Apple must ease App Store payment rules, U.S. judge orders in blow to iPhone maker

© Reuters. FILE PHOTO: 3D printed Lady Justice figure is seen in front of displayed Apple and Epic Games logos in this illustration photo taken February 17, 2021. REUTERS/Dado Ruvic/Illustration/File Photo

By Stephen Nellis

(Reuters) -A U.S. federal judge struck down a core part of Apple Inc's App Store rules on Friday, forcing the company to allow developers to send their users to other payment systems in a win for "Fortnite" creator Epic Games and other app makers.

The ruling vastly expands a concession that Apple made with Japanese regulators last week to encompass game developers, who are the biggest cash generators for Apple's App Store, which itself is the foundation of its $53.8 billion services segment. But relative to the sweeping shakeup that Epic was seeking, the ruling amounts to a measured change to Apple's rules whose impact may depend heavily on how the iPhone maker chooses to implement it, analysts said.

The decision orders Apple to stop barring developers from providing buttons or links in their apps that direct customers to other ways to pay outside of Apple's own in-app purchase system, which charges developers commissions of up to 30%. The ruling also said Apple cannot ban developers from communicating with customers via contact information obtained by the developers when customers signed up within the app.

The ruling comes after a three-week trial in May before Judge Yvonne Gonzalez Rogers (NYSE:ROG) of the U.S. District Court for the Northern District of California.

Apple shares (NASDAQ:AAPL) moved down about 3.4% on news of the decision, knocking $87 billion off the company's market value.

The decision strikes down a core part of Apple's App Store rules, which prohibit developers from telling users about other places they can go to pay the developer directly rather than using Apple's payment mechanisms. Gonzalez Rogers issued a nationwide order that allows developers to put into their apps "buttons, external links, or other calls to action that direct customers to purchasing mechanisms."

But Gonzalez Rogers stopped short of granting Epic some of its other wishes, such as forcing Apple to open the iPhone up to third-party app stores.

Apple said in a statement: "As the Court recognized ‘success is not illegal. Apple faces rigorous competition in every segment in which we do business, and we believe customers and developers choose us because our products and services are the best in the world."

After Friday's ruling, shares of Alphabet (NASDAQ:GOOGL) Inc, which operates an app store for Android smartphones, reversed an earlier gain and were last down 1%.

Shares of videogame makers that offer their games on Apple's app store rallied. Zynga (NASDAQ:ZNGA) Inc surged 8.6%, while Electronic Arts Inc (NASDAQ:EA) and Activision Blizzard (NASDAQ:ATVI) both rose nearly 3%.

CASH COW

The orders are similar to a move that Apple made last week to conclude an investigation by the Japan Fair Trade Commission. Under that agreement, Apple eased its rules for "reader" apps like Netflix Inc (NASDAQ:NFLX) to provide a link to customers to sign up for a paid account outside of the app.

Last week, analysts estimated that the JFTC settlement would shave off only 1% to 2% of Apple's profit because "reader" apps are a small part of the company's App Store revenue. But games are a much larger portion.

"While reader apps collectively make up just 14% of (the past 12 months') App Store developer revenue, Gaming apps are the App Store cash cow, accounting for 63% of developer revenue" over the past year, Morgan Stanley (NYSE:MS) analyst Katy Huberty wrote in a note.

But the precise financial impact to Apple is difficult to gauge immediately. On the one hand, only game makers like Epic with a well-known brand such as "Fortnite" can entice users to go through the extra steps of signing up to pay outside an app. At the same time, those large brands bring in the majority of Apple's game-related revenue.

"There's only a handful of games that can pull this off," said Ben Bajarin, head of consumer technologies at Creative Strategies. "To some degree, Apple could make it so that its in-app payments are still the easiest to use. It comes down to the implementation."

The judge ruled Epic failed to demonstrate Apple is an illegal monopolist, but did show the smartphone giant engaged in “anticompetitive conduct” under California laws.

The judge issued a nationwide injunction blocking Apple “anti-steering provisions” - rules that limit app developers from pointing users outside of Apple’s ecosystem.

The judge said these rules “hide critical information from consumers and illegally stifle consumer choice.”