Epic Games Kicks Off the Civil War in American Business

From cheerleading to video games, business leaders are saying "Enough!"

Hi,

Welcome to BIG, a newsletter about the politics of monopoly and finance. If you’d like to sign up, you can do so here. Or just read on…

Today I’m going to write about an important antitrust suit launched by Epic Games. For forty years, American business has been governed under a pro-monopoly ideological structure. What this suit, and the Congressional investigation suggest, is that this structure is now under attack from both Congress and from some leaders in the business world. I’ll have an assist from historian Rick Perlstein, whose new book Reaganland was just published yesterday, on why that structure was put into place.

Some housekeeping. First, I was on Foo Fighter guitarist Chris Shiflett’s podcast Walking the Floor to talk about antitrust, on Isaac Sauls Tangle on how concentrated wealth is breaking democracy, and on the show Rising with Krystal Ball and Saagar Enjeti to talk about the Democratic National Convention. Second, my organization the American Economic Liberties Project released white paper detailing the social and political harms of monopolies, as well as an agenda for how to address them. You can read it here.

And now…

The #FreeFortnite Civil War

Last week, powerful video game publisher and software developer Epic Games introduced a new version of its Fortnite video game for the iPhone. The key change was that players could bypass Apple’s payment system for in-game purchases, and use a proprietary Epic payment option instead. Such a move breached Apple’s terms for its app store, because Apple requires anyone who makes an app for the iPhone to use the Apple payments system. Such a requirement is how the corporation makes money directly from the app store; Apple’s payment system charges a 30% tax for any revenue generated by any iPhone app during its first year. Apple’s control over its app store has become a source of controversy, mostly because the corporation exploits its power over iPhones to extract high fees from developers.

During the Congressional hearings over the market power of large technology firms, Apple CEO Tim Cook insisted that Apple had little market power over mobile apps, because developers and consumers could always switch over to different types of phones or platforms on which to create software. Epic’s attempt to restructure terms with Apple is a great test case for Cook’s argument. One would expect, based on Cook’s views, that developers of popular apps have leverage against Apple, if Apple had little market power over app stores. Certainly, Epic’s Fortnite is popular, a massive multi-billion dollar game, as close to a must-have app as possible.

Without blinking, however, Apple blocked Epic’s app from its store, which shows that Cook’s argument about a competitive market was just wrong. No one, no matter how powerful, has any bargaining leverage with Apple over its app store, and competition is certainly not disciplining the iPhone maker. Epic CEO Tim Sweeney responded to Apple’s ban not with a modification of its app, but with an antitrust suit (and a parallel though less important suit against Google).

I suspect that a legal approach was not what Epic wanted to do. Epic has experience using the marketplace to address monopoly power; a few years ago, Epic took on Valve, which owned a monopoly game store, Steam, by launching its rival Epic Games Store. And Epic has used Fortnite’s draw to force interoperability among PC, Mac, Xbox One, PS4 and mobile platforms. But because Apple’s monopoly power over the iPhone is so total, Epic chose to use the legal and political system to make an aggressive set of claims that, if accepted by a judge, would essentially destroy Apple’s control over the app ecosystem on the iPhone.

These claims include the argument that Apple has tied its payments system to its app store, which is a fairly strong legal argument that judges have often (though not always) upheld. It also included an argument that the app store is what is called an ‘essential facility,’ and that Apple as a monopolist in control of such a facility has to share it with competitors or customers on reasonable terms. Judges have generally not upheld this kind of claim. So Epic is not only trying to take its dispute with Apple to the courts, it is also seeking to overturn court precedent, and encourage Congress to write statute overturning judge-made law.

As its head lawyer, Epic hired antitrust royalty, Christine Varney, who served as the Assistant Antitrust Attorney General under Obama, and before that worked for Netscape during the Microsoft battle in the 1990s. The suit draws heavily from the House Antitrust Subcommittee investigation and hearing, with multiple footnotes citing information unearthed by investigators, as well as a quote from Rep. Hank Johnson.

