’ and the concept of “virtual skinning”, arguing that digital clothing was what you’d have on web shops in the near future. Carlings CEO Ronny Mikalsen called it “the strangest meeting of my life. I didn’t understand what they were talking about, making a digital collection … I was like, this can’t be serious.”

Four months later, fashion and cosmetics collaborations have hit the online gaming scene in a big way, looking for new audiences in a US$152 billion market. Earlier this year, Louis Vuitton teamed up with Riot Games to create a series of digital “skins” for characters in League of Legends as well as capsule collections that can be worn in real life.

Louis Vuitton’s capsule collections for League of Legends including clothing and accessories which included a US$5,600 leather jacket designed by Louis Vuitton’s artistic director of women’s collections Nicolas Ghesquière each item possessed “unique and original references true to the universes of League of Legends.”

According to analytics firm Newzoo, China and the Asia-Pacific market is particularly important – in 2018, China’s online gaming population (which includes mobile gamers) was made up of nearly half a billion players, with women making up more than half of this market. They also  forecasted over $40 billion in virtual gaming revenue in China.

The Pandemic makes Digital Disruption the New Normal: Nike, Louis Vuitton, Marc Jacobs, Valentino are some of the new players

When the global pandemic hit and the subsequent national lockdown measures took place, the virtual environments of these online games became fashion’s new battlegrounds. Free of the COVID-19, masses including A-list celebrities like Chrissy Teigen and Brie Larson have called the online world of Animal Crossing home. Such is the game’s popularity that the Nintendo Switch handheld console on which it is played, has remained sold out since lockdowns began rolling out in March.

Valentino in Animal Crossing

Locked in and with no avenues to ‘peacock’ their style, sartorially minded players have taken to designing clothes for their Animal Crossing avatars, recreating high fashion and streetwear looks. At first, a majority of these virtual garments were re-created by virtual wardrobes with the creations on Animal Crossing Fashion Archive, which is run by fashion photographer and visual artist, Kara Chung. Painstakingly, Chung’s Animal Crossing Fashion Archive became a source for players to don the hippest designs from Chanel, Dior, and old Celine.

Anna Sui in Animal Crossing

From virtual rip-offs to collaboration, luxury fashion brands like Marc Jacobs, Valentino and Anna Sui have gotten in on the action, allowing players to dress their characters in any item from Marc Jacobs’ Animal Crossing capsule, or choose from a selection of looks.Valentino also digitised Spring/Summer 2020 and Pre-Fall 2020 collections, players can also don Moncler’s puffer jackets virtually, while these fashion offerings are entirely free, the lawsuit between Fortnite creator Epic Games and Apple and Google, will shape the future of digital luxury fashion.

Marc Jacobs

Fortnite’s in-game clothes have also become a status symbol of sorts among today’s youth. Techspot raised the point that Fortnite is more than a player vs. player competitive title, the game also serves as a digital playground and a place to hang out and socialise with peers. As is the case with real-world playgrounds, Fortnite’s digital space is ripe with bullies. And just like in the real world, one’s outward appearance can be a prime target for teasing: A “default” character outfit can attract bullying, leading many to believe that having individualised in-game costume is a form of “street-cred” among pre-teens and Gen Z. Hence, fashion as a tool for expression is as vital in the virtual world as it is in the real world.

Louis Vuitton League of Legends capsule collection was available both online and offline

David versus Goliath: Epic Games versus Apple

According to Tech Crunch, Epic Games never had a problem making money. Their first game, Gear of Wars grossed $100 million on a $12 million development budget. But with Fortnite, the company redefined modern gaming by making true cross-platform experiences possible and by pulling in vast amounts of money. Epic Games is privately held and hence keeps its financials closely guarded.

Sensor Tower, a tech blog tracking the global app economy, discerned that players spent an average of $1.23 million per day in the iOS version of Fortnite in 2018, contributing a total of approximately $37 million to the game’s life-to-date gross of more than $385 million. Fortnite’s sixth season began in September 2018, bringing in an estimated $17.6 million in its first week on Apple’s platform, an increase of 41% over the previous week. When player spending surged past the $1 billion mark amid the COVID-19 pandemic lockdowns, it was immediately clear to Big Tech what was at stake when Epic Games started encouraging Fortnite’s mobile-app users to pay it directly, rather than through Apple or Google. The companies require that all in-app payments are handled through their eco-systems so they can collect a 30% commission, a policy that has been at the center of antitrust complaints against the companies.

According to Sensor Tower, Fortnite’s app has been downloaded more than 133 million times on iPhones and iPads and brought in roughly $1.2 billion, and Apple has taken $360 million of that revenue as part of its commission, call us cynical, but it’s easy to see why the Cupertino brand wouldn’t give that up without a fight.

It was a war that Epic Games was apparently prepared to wage. Just after the ban, the game developer launched a snarky public relations campaign, lampooning Apple’s famous Orwell 1984 advert from the Cupertino company’s own fight against IBM 36 years ago. This time, it was Fortnite characters who were defying Apple’s totalitarian regime. According to NYT, #FreeFortnite was the top trend on Twitter within hours as Google followed suit and also removed Fortnite from its Android Play app store later that day. That said, the Android eco-system allows for external 3rd party downloads and so, Fortnite still remains available on Android phones, hence the battle between Apple and Epic Games is the one closely watched as it sets a precedent for how brands can potentially interact with their virtual partners for years to come.

Apple has been subject to anti-competitive investigation by European regulators and the US Justice Department over the last few years following complaints from App developers that Apple is taking an unfair cut of their business and in some instances, competing with their apps with its own offerings. Indeed, Apple has a business philosophy of acquiring small companies that can be easily integrated into existing company projects, in some cases, they would buy up a smaller rival of a dominant software developer and then repackage a competing product as their own.

The services business is Apple’s second largest source of revenue after iPhone sales. Given increasingly competition from the likes of Huawei and Samsung, the $51.7 billion iPhone revenue has been under increasing pressure and so the 30% service commission is a vital component of the world’s most valuable company’s profit and growth machine. While it is clear that the $1.58 trillion company is clearly the Goliath in this fight; Epic, a North Carolina company valued at roughly $17 billion and partially owned by the Chinese internet giant Tencent, is no mere David either.

David, with sword and empty sling, poised above Goliath about to take his head. A statue in the forecourt of Seaton Delaval Hall in Northumberland, England

It appears that the strategy is to sacrifice millions of dollars in revenue in a fight that will keep Fortnite off iPhones but alienate Apple’s core consumers since the game still remains available to Android users who can download it outside the official Play store. Fortnite announced more than 350 million registered players in May and if a percentage of those players, suddenly find themselves unable to get updates of their beloved game on iOS, Apple might witness a mass migration to Android devices instead. It’s not just a battle in courts of law but also the court of public opinion.

Epic Games is not the first software company with issues against Apple. Other big players like music streamer Spotify and email app-maker Blix have also made formal complaints to regulators in Europe and the United States.

Beyond how luxury fashion might eventually sell virtual garments in online games like Carlings’ digital collection which starts at $9 for a headband and up to $27 for an oversized shiny nylon puffer jacket,  Forbes senior tech contributor John Koetsier also posits that this is also a war for the future of mobile in-app payments: Will the old-school PC-centric model of a company (Apple or Google) selling a device (laptop) which the customer (you) can install any software you want on from any source win, or will the new-school locked-down one-official-place-to-get-software model win? At stake is likely tens of billions in Apple and Google annual revenue.