Apple vs. the Metaverse

Epic Games founder and CEO Tim Sweeney is by most accounts a pretty feisty guy, unafraid to pick a fight and rarely backing down from one. So his decision to pick fights with Apple and Google over their “unjust” app store policies seems very much in character.

It also seems carefully timed. Apple and Google, along with other major platform providers, are facing growing scrutiny for their outsize influence over digital commerce, both from lawmakers and from federal and state antitrust authorities. Competition authorities within the European Union are also mounting a concerted effort to rein in their power.

While that increased scrutiny may not have any direct or immediate bearing on the litigation Epic has now launched against both companies over the banning of “Fortnite” from their respective app stores, Sweeney has made it clear he sees the battle to break their grip on the mobile app economy as a long fight that he’s in until the end. Whatever the outcome, the information that is likely to be developed and put on the record as a result of the litigation will inevitably fuel the larger debate.

But there is more at stake in the conflict between Epic and the app stores than simply a dispute over payment terms and conditions, or even than the larger debate over whether and how to apply existing antitrust laws to the technology giants. The showdown is more like an early skirmish in the bigger battle to come for control over an emerging generation of meta-platforms built on top of the current generation of platforms and networks.

The fundamental economic transformation wrought by the internet and the World Wide Web has been to shift pricing power from those who control the supply of scarce commodities or resources, such as works protected by copyright, to those who control access to a vast market or audience for resources in unlimited supply.

The combination of network effects and near-zero marginal cost reproduction of digital objects has vested the likes of Google, Apple and Amazon with the power to charge what amount to monopoly rents for access to their audiences. In mobile apps those rents are collected in the form of Apple and Google’s 30% commission on sales through their app stores and on in-app purchases; in search they’re reflected in Google’s capacity to divert advertising dollars away from the objects of its users’ searches to itself.

The platforms’ abuse of their pricing power is what has finally begun to attract the attention of regulators and policymakers. But Epic’s challenge to their rent-seeking represents a potentially greater threat to Apple and Google than whatever new rules or regulations may come out of the current policy reviews.

The Mandalorian‘s virtual set

Epic’s “Fortnite” is a massively popular game with more than 350 million registered users worldwide, and is powered by Epic’s Unreal Engine, a powerful, 3D graphics creation and development environment. Critically, Unreal Engine is also widely used under license by other developers to enhance and accelerate their own creations, making Epic an increasingly powerful force within the broader games ecosystem.

Unreal Engine is also playing an increasingly important and prominent role in the film and TV production arena, in live music, architectural design, VR and in many other creative fields for its ability to render, manipulate and edit 3D objects in real time, making Epic into far more than a games publisher. Much of Disney’s hit streaming show The Mandalorian for instance, is shot on a virual set using Unreal Engine.

Crucially, for Epic, the judge overseeing its lawsuit against Apple over Apple’s “Fortnite” App Store ban seems to understand the distinction between the game and Unreal Engine, and the importance of the latter due to its connection with hundreds of other apps.

In a preliminary ruling, U.S. District Court Judge Yvonne Gonzalez Rogers said Apple can continue to bar “Fortnite” from the App Store for now but could not ban Unreal Engine, as Apple had threatened to do.

“Epic Games and Apple are at liberty to litigate against each other, but their dispute should not create havoc to bystanders,” Judge Rogers wrote in the her decision.

Part of Unreal Engine’s power comes from its ability to embed live imagery within virtual settings, seamlessly and in real time. Epic has now begun leveraging that capability to host live musical events within the virtual world of “Fortnite.” In April, for instance, the hip-hop artist Travis Scott performed a series of live mini-shows from within “Fortnite” using a digital avatar. Together, the shows were watched live e by 12.3 million “Fortnite” gamers and experienced by nearly 28 million total viewers.

Other artists have created similar live events inside “Fortnite” as real-world concert venues remain closed due to the Covid pandemic.

Epic’s Sweeney refers to “Fortnite’s” ability to integrate live events the “metaverse.” But what it amounts to is a virtualized platform that can support and host a wide range of experiences, just as Apple, Google, and Facebook can.

“Fortnite” can run on those other platforms. But it is not dependent on them for functionality, audience or monetization. It brings its own audience.

The technology it runs on, moreover, Unreal Engine, is capable of spinning up any number of other virtual platforms built around different types of virtual worlds and experiences. And it doesn’t need Apple’s developer tools, or Google’s, or Facebook’s or Microsoft’s, to do that.

It may need access to Apple’s developer tools to integrate with the App Store. But Apple’s pricing power over Epic is waning. And whatever the outcome of the current lawsuit, it will continue to wane as the metaverse grows.