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Fortnite’s Mastermind Goes to Battle With Apple


The billionaire behind one of the most successful videogames of all time came to view

Apple Inc.


AAPL 1.80%

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.

The man who is taking on Apple prefers an office uniform of cargo pants and t-shirts. Here he is pictured in Epic’s offices in 2019.



Photo:

Jeremy M. Lange for The Wall Sweet Journal

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.

Mr. Sweeney located Epic’s headquarters far from Silicon Valley, to a spot outside Raleigh, N.C. The offices are pictured here in 2019.



Photo:

Jeremy M. Lange for The Wall Sweet Journal

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. Babock 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 said in May 2020 it had reached 350 million registered ‘Fortnite’ accounts, up from 250 million a year earlier.



Photo:

cristobal herrera-ulashkevich/EPA/Shutterstock

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.

From an early stage, the plan depended on Epic’s payment system being rejected, read an email between Epic executives disclosed in court records. At that point: “The battle begins. It’s going to be fun!”

Epic co-founder

Mark Rein

predicted there was a greater than 50% chance Apple would immediately remove “Fortnite” from its platforms, according to an Epic employee deposition cited in court records. “They may also sue us to make an example.” Mr. Rein declined to comment.

While it worked on the technical attack, Epic also planned to cut prices on certain items in the console and PC versions of “Fortnite” by 20%— essentially creating a reason for players to eschew the mobile alternative offered by Apple.

But first, Epic would go to the front door and ask a favor of Apple and Google: The company wanted permission to run its own competing store and payment system.

In a late June email to Apple CEO

Tim Cook,

according to court records, Mr. Sweeney sought an exemption from App Store rules. Most important, he wanted to stop paying Apple’s 30% fee.

Apple rejected the request in a July 10 letter, laying out many of the same arguments it would make in defending itself against the eventual Epic lawsuit. Epic had other ways to sell its game, Apple’s lawyer added, as well as noting Epic collects royalties from games built on its software.

“Yet somehow, you believe Apple has no right to do the same, and want all the benefits Apple and the App Store provide without having to pay a penny,” the letter concluded. “Apple cannot bow to that unreasonable demand.”

‘Fortnite’ became a phenomenon beloved by teenagers around the world. Here fans cheer during the 2019 ‘Fortnite’ World Cup inside Arthur Ashe Stadium in New York City.



Photo:

johannes eisele/Agence France-Presse/Getty Images

Mr. Sweeney on July 17 responded with another email to Mr. Cook and others calling the response a “self-righteous and self-serving screed.” He promised to “continue to pursue this, as we have done in the past to address other injustices in our industry.”

Behind the scenes, Epic’s Project Liberty team met regularly and devised a way to present their plan to a judge and the public. The team included as many as 200 Epic staffers, outside lawyers and public-relations advisers. It developed an argument that Apple violated antitrust laws with its requirements that all apps offered on its iPhones and iPads go through its App Store and that all purchases of digital content go through the tech giant’s in-app purchase system.

It wasn’t a unique gripe. Other app makers, including

Netflix Inc.

and Spotify Technology SA, have also butted heads with Apple on its slice of fees and control. Apple says the walled mobile-software garden it built in 2008 is now responsible for more than a half-trillion dollars in commerce.

Epic’s team worried it wouldn’t be a sympathetic character in a public fight and that gamers would blame the company if Apple and Google ultimately decided to yank “Fortnite.” So it strategized on how to bring in additional companies, including smaller, sympathetic developers, to advocate for its cause, records say. It also studied past Apple responses to major public fights, focusing on its battle with the Federal Bureau of Investigation over demands to create a backdoor into the iPhone of a shooter in a 2015 terrorist attack in San Bernardino, Calif. The controversy subsided when the government found an alternative way into the device.

The Epic team concluded that Apple could be thin skinned when it came to its public image. “Nothing moves Apple to change other than notable consumer pressure,” an Epic memo noted.

Share your Thoughts

Do you think Apple is misusing its power to quash competition? Why or why not? Join the conversation below.

