Wedbush: Apple vs. Epic as a Game of Thrones

Barring a settlement, the end is three weeks away — and a foregone conclusion, says analyst Daniel Ives.

From a note to clients that landed on my desktop Sunday:

“Game of Thrones” Court Battle Between Epic and Apple Kick Off This Week This week Epic Games, the maker of Fortnite, will officially begin its much anticipated court battle royale with Apple in Northern District of California that we ultimately believe Cupertino will win while defending its golden jewel App Store ecosystem…

Our thoughts. Epic Games has taken a risky and calculated path in going after Apple at a time that Cook & Co. are under the bright spotlight both in the Beltway and in the EU (preliminary antitrust ruling filed this week) around its App Store stronghold and 30% fee structure.

While Epic will play into Fortnite’s massive installed base which is unrivaled and drum up support (through social media, etc), legally Apple has successfully defended its App Store moat again and again with this time being no different in our opinion.

From an investor perspective, the key services business and its $65 billion+ annual revenue stream for FY21 remain what we estimate is a $1.3 trillion valuation alone for this business and key to future monetization efforts with more bundling efforts on the horizon.

This is a high stakes game of poker being played as Apple needs to make sure the Epic challenge, which is very timely in light of anti-trust swirls and growing opposition to Big Tech within the Beltway, does not create a ripple effect which developers and regulators globally are watching carefully.

We will be watching this trial closely and the ultimate ruling likely in the next three weeks for any ripple effects that could negatively impact the App Store fee structure going forward which we view as fortress-like despite the Epic noise. A negative ruling vs. Apple would be a major gut punch to the App Store crown jewel monetization engine.

Maintains Outperform rating and Street-high $185 price target. 

15 Comments

  1. Michael Goldfeder said:
    There will be no settlement as Epic is doing this solely for the publicity and trying to stoke the flames of sentiment against Apple on social media, Congress, and the EU.

    IMO, based on the facts and the law, Epic will lose in the courtroom and on appeal. They’re trying to appeal to the morality that nobody should be required to pay any type of fee to Apple and that it stunts developers from bringing great services to Apple iOS consumers.

    While that line of rhetoric might play well in Congress and the Apple Hater running the EU antitrust division, it’s all speculative drivel without any legal traction in a court of law.

    10
    May 2, 2021
    • Kirk DeBernardi said:
      @ Michael Goldfeder —

      Oh, snap.

      0
      May 3, 2021
  2. David Drinkwater said:
    I think the publicity/notoriety piece is real. It’s real dumb, but it’s still real. In the long run, it will look really, really, really dumb. Might even make future lecture material for beginning law students. Apple isn’t doing anything different than their competitors and they aren’t doing anything disproportionate to their partner vendors (except by lowering their cut from smaller earners, and who can argue against that).

    This is a bit like Adobe lashing out at Apple after the 1980s WYSIWYG publishing moment essentially created Adobe.

    Fortnite would not exist as it is today without the Apple App Store. Ungrateful!

    Also I recall from the call yesterday someone noting that some developers are complaining that it is “too hard” to convert their programs from the Apple App Store for sale on other platforms. Not Apple’s problem!

    5
    May 2, 2021
  3. Fred Stein said:
    Here’s another angle. Microsoft file declaration in support Aug 24, 2020. Sony, who is an investor, recently up’ed their stake. Why might both support Epic? Both have gaming device hw.

    Who’s gaming revenue is out pacing the industry? Apple.
    Who’s has the best silicon and silicon foundry? Apple; And neither Sony nor Microsoft can keep up with Apple’s advances.

    Apple may be a threat to Microsoft and Sony in gaming.

    5
    May 2, 2021
    • David Emery said:
      I don’t expect Apple to be a direct competitor for games. Rather this is about continued Apple ecosystem lock-in. If your computer, tablet, phone, watch, “smart tag” and “smart speaker” are all in Apple’s infrastructure, that’s an awful draw for when your gaming console is not in that same ecosystem.