At the same time as Epic filed the case, the company also released a brutal ad parody of Apple’s legendary ad unveiling the Macintosh, an ad originally released during the 1984 Superbowl that showed a female athlete wearing bright colors smashing an Orwell-style Big Brother character, who was not-so-subtly understood to be IBM. In the parody, Epic reframed the ad, portraying Apple as Big Brother, with a female video game character doing the smashing. Epic also launched a hashtag, #FreeFortnite. Millions of people watched the video, and millions more have been engaged over Apple’s monopoly power. Clearly, this fight is going to be big and public.

What Sweeney is doing isn’t just some battle over money, though it is that (and game-makers like Epic do like money). Sweeney has been an outspoken critic of tech monopolists for years. In 2017, he argued that Google and Facebook were “a grave threat to our democracy.” It seems likely that the Antitrust Subcommittee investigation and the rising sentiment against monopolization opened a political opportunity for Epic.

But then Apple chose the nuclear option. Epic Games has a large video game business where it profits through games like Fortnite, but it is also a company that licenses powerful tools for other video game makers. Its most important product is called the Unreal Engine, which is an enormously complex game engine that handles graphics rendering, sound, physics for 3D shapes and lighting, memory, networking, and a bunch of other tools you need to make hyper-realistic video games. Thousands of video game makers rely on it, and it is so good it has even been used in animated films. Essentially the Unreal Engine serves as an operating system for video games, and is widely licensed.

After Epic filed its antitrust suit, Apple effectively threatened to cut off the Unreal Engine from the app store, meaning that game makers couldn’t use Epic’s tools if they want to sell their games on Apple’s platform. Such a ban is an ‘existential threat’ to Epic’s business, and the corporation rushed to court seeking an injunction.

In other words, the fight between Epic and Apple is a high stakes affair, done largely for philosophical reasons over the right way to run an economy. This is not to say that Apple doesn’t have a case, it does. Apple will argue that it protects iPhone users from spam, malware, and predatory apps by tightly controlling its app store. It may be a big brother, but better have one big brother to protect you from the many bad actors seeking to steal your data and your money. Epic has a pretty strong counter-argument, but that’s not really the point, what’s important is that this debate is as much philosophical over the moral nature of who should control commerce as it is about money.

Typically large businesses reserve their political capital to limit government enforcers or regulators, but something strange started happening a few years ago, and it’s continuing today with this suit. Businesses began battling each other, and some started asking for an expansion of public power to structure markets. This suit is the latest on that score, the escalation of an ideological civil war within the business world, an attempt to undo deep changes in our society implemented forty years ago.

It’s Ronald Reagan’s World. We Just Live Here.

Yesterday, historian Rick Perlstein published his sprawling biography of Ronald Reagan’s ascent to power, Reaganland: America's Right Turn 1976-1980. Perlstein’s speciality is the rise of conservatives in the 1960s and 1970s, and Reaganland covers key years of the late 1970s, when both political parties in America turned against antitrust enforcement and rejected organized labor and public governance.

In many ways, Epic’s Sweeney is wrestling with Reagan’s legacy, reopening a debate last had during his Presidency. Reagan’s relaxation of antitrust enforcement helped establish the key tech monopolies of the era, Microsoft in particular (though Apple eventually emerged as a dominant platform starting in 2007), and then decades later, Facebook, Amazon, and Google. Reagan himself represented and led the backlash against liberal policies of the 1960s leading to today’s corporate titans, so I asked Perlstein how those political changes helped produce today’s era of corporate dominance.

Here’s what he told me.

As is well known (and as I narrate in my 2008 book Nixonland), the wave of progressive legislation known as the "Great Society" shuddered to a stop after two years due to the law-and-order backlash. But I discovered something striking, researching the book, that I don't believe any historian has quite appreciated before: it was immediately followed by another wave of progressive legislation, only one with a different emphasis.

The 1965-67 landmarks were what used to be called "social legislation": Medicare, Medicaid, federal aid to schools, the Civil Rights Act and the Voting Rights Act. What came next was an extraordinary run of environmental (the National Environmental Policy Act, tough amendments to the Clean Air Act of 1963 , the 1975 law establishing CAFE standards) and consumerist legislation (tough updates to the Pure Food and Drug Act and Flammable Fabrics Act, laws fighting deceptive sales practices, federal regulation of product warranties, and curbs on dangerous products like cigarettes, a massive administrative expansion of the power of the Federal Trade Commission, the National Highway Traffic and Motor Vehicle Safety Act); and also the Occupational Safety and Health Act and ERISA.