As August approached, Epic’s board of directors was briefed on the project’s final pieces in a presentation dubbed “battle plan.” By this point, the board was told, Epic had spent time helping form the Coalition for App Fairness, an advocacy group, to support its crusade and it tested the payment system that would eventually be uploaded to Apple’s and Google’s app stores.

Mr. Sweeney sent emails to Sony, Microsoft and Nintendo alerting them to the upcoming price changes in “Fortnite,” a prelude to the “fireworks show.”

On Aug. 13, he lighted the fuse. “Epic will no longer adhere to Apple’s payment processing restrictions,” Mr. Sweeney wrote at about 2 a.m. in an email to Apple. Hours later, Epic flipped the switch on the new payment system and a public-relations campaign to rally gamers to its fight.

Project Liberty was in play.

Apple and Google both booted the game by day’s end, springing the second part of Epic’s plan: a legal battle.

A trial date hasn’t been set in Epic’s lawsuit against Google, though the situation is distinct. Devices that run Google’s Android operating system can download software from other app marketplaces in addition to the Google Play store. Google has said that Epic violated its app store’s policies as well, which are designed to keep it safe for users.

In the months after its lawsuit, Epic pursued complaints with regulators around the world and supported lobbying efforts among statehouses and Congress for changes that would crimp Apple’s power. It also released an online video that echoed Apple’s famous 1984 ad, a nod to George Orwell’s dystopian novel, that framed the computer maker as the underdog against the then-mighty

IBM.

This time around, the image of a televised Big Brother was replaced by one of a talking Apple wearing glasses similar to those of Mr. Cook. The call to action at the end read: “Join the fight to stop 2020 from becoming ‘1984.’ ”

Write to Tim Higgins at [email protected] and Sarah E. Needleman at [email protected]

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8



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Categories
Future

Nationhood: A Better Future for Puerto Rico


Regarding Jenniffer Gonzalez’s letter “Of Course Puerto Rico Deserves to Be a State” (Oct. 28): Unlike politics in the U.S., Puerto Rican politics are not based on the usual left/right spectrum, but on the centuries-old status issue. Pro-sovereignty groups were persecuted and exiled by the colonial government as well, ingraining a colonial mentality in many Puerto Ricans. Today, Puerto Rican politics is still based on the status issue and rooted in these colonial fears.

In 2020, not only did the Democrats erase statehood from their platform and Republican leaders say no to statehood, but the U.S. Justice Department invalidated the Nov. 3 “statehood yes or no” referendum and stated that even if statehood were to win, it would not lead to statehood. Statehood is not economically viable, as detailed in the 2014 U.S. Government Accountability Office report, but Puerto Ricans and Americans have an opportunity to forge the path to sovereignty and free association.

Free association would offer Puerto Rico a dignified relationship with the U.S., where Puerto Rico would be a U.S. ally and economic strategic partner. Currently, free association is the option with the largest growth of support in Puerto Rico. Together, both sovereignty options garnered almost 39% of the vote in the 2012 plebiscite.

This referendum will show Americans that statehood is not supported by an absolute majority of Puerto Ricans. After 500 years of colonialism, Puerto Ricans deserve freedom and nationhood, not statehood.

Javier A. Hernández



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Quibi Is Shutting Down Barely Six Months After Going Live


Quibi Holdings LLC is shutting down, according to people familiar with the matter, a crash landing for a once-highflying entertainment startup that attracted some of the biggest names in Hollywood and had looked to revolutionize how people consume entertainment.

The streaming service, which served up shows in 5- to 10-minute “chapters” formatted to fit a smartphone screen, has been plagued with problems since its April launch, facing lower-than-expected viewership and a lawsuit from a well-capitalized foe.

On Wednesday, founder Jeffrey Katzenberg called Quibi investors to tell them he is shutting the service down, some of the people said.

Mr. Katzenberg and Chief Executive Meg Whitman decided to shut down the company in an effort to return as much capital to investors as possible instead of trying to prolong the life of the company and risk losing more money, according to the people familiar with the matter.

