The DeanBeat: Apple must tread carefully lest it trample the game industry

Apple has a value of more than $2 trillion. But the behemoth is in danger of forgetting where it came from. One day, the federal government or the courts will conclude this treasure of a company has gotten too big and that maybe it is strangling competition and choking off the very values and freedoms that it espoused at its origins.

By listening to the smaller companies and people around it — those who give the company that enormous value — Apple can save itself from flying too close to the sun. We saw a small example of that this week. Apple was taking aim at some big targets with an update coming in iOS 14, which debuts in mid-September. It wanted to take a step toward greater user privacy, which has become one of Apple’s rallying cries — that privacy is a fundamental human right. At the same time, it was taking a swing at two other tech giants (and some would say smaller bullies), Google and Facebook, whose business models are built on knowing everything about us.

Google and Facebook depend on users giving up their personal information for free. They turn around and monetize that information and enrich a number of other entities, including mobile game companies and the mobile advertising ecosystem. Apple decided to make this harder to do by retiring the Identifier for Advertisers (IDFA). It decided to ask users point-blank if they wanted to be tracked. If they said no and opted out, then the companies that depend on advertising like Google and Facebook would lose access to the user data.

This is where the collateral damage of this artillery barrage aimed at the tech giants could hurt the game industry. Apple’s move could have also hurt a lot of mobile game companies in a $77 billion industry (estimated by market researcher Newzoo, while App Annie says it will be $100 billion) as well as many companies in mobile advertising, measurement, and marketing.

Elephants and mice

As Consumer Acquisition CEO Brian Bowman warned on Thursday, Apple’s trampling — in particular its retirement of the IDFA without an adequate alternative for the mobile gaming ecosystem — would squish a lot of mice. That could result in thousands of layoffs and billions of dollars of lost revenues in mobile gaming, mobile advertising, and related industries. Apple evidently realized it did not want that to happen, and it gave the industry a reprieve, saying it would not enforce its changes in the IDFA until early next year.

Above: The segments of the global game market

Image Credit: Newzoo

That was the right thing to do, as Apple would have hurt its own revenues as well, as it gets a big cut of mobile gaming revenues. But the whole process felt like Apple wasn’t listening to the little people. Only when disaster was looming in two weeks and mobile game companies and advertisers started voicing their concerns — and laying off people — did Apple seem to notice what was happening. As the folks at Microsoft used to say in the early days of the Xbox, developers are the “canaries in the coal mine.” When they start dying, the platform is in trouble.

It feels like Apple is one of those friends in need of an intervention. CEO Tim Cook is running a company that doesn’t realize it has become a bully. Facebook dealt with a similar problem when Zynga was growing fast with FarmVille. Social game maker Zynga found that flooding our news feeds with cute crop messages was great for getting people to come back to its games. But it was turning off the mainstream audience that Facebook needed to survive. So CEO Mark Zuckerberg cut Zynga off, stopping them from using the viral messaging so that it wouldn’t annoy users anymore.

That was a landmark move that helped Facebook secure billions of users. But it came with a cost. The social game companies left the platform in an exodus. They tried to go to Google+, but that failed. And where did they land? The iPhone. Apple offered them a haven where they could publish their games without taking a huge cut and without having to worry about viral messaging. And Apple took only 30% of the revenues from purchases made inside mobile games, compared to 70% for the evil mobile carriers that Apple was disrupting. Chased off by other platforms that didn’t welcome them, the game makers saw Apple (and later Google) as a savior, particularly as mobile became the biggest part of the game industry. Steve Jobs once held a dinner for game developers and thanked them for believing in Apple and getting them off the ground in the early critical days of the App Store. Yet somewhere Apple’s good intentions got lost.

Antitrust problems

Above: Epic takes a swing at Apple.

Image Credit: Epic Games

Apple’s 30% cut has become a huge amount of money over time, roughly $12 billion a year based on estimates by market researcher Newzoo. That makes Apple the No. 3 game company in the world, even though Apple doesn’t make games, as Epic Games CEO Tim Sweeney tweeted recently in a campaign to get Apple to do the right thing and return more profits to game developers. The whole mobile game industry could take in around $76 billion in 2020, according to Newzoo. That means Apple takes in 16% of mobile game revenue, but Apple’s take from games is only around 4% of the total profits that it makes in a year. Apple commands two-thirds of mobile gaming profits, but Apple doesn’t care about those profits. Apple is an elephant, trampling around in a space where it might step on some mice.

