Speaking from behind plexiglass dividers, a face shield and a mask, Epic Games CEO Tim Sweeney spent hours this week fielding questions from lawyers in the blockbuster lawsuit his company has levied against Apple.
The lawsuit dates back to August when the Cary-based Epic Games, the developer of the Fortnite video game, inserted its own payment system within its iPhone app. It was an effort to circumvent Apple’s 30% mandatory fee, but it resulted in Fortnite being kicked out of the App Store.
Epic’s contention remains that apps should be able to provide their own payment systems and be able to avoid the App Store altogether. Apple says this will undermine the security of all of its phones.
The resulting courtroom battle could have a profound impact on how apps are distributed going forward. It also gives Sweeney perhaps the most public stage the soft-spoken 50-year-old video game developer has ever held.
Sweeney testified Monday and Tuesday. Here are some of the biggest takeaways so far.
Epic believes Apple is stifling its ambitions
A large chunk of Sweeney’s time was spent providing simple definitions to questions like “What is a console?” or “What is an app?”
The answers were mostly rote, but they did result in some interesting revelations, like the fact Sweeney doesn’t keep a PlayStation at his house, prefers iPhones to Androids because of their privacy settings, and doesn’t use the Nintendo Switch gaming console.
But perhaps the most existential moment came when Judge Yvonne Gonzalez Rogers asked Sweeney what he believes constitutes a “game.”
The question arose from one of Epic’s main arguments in the lawsuit. Fortnite is not just a video game, but a social experience, the company argues. Sweeney often speaks about transforming Fortnite into a “metaverse,” where people can gather for social experiences, rather than only compete against one another.
Apple’s fees and rules create an “existential issue” for that future, Sweeney said in an email provided in evidence.
“The long-term evolution of Fortnite,” Sweeney said on Tuesday, “will be opening up Fortnite as a platform for creators to distribute their work to users.
“With Apple taking 30 percent off of the top, it makes it very hard for Epic and creators to exist in this future world,” he added.
Sweeney believes Apple’s tight control over iPhones will prevent users from seamlessly taking part in that.
Gonzalez Rogers seemed confused by the exchange, asking if Sweeney is hoping to create something like the world in the 2018 movie “Ready Player One,” in which people can interact in a life-like virtual reality.
Sweeney called the movie a “great example” of a metaverse, as well as the science-fiction book “Snow Crash” by Neal Stephenson.
Epic’s growth since launching Fortnite is truly spectacular
Perhaps the most striking example of how rapidly Epic Games has grown since the release of Fortnite in 2017 is a response Sweeney got in an email to Apple CEO Tim Cook in 2015.
In the email, provided to the court, Sweeney writes several paragraphs to Cook, laying out myriad reasons why iOS, the iPhone’s operating system, should be more open.
Cook’s only response was to forward the email to colleagues to essentially ask, “Who is this guy?”
Cook definitely knows who he is now. While Epic Games is not close to the same stratosphere as Apple, Sweeney has built the company into a $29 billion juggernaut in the video game world.
Financial documents released as part of the lawsuit show Epic made $5.1 billion in 2020, a number that surpassed its own internal expectations of $3.8 billion. Revenue was also up from the $4.2 billion Epic made in 2019.
A majority of that revenue comes from Fortnite, but Epic also makes money from its visualization tool Unreal Engine and its Epic Games Store, which sells video games directly to consumers.
Apple, in its arguments, has tried to paint Fortnite as a game in decline. But the financial documents show a game that benefited from the pandemic, growing its user base to 400 million users, according to Sweeney.
Sweeney also shared that Epic now employs 3,200 people around the world. Epic Games announced in January that it bought Cary Towne Center and plans to move its headquarters there by 2024.
Consoles dominate now, but Sweeney feared rise of AR
During Sweeney’s questioning, it became clear that iOS is not currently a large contributor to Epic Games’ revenue growth. However, Sweeney privately worries about its future impact.
Apple’s own research found that iOS only contributed to 7% of Fortnite revenue, while other consoles account for a more sizable share. Sony’s PlayStation represents 46.8% of its Fortnite revenue while Microsoft’s Xbox brings in 27.5%.
But the iPhone still represents the most growth potential, Sweeney said, because there are more than a billion iPhone users in the world.
And, according to emails provided to the court, Sweeney feared its potential dominance of augmented reality technology.
“Time is now to solve this problem before AR takes off and that rate is set at 30%,” he wrote in an email.
Apple lawyers also took the dominance of consoles as a chance to ask why Epic Games has not sued Sony for the 30% fees it charges to Epic Games. (Sony is a major investor in Epic Games, and it recently put $200 million into the company.)
Epic’s lawyers’ rebuttal was to point out the major differences between phones and game consoles, as well as the fact that Sony and Microsoft are more willing to negotiate than Apple.
At one point, Sweeney said he would have taken a deal from Apple for lower commissions, if it had been offered.
Sweeney also noted that most game consoles are sold at a loss and make money back from sales. Unlike phones, consoles are mainly used to play games. To Sweeney, this was a big reason why Sony and Microsoft’s fees are more palatable.
Epic Games Store will remain in the red for some time
Sweeney’s testimony also revealed just how in the red his company’s nascent Epic Games Store is.
The video game company has poured hundreds of millions of dollars into the store since it was launched in 2018. The store competes with digital video game distributors, like Steam, and Sweeney has said he wishes to create a version of the store that can be downloaded onto iPhones.
In Epic’s dream scenario, and one that is currently barred by Apple, an iPhone user would download Fortnite directly from the Epic Games Store rather than the App Store.
In internal projections, Epic has said it doesn’t believe the store will be profitable for three to four years, and that it could still be in the red overall because of the generous deals it offers other developers for exclusives and discounts on their games.
“[O]bviously the direct ROI scenario here is super crappy. The long-term value is in bringing consumers into Epic’s multi-game, multi-platform social and e-commerce system,” Sweeney wrote in an email about the store.
One “aggressive” internal projection had the Epic Games Store making an operating profit of $15 million for the first time in 2024, while still being in the red overall by $854 million.
A “winding down” projection put those same figures at a profit of $36 million in 2024 and an overall loss of $654 million.
Crucially, the Epic Games Store charges a 12% fee for distributing games, while the App Store charges 30%.
This story was produced with financial support from a coalition of partners led by Innovate Raleigh as part of an independent journalism fellowship program. The N&O maintains full editorial control of the work. Learn more; go to bit.ly/newsinnovate