Tencent vs US Government

Fortnite Banned by Apple and Google App Stores

Yesterday, Epic Games decided to offer Fortnite players on mobile the ability to purchase in-game items directly through their Epic Direct Payments system (in-app), thus circumventing the expensive 30% cut that Apple and Google take through their mobile app stores. Epic is passing through all of those cost savings to its players.  

Within a few hours, the Fortnite app was removed by Apple and Google. Epic fully expected this and quickly issued a lawsuit against both companies. Epic, led by Tim Sweeney, is pushing primarily for the 30% fees to be dramatically reduced.  

A couple of reflections here:  

1) Apple & Google are being inconsistent - Epic created a payment option within their Fortnite app that was cheaper and would pay Epic directly (bypassing Apple’s fee). This is not too dissimilar from many other apps that don’t allow any payments via the mobile app. For example, Netflix and Spotify force users to pay on their websites (bypassing Apple’s fee). Apple and Google have chosen not to ban apps like Netflix and Spotify yet they are choosing to ban Fortnite.  

2) Mobile gaming is their core offering - video gaming accounts for over 70% of app store revenue for both Apple and Google (it’s a big deal). In 2019, net of the 30% fees, Apple made ~$16B ($11B = 70%) and Google made ~$8.7B ($6.1B = 70%) in revenue from their respective stores. Video gaming is by far the most important revenue driver for their mobile app store businesses.  

3) Fortnite is 0.93% of Apple’s app store revenue - As of April 2020, 96% of the ~130M Fortnite mobile downloads have come through iOS. In 2019, Fortnite brought in ~$500M in sales for Apple, which resulted in ~$150M in revenue (30% fee). This $150M is only ~0.93% of the App Store’s total revenue for 2019 ($16B), yet Fortnite has significant influence in the video gaming space.

4) 1984 Macintosh vs #FreeFortnite - After the ban, Epic released a video online mimicking Apple’s famous Macintosh ad from 1984. Epic accuses Apple of being the bad guy this time around, instead of the hero. The video ends with the hashtag, #FreeFortnite, which quickly became the top trending tag worldwide on Twitter.

5) The Epic lawsuit is an antitrust question - In 2001 a district court ruled that Microsoft violated the Antitrust Act by making it harder for PC manufacturers and users to uninstall Microsoft’s Internet Explorer and use third party browsers and programs. The U.S. government argued this created a monopoly for Microsoft to control not only the PC market but the browser market as well. Epic is similarly arguing that Apple places unreasonable restrictions on third party app developers to create and market their software for iPhones.  

Takeaway: this is a big deal. Given video gaming’s importance to their app stores, it is no surprise that Apple and Google want to crack down on Fortnite (industry leader), yet they should then also ban Spotify and Netflix as well (but they won’t). If enough game publishers follow suit, this will put significant downward pressure on the 30% distribution fees. It is unclear to us where the lawsuit will go, but this is a healthy challenge by Epic and will be a net positive for the video gaming industry.

Gaming Implications of ‘Tencent vs the US Government’

China has denied many U.S. companies (e.g. Facebook, Snap, Google) from accessing the Chinese market for a long-time, and now the U.S. has reciprocated through a presidential order under the International Emergency Economic Powers Act and the National Emergencies Act, banning both TikTok and WeChat within the United States. India has also banned both of the applications.    

The executive order makes mention of Tencent, the parent company of WeChat, which caused the gaming community to go into a flustered state. Tencent’s vast gaming portfolio includes Riot (100% ownership),  Supercell (84.3%), Epic Games (40%), Bluehole (11.5%), Ubisoft (5%), Activision Blizzard (5%), and Discord (undisclosed) just to name a few (here is the full list).  

To the gaming community’s relief, Tencent was only included due to its full ownership of WeChat, and transactions on WeChat were banned. WeChat is a multi-purpose social media and P2P payment platform. It has an average of 19M DAUs in America, and is especially popular with people who have family in mainland China as it is one of the few platforms that is available in both countries. Here is the direct quote that stirred up the initial rumors:  

“The following actions shall be prohibited beginning 45 days after the date of this order, to the extent permitted under applicable law: any transaction that is related to WeChat by any person, or with respect to any property, subject to the jurisdiction of the United States, with Tencent Holdings Ltd. (a.k.a. Téngxùn Kònggǔ Yǒuxiàn Gōngsī), Shenzhen, China, or any subsidiary of that entity, as identified by the Secretary of Commerce (Secretary) under section 1(c) of this order.”  

The quote is somewhat confusing as it includes “or any subsidiary of that entity” after mentioning Tencent Holdings Ltd but is actually referencing subsidiaries of WeChat. This was clarified later when the LA Times reported, “A White House official on Thursday night clarified that the executive order concerning WeChat only blocks transactions related to WeChat, not those involving other Tencent holdings.”  

Takeaway: We believe this will discourage Tencent from investing in the U.S. as a whole and will create voids that will be quickly filled by Microsoft, Sony, Disney, Google, Facebook, and others already heavily investing in the industry.