Below, Tim Higgins shares five key insights from his new book, iWar: Fortnite, Elon Musk, Spotify, WeChat, and Laying Siege to Apple’s Empire.
Tim is a business columnist for the Wall Street Journal, where he covers Silicon Valley and writes about the world’s most influential business leaders. He is also a frequent contributor to CNBC and has previously written for Bloomberg News.
What’s the big idea?
Those who operate in the digital world accessed by the iPhone have no choice but to operate by Apple’s rules—or do they? Objections that Apple has overstepped fair play in the app economy resulted in pushbacks, including one of the biggest antitrust battles of the last century. The highlight reel of this great corporate drama features fascinating fights between Apple and its rivals, including Spotify and Epic Games.
1. It’s easier to win when you make the rules.
Almost 20 years ago, Apple followed up the iPhone with the App Store—a new way for software developers to sell their offerings to smartphone users. Instead of going to a physical store, software could be acquired through the internet. It was basically free for developers, unless they charged users. If so, then Apple would take as much as 30 percent. The genesis of the fee was simple enough: Apple would claim a royalty on digital goods consumed on its devices (like video games), but not goods purchased through the app and used in the real world (like sneakers).
The early days were something of the Wild West as entrepreneurs rushed to see what they could sell. At first, the rules seemed simple enough: no scams, no porn, etc. As time went on, however, Apple realized policing its digital realm was going to take a lot of effort. Apple co-founder Steve Jobs wanted to ensure that Apple users were safe.
Eventually, big businesses began to emerge in the App Economy. Facebook had to redo its web-based business for mobile computing. Spotify, the streaming music service, saw huge adoption. Epic Games, maker of expensive video games, started tinkering with smaller iPhone offerings. As those companies’ executives saw what was possible in the new iPhone world, they grew concerned about the control Apple held over it. They felt Apple was taxing them and controlling access to their users. But they had little recourse.
Very quickly, the mobile computing world boiled down to basically the iPhone and smartphones running on Google’s Android operating system. Apple controlled its own hardware and software, while, for the most part, Google controlled its own software and depended on phone makers, such as Samsung, to use its operating system. Google would try to match Apple’s ecosystem as best as it could, collecting its own 30 percent.
2. Execute, execute, execute.
Apple’s digital world became known as a ‘Walled Garden’ because its App Store was essentially the only entrance. Users’ digital lives grew deeply rooted in that garden. Text messages with non-Apple users would show up as green bubbles instead of blue bubbles. In the abstract, such a subtle difference might seem trivial. But with time, the blue bubbles became a status symbol, another reason to stay inside the Walled Garden. Nobody wanted to go green.
“Blue bubble envy was a powerful selling tool.”
Some inside Apple discussed offering its popular messaging system to Android users, essentially making its iMessage a rival to WhatsApp. But the idea was continually shot down. Blue bubble envy was a powerful selling tool. As one senior Apple executive argued to his colleagues in an email: “In the absence of a strategy to become the primary messaging service for [the] bulk of cell phone users, I am concerned the iMessage on Android would simply serve to remove [an] obstacle to iPhone families giving their kids Android phones.”
Apple was creating a world where consumers wanted to live, and other companies had to operate if they wanted to reach those deep-pocketed users.
3. Trust no one.
Apple prided itself on the idea that it didn’t cut special deals with developers to be on the App Store, while Google did, in part, because it wanted to ensure that the hot new games and apps were available in its app store. It also had a disadvantage to Apple’s Walled Garden. In theory, a user could download software onto an Android device outside of the Google App Store. Though users rarely did because it was so complicated.
Tim Sweeney, the founder of Epic Games, grew convinced that the taxes charged by Apple and Google were unfair. The success of his wildly popular video game Fortnite created an opening, he thought, to change how the app economy worked. He wanted to create his own store outside the reach of Apple and Google.
To much fanfare, he attempted to do that for Android phones but eventually found too many barriers to making such a gambit work. In part, other game makers weren’t rushing to join him. Behind the scenes, Google was offering lucrative deals to game makers to stay in its store. It seemed that Sweeney’s idea was great negotiating leverage for other game makers to get a better deal from Google.
Frustrated, Sweeney concluded he needed to challenge the legality of both Apple’s and Google’s control over the app economy, triggering costly court battles that would drag on for many years. Fortnite was also kicked out of the app stores, cut off from the app economy entirely.
4. Sail close to the wind.
Many companies choose the easy way. They settle legal disputes to avoid costly litigation, reputational harm, and the unknown risks associated with public fights. Not Apple. Apple fights. A former top lawyer at Apple once talked about Apple’s willingness to embrace legal risk as an advantage in fighting rivals.
“Not Apple. Apple fights.”
Bruce Sewell, who was armed with an annual budget approaching $1 billion, compared his approach to sailing close to the wind. “You want to get to the point where you can use risk as a competitive advantage—that’s the point at which law actually becomes a commercial asset to the company,” he once said.
During his time, Apple fought against U.S. government claims that it improperly colluded with book publishers and against European regulators unhappy with its tax deal in Ireland. Ultimately, Apple would lose both battles. But how many other fights did it avoid by scaring off others?
Like Epic Games, Spotify was unhappy with the control Apple held over its streaming business, especially after Apple CEO Tim Cook launched a rival music service that was undercutting Spotify’s prices. Instead of challenging Apple in U.S. court, Spotify plotted another path that took it to Europe, where its headquarters was located. It worked with European regulators to develop a case against Apple’s control, specifically an App Store rule that prohibited developers, such as Spotify, from directing users outside of their app to purchase services not covered by Apple’s fees.
In Brussels, the home of the European Union, Spotify found a receptive audience, especially among officials who had battled Apple over its tax case and felt like the U.S. tech giant was overreaching. The European Commission would ultimately rule in Spotify’s favor against Apple and subsequently pass new laws aimed to weakening Apple’s control over the App Store.
5. Losing by winning.
Back in the U.S., Apple would mostly win its case against Epic’s Sweeney. One area that a judge found fault with Apple was its rules prohibiting developers from providing links outside of apps to alternative payment methods. Apple was ordered to stop that practice. At the time, it seemed like a small thing.
But Apple didn’t simply allow Epic or Spotify or anyone else to do whatever they wanted. What followed was a complicated effort to make it so burdensome for developers to link out that they would ultimately just stick with Apple’s own payment system and continue to pay that 30 percent commission.
“The issue was a matter of principle.”
Fuming, Sweeney sought more help from the court. That would take many more months of fighting before a judge would ultimately find that Apple had violated her order. It was a stunning rebuke—one that Apple would appeal. Nevertheless, very quickly, Sweeney’s Fortnite was back in the App Store. And Spotify was offering links to outside payment methods.
Sweeney would say the fight would cost his company more than $1 billion in legal fees and lost revenue. But for him, the issue was a matter of principle.
It was a matter of principle for Apple as well. Cook and his executives felt like they had done nothing wrong. To them, it was Sweeney, Spotify, and others who wanted special deals and didn’t want to pay their fair share.
In the end, the years-long fight ranks as one of the biggest antitrust battles of the past century. And threatens to remake Apple’s business.
This article originally appeared in Next Big Idea Club magazine and is reprinted with permission.