And unlike the Great Society, which big business either accepted or activity supported, this stuff all placed corporate power directly in its sights. This—and the onset of declining corporate profits following the 1973 Arab oil embargo—was immediately followed by a wave of anti-liberal corporate lobbying and propaganda of unprecedented aggressiveness. That's the story I tell in Chapter 10 in the book, and I think it's one of Reaganland's most important contributions to understanding the world we live in now: one in which corporations sacrifice social wellbeing to profit as second nature.

There’s an even more direct connection between the fight between Epic and Apple; Steve Jobs actually worked with Reagan’s antitrust chief, Bill Baxter, to establish Apple’s model of controlling distribution through retail stores. And Apple went public in December of 1980, during the transition from Carter to Reagan, in the biggest initial public offering since Ford Motors in the 1950s. Steve Jobs’s Apple is a creature of Ronald Reagan’s America, the corporatization of the hobbyists and hippies of Silicon Valley.

To Apple and Beyond…

So in some ways, that the pushback is organized against Apple is poetic. And it’s not just Epic that’s clapping back. As CNBC noted, “Spotify, Match Group, and Facebook have all publicly criticized Apple’s App Store policies.” Epic cited ClassPass in its complaint, because Apple is now organizing swaths of the economy through its control of the app store. Apple has just taken on the entire targeted ad industry with recent changes to its iOS that no longer allow easy tracking of app installs, which makes it much harder for ad companies to find out if ad campaigns work and thus reduces ad prices. This move was done under the ostensible rubric of privacy, through Apple granted an exception of data tracking to Apple’s own targeted ad business.

In truth though it’s much more than just one company in the crosshairs. Authors, booksellers, and publishers are again asking Congress to intervene on Amazon. They are seeking to stop Amazon from forcing merchants who sell on its platform to buy Amazon advertising, to block Amazon from using third party data to compete with third parties, and to prohibit Amazon from selling items below cost to gain market share. Qualcomm just won an antitrust appeal over the FTC, after being pressured by Intel and Apple, while Amazon lost on appeal in California over liability for third party products.

Small companies are also beginning to rebel in niche markets. Much of the cheerleading industry is suing Bain Capital over antitrust violations relating to its capture of the school cheer market, and extending beyond that to Bain’s capture of the market for band equipment, gap and gowns, signet rings, and athletic gear sold to schools. Bain’s subsidiary, Varsity, engages in practices like offering the right to win all-expense paid trips to Disney World to school officials who sign exclusive vendor relationships with the corporation, and killing all advertising in cheer-related magazines it does not own. Gyms, independent event coordinators, and rivals are finally pushing back.

It goes beyond antitrust. My own organization and a group of restaurants have put together a coalition called Protect Our Restaurants to address price gouging by food delivery apps, asking the Federal Trade Commission and local cities to take action to protect business. Meanwhile, the International Franchise Association attacked FTC Commissioner Rohit Chopra, after he spoke out on behalf of franchises and their mistreatment by corporate franchisors. More businesspeople are speaking out, like designers talking about big tech monopolies, architects demanding better cheaper software tools, or small business leaders like EasyDNC CEO Mark Jeftovic asking why the Federal Reserve is subsidizing his giant competitors by buying the bonds of Apple, Microsoft, and Amazon.

Mostly when we think of politics we think of politicians arguing with each other about abortion, immigration, taxes, or racism, or something Trump said, Democrats vs Republicans, whether Joe Biden is a decent man, and so forth. But there’s another deeper form of politics, which is when a society at all levels has a debate over the very basis of its wealth production. And that’s what’s happening now, from the banks to the boardrooms.

And that’s how real change happens.

Thanks for reading. Send me tips, stories I’ve missed, or comment by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.

cheers,

Matt Stoller

P.S. If you are a chef, restaurant owner, or you work in a restaurant, my organization has started a coalition Protect Our Restaurants to address price gouging by food delivery apps Grubhub, Uber Eats, Postmates, and DoorDash. So if you have any stories on these apps, let me know. And if you are interested in the campaign, join up here: https://protectourrestaurants.com/