Two facts about Apple:

1) Apple is #3 in the world in game revenue

2) Apple doesn’t make games https://t.co/XlztLnLemC

— Tim Sweeney (@TimSweeneyEpic) August 30, 2020

And as Apple has learned in dealing with Sweeney, these mice can be terrifying. Sweeney cares a whole lot about small game developers, who are the lifeblood of the Unreal Engine that Epic makes. But thanks to the profits from Fortnite, which has 350 million registered users and the $750 million in annual profits coming from them, Sweeney has been able to take on Apple and Google in antitrust lawsuits.

Sweeney wants Apple to reduce its “tax” on mobile game revenues from 30% to 12%, as he feels that Apple no longer earns its cut. In Apple’s defense, it started Apple Arcade, but that hasn’t set the world on fire. Indeed, you could ask what has Apple done for games lately? Well, it almost killed the industry with the IDFA process.

Apple could argue that it doesn’t make games and it doesn’t compete with Sweeney and so its actions aren’t anti-competitive. Apple could very well win the legal case. But it won’t make friends in the process. As an example, Apple threatened to cut Epic Games off because of the lawsuit. Not only did it disable Fortnite in the App Store, but it also said it would cut off Epic’s access to Apple development tools for the Unreal Engine. That could have disrupted Epic’s 11 million game developers who use the Unreal Engine. Epic filed for a preliminary injunction in the case to stop Apple from cutting off Unreal. And Epic won, so Unreal Engine’s access is safe for now. But lots of game developers, including the strange bedfellow of Microsoft, were ready to complain to Apple about that unfair tactic. Even Facebook and Google could theoretically join in the litigation against Apple, and that would be sweet revenge for the IDFA move.

Sweeney might not win this lawsuit, but he could get the ear of Congress and federal antitrust enforcement agencies, which could make life very difficult for Apple. They could bring a case to break up Apple, or they could pass laws to prohibit it from doing things that could hurt the little people.

Everything is connected

Above: Epic Games satirized Apple’s own 1984 ad in Fortnite.

Image Credit: Epic Games

Is it possible that Sweeney’s antitrust case and the IDFA move could be tied together? Yes, it’s possible. This takes me back to the antitrust litigation against Intel in the 1990s, when Advanced Micro Devices tried to compete with its processor chips against the industry giant. The Federal Trade Commission sued Intel for antitrust, and some of the evidence had to do with how the giant company behaved across the ecosystem that supported it. Intel had not only been making chips, but it was also making motherboards, systems, and funding advertisements to sell computers that used Intel chips. AMD couldn’t compete, nor could the independent makers of motherboards and PCs. If Intel moved to shore up the motherboard makers and PC makers with Intel Inside marketing dollars, it could effectively control them so they never bought from AMD. The result was higher prices for consumers and what could be considered anticompetitive behavior.

The FTC and Intel settled their litigation in 1999. But here’s why it’s relevant. In the name of protecting privacy, Apple has shown that it is willing to take back what it has given to the third-party mobile marketing industry. Apple will assume the measurement of mobile advertising’s effectiveness, and it will handle a lot of mobile marketing functions for the game developers. In the future, it might create its own ad network. But that would be anticompetitive. When you have monopoly power, you can’t use that monopoly power to wedge your way into adjacent industries — in this case mobile advertising — and take them over when existing players are already out there. That would be like Microsoft trying to use its operating system to take over web browsers and choke off Netscape’s air supply (another case from the 1990s).

Now Apple is quite far away from stepping into yet another antitrust issue, as it hasn’t said it would create its own internal ad network. But the point is that acting like a bully or screwing over the companies that helped you get where you are today produces negative karma. And that karma can come back to haunt you. So Apple CEO Tim Cook should remember the game companies that put Apple where it is today. The road to hell is paved with good intentions. Caring about privacy is a good thing, but such intentions almost imploded the game industry during the middle of a historic game boom and the worst global recession ever. And all big companies should remember that how they treat the smaller companies and the little people around them is what matters to the longevity of the big companies.