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    AAPL   US0378331005

APPLE INC.

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Fortnite's Mastermind Goes to Battle With Apple

04/26/2021 | 10:35am EDT

By Tim Higgins and Sarah E. Needleman

The billionaire behind one of the most successful videogames of all time came to view Apple Inc. as an existential threat to his dream of the future. So Tim Sweeney decided to fight. He gave his dispute with the world's biggest company a code name: Project Liberty.

The clash was a bold gambit from a man who built an empire around "Fortnite," the online multiplayer shooter game filled with cartoonish characters that became a phenomenon beloved by teenagers around the world. The ambition of Epic Games Inc.'s chief executive was that Fortnite's legions of devoted young fans could turn it into a thriving social network, and help realize his vision of the "metaverse," a shared virtual world where people might one day live, work and hang out.

Mr. Sweeney saw Apple as a central roadblock to that vision, according to people familiar with his thinking and documents unveiled in a recent court proceeding, because of the iPhone maker's tight control over how people access "Fortnite" and any other mobile apps from Epic. Apple's App Store takes a 30% cut of Epic's revenue from those users.

Epic circumvented Apple's fees and rules last August by introducing its own system for processing user purchases into mobile versions of "Fortnite." It also prepared for a larger legal and public-relations campaign, complete with a video mocking a legendary Apple ad and the social-media hashtag #FreeFortnite.

"You'll enjoy the upcoming fireworks show," Mr. Sweeney said in an email to an ally at Microsoft Corp. on the eve of the plan's launch. Apple made that email public in a court filing, along with other emails and witness testimony cited in this story.

Epic hoped to draw the company into a larger conflict, the court documents show. Once Apple and Alphabet Inc.'s Google booted "Fortnite" from their app stores, Epic responded by suing both companies.

The fate of Epic's fight has widespread implications for the entire technology world. It could help determine everything from how much revenue app developers are able to keep to how exposed Apple could be to potential antitrust violations. Apple has rejected claims it has monopoly power, saying that Epic broke the terms of a contract and engaged in a smear campaign.

A resolution could be drawing near. Starting May 3, the dispute goes to trial before federal Judge Yvonne Gonzalez Rogers in Oakland, Calif. The judge must decide whether Apple is misusing its power to quash competition or if Epic is merely trying to break its contract with the iPhone maker to boost its bottom line.

Save the world

The man at the center of this clash is a 50-year-old programmer who prefers an office uniform of cargo pants and T-shirts. He eschewed the clubby confines of Silicon Valley to locate Epic's headquarters just outside of Raleigh, N.C. Mr. Sweeney's previous dealings with other technology companies showcase his instincts for big and prolonged fights, as well as an eye for strategy. The Maryland native is worth more than $9 billion, according to Bloomberg's Billionaires Index.

He launched Epic from his parents' basement at age 20 in 1991 and evolved his company from solely building games for PCs to include those for videogame consoles and smartphones. In 2012, he sold a 40% stake of his company to Tencent Holdings Ltd., in part to tap the Chinese tech giant's expertise in mobile gaming and wringing money from users through small purchases known as microtransactions. (Mr. Sweeney remains Epic's largest shareholder.) Epic also owns the video-chat app Houseparty and makes the Unreal Engine, a suite of software tools for developing games and producing special effects for television shows, movies and other types of digital content.

Epic's biggest hit started with the 2017 launch of "Fortnite: Save the World," then a $40 game for up to four players to fight zombies and build forts. A few months later, after disappointing results, Epic offered up a new, free-to-play mode called "Battle Royale," in which 100 players duke it out until only one combatant or squad remains. It later sold virtual currency that players could use to acquire in-game perks such as an outfit to make their avatars appear as a Marvel Comics superhero.

To build the community, since only a small percentage of players make such purchases, Epic pushed console makers to allow users of one machine to play "Fortnite" with users of another machine, in what would be an industry first for all three major videogame systems. That meant a PlayStation player could join a match with a friend on Microsoft's Xbox or Nintendo Co.'s Switch.

Microsoft and Nintendo had shown a willingness for such cross-platform play. Sony Group Corp. balked.

In the fall of 2017, Epic updated its software that briefly allowed a Sony PlayStation "Fortnite" player to compete against someone on Microsoft's Xbox. It pulled that function back, saying it was a mistake, after online chat boards lighted up with excitement. Seeing what was possible, gamers demanded more. Players cast Sony as the villain on social media with hashtags such as #blamesony and #notfortheplayers, a harbinger for the Apple dispute.

As Sony internally debated its position, executives were worried about exposure of its consumer-behavior data and competitors taking an unfair share of their business, according to people familiar with the talks. They felt Epic had backed them into a corner and worried that finicky gamers would turn on them, the people said.

Following months of negotiations, Sony relented. Asked about it afterward, Mr. Sweeney described it simply as "an effort in international diplomacy." Since then, the Tokyo-based company has twice invested in Epic, having most recently contributed around $200 million in a funding round that valued Epic at $28.7 billion. A spokesman for Sony declined to comment.