      Now if you buy my argument, then maybe Apple should be looking for a gaming console company to buy 🙂

      1
      May 2, 2021
  4. Michael Goldfeder said:
    @Fred Stein: I agree 100% with everything you posted. In addition, it’s a conflict of interests on steroids that any judge will most certainly see as a blatant, while artfully veiled, effort to further their own business opportunities.

    Microsoft taking on the mantle as the champion of the “little guy” is hysterical based on their less than stellar antitrust track record.

    5
    May 2, 2021
    • David Emery said:
      Apple v Epic is a bench trial before a judge, right? The judge is less likely to be swayed by arguments of ‘fairness’, but is likely to be swayed by the obvious “conspiracy” of Epic’s planned attack on Apple.

      1
      May 2, 2021
    • Fred Stein said:
      Yes.

      Apple’s own App or Subscription revenue is small in every category they compete in.

      The App Store represents a minority portion of revenue for all the plaintiffs.

      0
      May 3, 2021
  5. Gregg Thurman said:
    My comment was too long, and cutting it up into three comments has proven to be much to difficult with current limitations. So I deleted my attempt. Current limitations (designed to encourage short pithy comments) are ridiculous and devalue Apple 3.0.

    READERS CAN SKIP OVER COMMENTS THEY FEEL ARE TO LONG.

    5
    May 2, 2021
  6. Michael Goldfeder said:
    @David Emery: Correct. It’s a bench trial before the Federal District Court Judge.

    1
    May 2, 2021
  7. Jerry Doyle said:
    Bench trail before the Federal District Court Judge means more objectivity targeted at the legal issues affecting both sides’ allegations. Daniel Ives is correct to note that a favorable ruling for Apple can result in momentum going forward having ripple effects for a positive convergence of subsequent rulings impacting the App Store fee structure. Bring it on Epic! This is the Super Bowl for many of us Apple followers, or should I say “Game of Thrones?”

    0
    May 2, 2021
    • David Emery said:
      Prevailing against Epic won’t stop the attacks on the Apple App Store. The “unfair advantage for their own apps” argument has a lot more legal legs, I think.

      2
      May 2, 2021
  8. Michael Goldfeder said:
    The unfair advantage for their own apps is a loser proposition as every store has their “house brands” that they market right alongside national brands too.

    This is a pure publicity stunt court case and after they get slammed, they’ll have to answer to their shareholders and investors for this idiotic frolic undertaken by their CEO.

    6
    May 2, 2021
    • John Konopka said:
      The arguments are always about Apple advantaging their own apps, yet near as I can tell this boils down to just Apple Music v Spotify.

      Apple gives away iWork and Garage Band (I think) to those who buy Apple products. These are really good, but I think Apple purposely pulls their punches so they don’t compete head on with MS Office. Keynote is better than PPT but Numbers is not as good as Excel for pros.

      Apple charges a competitive amount for things like FCPX, Compressor, Logic, Motion, FMP, others(?).

      Apple charges $5 a month for AppleTV+, but I don’t hear complaints about that much.

      Spotify complains a lot about Apple, but then Spotify is losing a lot of money so they have an axe to grind. When Senators Warren and Klobuchar talk about this I guess they must be thinking about Spotify.

      Epic is suing Apple but Apple doesn’t make a competing product so can’t give it an advantage on the App Store.

      0
      May 2, 2021
  9. Kirk DeBernardi said:
    I just wanted to remind everyone interested in this “battle” — however Epic it may be 😉 — that the majority of the App Store’s apps (methinks ~85%?) are free, most don’t sell over a million dollars either in sales or in-app purchases so their Apple “tax” (HA!) rate is 15% and their developers are doing just fine before a spendy user base of a billion +.

    They’re apparently a very quiet success story, thank you.

    Carry on.

    3
    May 2, 2021

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