Employees will be laid off and will be paid a severance, the people said, and the company will explore selling the rights to some of its content to other media and technology firms.

The decision marks a disappointing turn of events for Mr. Katzenberg, a former

Walt Disney Co.

executive and DreamWorks co-founder who pitched the streaming service as a revolutionary new entrant to the video-streaming wars.

Quibi was designed for people who consume entertainment in short increments on their smartphones, but the coronavirus pandemic forced would-be subscribers away from the kinds of on-the-go situations Quibi executives envisioned for its users. Quibi eventually allowed subscribers to watch its shows on their TVs.

Even before the Covid-19 crisis, Quibi had its share of skeptics in the media world, since consumers already had free options for short-form video, such as

Alphabet Inc.’s

YouTube. Quibi’s bet was that it could charge subscriptions by creating higher-end content, and it paid handsomely to develop that programming. Some Quibi executives believed the venture could have been a success, if not for the pandemic, with better execution, pointing to the rise of TikTok, people close to the company said. Some of them believed, for example, that Quibi could pivot to a “freemium” model, offering some content for free while making customers pay for the top programming.

Quibi, which cost $4.99 a month, also had to compete with a growing number of rivals, with Walt Disney’s Disney+,

Apple Inc.’s

Apple TV+,

AT&T Inc.’s

HBO Max and

Comcast Corp.’s

Peacock all launching in the past year.

Mr. Katzenberg and Ms. Whitman had raised about $1.75 billion from high-profile investors including Disney, Comcast’s NBCUniversal and AT&T’s WarnerMedia.

The company spent aggressively to develop its content. Its lineup of star-studded programming included a court show featuring Chrissy Teigen, a romantic comedy with Anna Kendrick and an action thriller starring Christoph Waltz and Liam Hemsworth.

Quibi has drawn on the deep Hollywood connections of Mr. Katzenberg, who ran Disney’s movie business, co-founded DreamWorks SKG and led its animation spinoff DreamWorks Animation SKG Inc., the studio behind “Shrek” and “Kung Fu Panda.”

The streaming service attracted blue-chip advertisers including

PepsiCo Inc.,

Walmart Inc.

and

Anheuser-Busch InBev SA,

securing about $150 million in ad revenue in the runup to its launch. Those deals came under strain earlier this year amid lower-than-expected viewership for Quibi’s shows, prompting advertisers to defer their payments.

In recent weeks, Quibi hired a restructuring firm, AlixPartners LLP, to evaluate its options, the people said. It recommended the options to the board of directors this week, laying out a list that included shutting the company down.

AlixPartners didn’t immediately respond to a request for comment. The firm previously handled the bankruptcy of Enron Corp.,

General Motors Co.

and Kmart.

Earlier Wednesday, Mr. Katzenberg and Ms. Whitman held a conference call with investors to explain the decision to shut the company down. During the call, Mr. Katzenberg told investors that the company decided to return $350 million in capital rather than pursue a new strategy that could have attracted additional subscribers but would have required a hefty investment, according to a person familiar with the call.

The Information earlier reported that Mr. Katzenberg told people in the media industry he may have to shut down the company.

The decision to hire AlixPartners came after starting a process to sell the company, The Wall Street Journal reported. Quibi pitched suitors including NBCUniversal on a sale, according to people familiar with the matter, but would-be buyers were put off by the fact that Quibi doesn’t own many of the shows it puts on its platform.

NBCUniversal declined to comment.

Quibi is also fighting a legal battle with interactive-video company Eko, which claims Quibi is violating its patents and has stolen trade secrets. Hedge fund Elliott Management Corp. is financing the high-stakes patent lawsuit.

The fight centers on a key feature of Quibi’s app that plays different videos for users depending on whether they are holding their phone horizontally or vertically. Quibi has denied infringing on Eko’s patents or stealing trade secrets.

Write to Benjamin Mullin at [email protected], Joe Flint at [email protected] and Maureen Farrell at [email protected]

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8



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