Mr. Sweeney's hardball tactics with Sony helped him usher in cross-play across videogame consoles, personal computers and Apple and Android devices.

All hands on deck

The relationship with Apple was cordial for its first decade. In March 2018, "Fortnite" was launched on Apple's App Store. A year later, Mr. Sweeney was at the annual Game Developers Conference celebrating how cross-play had helped the game grow to almost 250 million players world-wide -- a smashing success. Apple's managers were happy to help promote the new hit, offering technical and marketing assistance to Epic.

Mike Schmid, head of Apple's games business development for the App Store, helped oversee the "Fortnite" rollout and several updates. In a court statement, he described an "all-hands-on-deck treatment to address Epic's non-stop asks, which frequently involved middle-of-the-night calls and texts demanding short-turnaround."

To manage the work, he assigned someone in Australia so Apple could provide 24-hour coverage.

The relationship described by Apple in court papers differs greatly from the experiences detailed by other developers on Apple's iOS mobile operating system. Smaller software makers have complained about what they perceive as Apple's seemingly arbitrary rules and mercurial ways.

With Epic, Apple appeared to go out of its way to help the gamemaker establish itself on the platform. Mr. Schmid said Epic employees had told him Apple represented just 7% of its revenue. He couldn't be reached for comment through Apple.

"On a variety of occasions, Epic personnel have told me that if Apple did not comply with its demands, Epic would simply terminate its relationship with Apple and remove its games off the iOS platform," Mr. Schmid said in court records. A core part of Apple's antitrust defense is that Epic's games are available on a variety of tech companies' platforms, not just Apple's.

By early 2020, "Fortnite" was showing signs of aging, although popularity for online games can sometimes ebb and flow due to new seasons or features. The privately held company doesn't disclose financial records but app-analytics firm Sensor Tower Inc. estimates global consumer spending within "Fortnite" on Apple devices had fallen in the first quarter of last year to $70 million from a peak of almost $180 million in the third quarter of 2018. Epic Chief Financial Officer Joe Babcock, who departed the company in early 2020, said it expected the trend to continue, according to a deposition he gave cited by Apple. Mr. Babcock couldn't be reached for comment.

Epic disputes the notion that "Fortnite" was waning in popularity, as the company in May 2020 said it had reached 350 million registered accounts.

Epic hatched a plan, according to court records citing a board presentation, to revive interest in "Fortnite" beyond its seasonal updates and occasional music performances and movie screenings that people experience together in a virtual setting. Epic would turn to third-party developers to create new content for "Fortnite," essentially turning it into an open platform unto itself.

But for this new plan to work, the company needed to find a way it could afford to compensate its would-be partners. Apple's 30% share, the presentation concluded, was an "existential issue" for its plan and needed to be cut so Epic could share a majority of the profit with creators.

The battle begins

Last spring Epic began sharpening its plan to wrest itself from Apple's fees and control. Its team investigated ways to surreptitiously add an alternative payment system to the versions of "Fortnite" on Apple and Google's app stores, according to court records. By May Epic decided it would deploy the new system through a so-called hotfix, an important software update usually reserved for security bugs, records show, and do so just before the debut of the game's new season.

Epic executives initially considered targeting Google alone, according to court records citing internal emails. But later they decided to include Apple, which in time would become the focus of the effort.

(MORE TO FOLLOW) Dow Jones Newswires

04-26-21 1235ET

Stocks mentioned in the article
ChangeLast1st jan.
ALPHABET INC. -0.26% 2713.33 Delayed Quote.55.30%
APPLE INC. 0.57% 145.86 Delayed Quote.9.26%
DJ INDUSTRIAL 0.62% 35145.12 Delayed Quote.14.55%
MICROSOFT CORPORATION 0.17% 286.685 Delayed Quote.28.68%
NINTENDO CO., LTD. -0.79% 58710 End-of-day quote.-10.82%
SONY GROUP CORPORATION 3.46% 11520 End-of-day quote.12.01%
TENCENT HOLDINGS LIMITED 10.02% 492 End-of-day quote.-12.77%
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Financials (USD)
Sales 2021 366 B - -
Net income 2021 93 706 M - -
Net cash 2021 75 818 M - -
P/E ratio 2021 26,1x
Yield 2021 0,59%
Capitalization 2 397 B 2 397 B -
EV / Sales 2021 6,35x
EV / Sales 2022 6,15x
Nbr of Employees 147 000
Free-Float 99,9%
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Technical analysis trends APPLE INC.
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Mean consensus OUTPERFORM
Number of Analysts 46
Last Close Price 144,98 $
Average target price 162,00 $
Spread / Average Target 11,7%
EPS Revisions
Managers and Directors
Timothy Donald Cook Chief Executive Officer & Director
Luca Maestri Chief Financial Officer & Senior Vice President
Arthur D. Levinson Independent Chairman
Kevin M. Lynch Vice President-Technology
Jeffrey E. Williams Chief Operating Officer
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