Epic vs. App Stores

The ongoing fight between Epic and Apple / Google is one of the biggest tech stories of the year. The situation is very fluid, with a lot of developments since last week, and a ticking time bomb by end of August.

Not surprisingly, there’s been a lot of “takes”, most of which is candidly not too useful, and a small amount that have covered the situation from insightful angles. Instead of regurgitating these insights, I thought I’d just list a few here (most of these are usual suspects if you surf a lot of tech punditry):

The Chinese Android app stores example

I think it’s rather futile to debate the abstract merits of “open” vs “closed,” which at the ideological level is the heart of this fight. Tim Sweeney has been very consistent over the years – his public criticism of UWP is spiritually similar to his stance against Apple / Google, and I believe it’s stemming from not merely a business interest calculation (though he is often accused of such), but a genuine belief in “open.” 1

Instead, I think it’s more useful to discuss the Chinese Android app distribution landscape, as a real example of why Epic’s desired state (open up iOS to 3rd party stores and alternative payments) may not be good for consumers. (The linked Chinese post above is a great read on this, below is my brief summary of the same topic.)

When Google abruptly exited China in 2010 (and along with it, the Google Play store), there was a gold rush to fill in the vacuum left in the Android ecosystem. At a 30,000 ft level, a series of things happened:

  • In the beginning there was a flood of independent stores, with notable ones like Wandoujia (funded by ex-Google China head Kaifu Lee’s Innovation Works) and 91 Assistant.2
  • In a landmark deal at the time, Baidu acquired 91 Wireless (which owned the 91 store) for almost $1.9B in 2013.
  • As of 2013 Tencent also had an Android app store MyApp. After Tencent leveraged WeChat’s popularity to promote MyApp (“if you wanted the latest version of WeChat, go to MyApp”), MyApp gradually became one the most popular stores.
  • In 2014, prominent Chinese Android handset brands (with the exception of Xiaomi) formed a coalition called the “Mobile Hardware Alliance”. A major goal of this coalition was to exert influence in the distribution of games (which was recognized as the key cash-cow in app stores) in the Chinese Android ecosystem.

The current state of stores, at a high level, is this:

  • All the Chinese Android brands have their own stores, and because of the coalition, these stores have significant weight.
  • Tencent MyApp is the biggest non-OEM owned store.
  • The once prominent independent Android stores (without backing of OEM or a major social app like Tencent’s QQ/WeChat) are greatly declined in presence.
  • Collectively there are still dozens of stores.

How about the economics – let’s talk about that 50%?

  • There isn’t a unified rate – everything is negotiated. But indeed, if you are a game publisher not Tencent or Netease, the 50% store cut is the common term you will get.
  • Strictly speaking, this isn’t an “Apple-apple” comparison, as these Chinese Android stores call this “joint operations” of games where in theory they are providing more value-add (funneling more traffic etc.).
  • The prevailing rate for Tencent and Netease have been pushed down to 30%. (And of course Tencent keeps 100% in its own MyApp store.)

To summarize, the Chinese Android app store landscape is very much objectively a worse state than the Apple / Google monopoly Epic is complaining about:

  • Consumers have a confusing user-experience (overwhelming amount of store choices, fraud / security / malware concerns, inconsistent UX of the same app across different stores).
  • Developers are typically giving up a much higher share of revenue.
  • Developers have a lot more development costs / headaches (support dozens of app stores, SDKs, builds).

To be clear, it’s not a certainty that we will see a similar end-state if the Apple / Google “app distribution market” and “payment market” is opened up by regulation. (For one thing, the Hardware Alliance thing is clearly suspect to anti-trust scrutiny.) But it is clearly a possibility with strong factual support.

Problems that Apple should address

Having argued why “the grass isn’t greener” on the other side that Epic desires, let’s briefly talk about issues that Apple should tackle. This part is focused on gaming specifically.

For the 30% rate, I do believe (and clearly I’m biased with a vested interest here…) that this should be pushed lower with how the ecosystem has grown and evolved, even if purely arguing from an economies of scale perspective. Ultimately though, economics are a reflection of “who owns the customer”, so Valve’s model of volume-based tiers (starts at 30%, drops to 20% for sales above $50M) isn’t a bad reference. (This is also the common logic in retailer / wholesaler agreements.)

(Alternatively, Apple can continue to make confidential deals with the biggest partners, offering rev share discounts on a case-by-case basis.)

Apple also should update its strategy (and thus policies) regarding emerging services like cloud gaming. The rejection of Microsoft xCloud on iOS feels short-sighted, and untenable in the long-run if cloud gaming does take off. (It’s also a bit silly that at the same time thousands of HTML5 games are available directly within WeChat, which seems like a much bigger violation; arguably xCloud is offering much better games that would enrich the user-experience of iOS gamers.)

To end on a light-hearted note. Every time I write about Apple and mobile gaming, I will bring up my dream for an Apple-designed controller peripheral. I don’t think that will ever happen, but one can dream…

  1. Conversely, Apple, like Nintendo, like Disney, have been decades-long champions of the “closed” side of the debate. Just for transparency, at at the abstract level I lean closer to this camp, because I idolize seamless user experiences (which are typically easier to realize in a “closed” ecosystem).
  2. As a sign of the times, a popular feature-set back then was a PC client that was a storefront and also a manager for the download and installation to the phone, similar to using iTunes to manage iPhone apps.

Platform alliances and fragmented user experiences

As a bit of funny context, I’m writing this post amidst one of the biggest stock sell-offs in recent decades. US stock markets actually triggered their circuit-breakers after opening 7% down, and paused trading for 15 minutes. I thought I’d try to be a bit more constructive with my time (while sipping some scotch), instead of just fidgeting in front of my portfolio dashboard.

Nvidia’s GeForce Now has been a steady thread of gaming news in recent weeks. Despite (or rather, exactly due to) what feels like a more compelling end-user value proposition (stream the games you previously purchased), numerous publishers large and small (Activision Blizzard, Bethesda etc.) have pulled their content from this service. Publishers’ perspective is simple: they really don’t like it when a new service generates revenue off their content, without their permission or share of profits. (This The Verge article gives a good overview and analysis of the situation.)

One interesting development today – on one hand, another large publisher, 2K Games, pulled their content; on the other, Epic Games endorsing the platform with the full weight of their store.

The Epic decision is interesting partially because how transparent Tim Sweeney is with his intent. To quote him directly:

Epic is wholeheartedly supporting NVIDIA’s GeForce NOW service with Fortnite and with Epic Games Store titles that choose to participate (including exclusives), and we’ll be improving the integration over time.

It’s the most developer-friendly and publisher-friendly of the major streaming services, with zero tax on game revenue. Game companies who want to move the game industry towards a healthier state for everyone should be supporting this kind of service!

Cloud streaming services will also be key players in ending the iOS and Google Play payment monopolies and their 30% taxes. Apple has decreed that these services aren’t allowed to exist on iOS, and therefore aren’t allowed to compete, which is megalomaniacal and won’t stand.

Some quick observations. First of all, Sweeney caveats/acknowledges that this support still requires publishers’ participation. So the actual impact / enrollment still needs to be seen. (When I first saw the headline without reading Sweeney’s original tweet, I thought it was an unilateral move and wondered how that would work.) And if it does not result in a great majority of the store’s titles becoming streamable, it could mean a very fragmented (and confusing) end-user experience – for example, would Epic Game Store (EGS) add a platform tag on each title that shows which ones are compatible with GeForce Now?

Second, Sweeney discloses his motive is at least partially (if not primarily) about forming an alliance against iOS / Google Play. This makes theoretical sense, and is the sort of classic partnership that gets discussed in business strategy classes. The reason Epic is so eager to rally support against iOS / Google Play platform rules is simple – across the entire video-games vertical, mobile (due to its sheer scale) is generally the biggest opportunity for revenue growth, and the 30% platform fees are likely the biggest opportunity for profit (bottom-line) growth. This logic is the same whether Epic sees itself as a games developer or a publishing platform for 3rd parties.1

For this particular partnership, I’m a bit dubious whether it will meaningfully move the needle. I’m generally bearish on streamed gaming – I think it’s cool technology in search of a problem / audience, and if the strategy is to reach multi-billion gamers, I’d argue mobile-first (or mobile-only) remains the best path over the next 5 years.

Anyway, the other part I wanted to write about is the fragmented user experience in this age of multiple co-existing / overlapping games platforms. What do I mean? To use AAA games as an example – to date, publishers have all built their own launchers / platforms (Uplay, Origin, Rockstar Social Club) alongside distribution platforms such as Steam, GOG and EGS. Players are all familiar with the experience of launching a Ubisoft game on Steam / EGS, just for it to pull up Uplay and the game itself. Putting aside the obvious overlapping functionalities (duplicate social features, overlays, platform achievements, cloud saves), I’ve also seen cases of weird hand-offs – for example, the initial game download was handled by Epic, but during the first launch Uplay initiates a huge patch.

Also – alliances can be temporary, and every break-up is a chance for fragmentation. When Bungie exited its partnership with Activision on Destiny, and moved over to Steam, what did that mean for players’ friends-lists? (They stayed on Battle.net.) And how long will Bungie keep its PC migration service up? (Not that it matters that much, as inventory rapidly devalues with new expansions.)

There can also be player-caused fragmentation. Again using Ubisoft as an example – I bought The Division 2 on EGS, but purchased the Warlords expansion directly on Uplay. Would this cause any weird experiential issues on EGS? (I don’t know because I’ve not launched the game via EGS since, which I’m sure is exactly what Uplay prefers.)

Similarly, there are (and will be more) fragmented experiences when we talk about “cross-platform-play”. Experiential fragmentation is not going away (at least without a huge fight), because it’s not fundamentally a technical problem, but rather a business model / strategy problem – just as it is in the above case of GeForce Now. In theory, the combination of cross-play and free-to-play monetization is exactly opposite what large platform incumbents like Microsoft and Sony want: they want to have a monopoly on network effects, and they certainly don’t want out-of-network spending. In practice, there are complicating motivations,2 and some games like Fortnite have a big enough audience to force the issue, though as we have seen these games remain the exception.

From the end-users perspective – a lot of this is exactly an argument for a vertically integrated platform with monopoly market share, in exchange for an user experience guaranteed to be seamless. For PC, that sounds a lot like Steam, which I guess partially explains the player anger towards EGS. But Steam’s monopoly was always built on shaky grounds (the underlying attributes of the PC platform), and Steam’s margins were Epic’s opportunity.

  1. By the way, if it’s not clear, I am not being critical of Epic’s motives.
  2. Microsoft as the also-ran to Sony, has an incentive to open up and share the network.