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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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Future

Opinion: Biden’s infrastructure plan must look to the future, not wrap itself in a nostalgic view of past American greatness


CAMBRIDGE, Mass. (Project Syndicate)—President Joe Biden’s $2 trillion infrastructure plan is likely to be a watershed moment for the American economy, clearly signaling that the neoliberal era, with its belief that markets work best and are best left alone, is behind us. But while neoliberalism may be dead, it is less clear what will replace it.

The challenges that the United States and other advanced economies face today are fundamentally different from those they faced in the early decades of the 20th century. Those earlier challenges gave rise to the New Deal and the welfare state. Today’s problems—climate change, the disruption of labor markets due to new technologies, and hyper-globalization—require new solutions.

Capitol Report: Biden says he’s ‘prepared to negotiate’ on infrastructure as he meets bipartisan group of lawmakers

We need a new economic vision, not nostalgia for a mythicized age of widely shared prosperity at home and global supremacy abroad.

On climate change, Biden’s plan falls short of the Green New Deal advocated by progressive Democrats such as Rep. Alexandria Ocasio-Cortez. But it contains significant investments in a green economy, such as supporting markets for electric vehicles and other programs to cut carbon-dioxide emissions, making it the largest federal effort ever to curb greenhouse-gases.


Economics is different from an arms race. A strong U.S. economy should not be a threat to China, just as Chinese economic growth need not threaten America.

On jobs, the plan aims to expand employment offering good pay and benefits, focusing, in addition to infrastructure, on manufacturing and the growing and essential care economy.

Book Watch: Caregiving is a vital part of the nation’s infrastructure like bridges and roads

The role of government

New ways of thinking about the role of government are as important as new priorities. Many commentators have framed Biden’s infrastructure plan as a return to big government. But the package is spread over eight years, will raise public spending by only 1 percentage point of gross domestic product, and is projected to pay for itself eventually.

A boost in public investment in infrastructure, the green transition, and job creation is long overdue. Even if the plan were nothing more than a big public investment push financed by taxes on large corporations, it would do a lot of good for the U.S. economy.


We need a new economic vision, not nostalgia for a mythicized age of widely shared prosperity at home and global supremacy abroad.

But Biden’s plan can be much more. It could fundamentally reshape the government’s role in the economy and how that role is perceived.

Traditional skepticism about government’s economic role is rooted in the belief that private markets, driven by the profit motive, are efficient, while governments are wasteful. But the excesses of private markets in recent decades—the rise of monopolies, the follies of private finance, extreme concentration of income, and rising economic insecurity—have taken the shine off the private sector.

At the same time, it is better understood today that in a complex economy characterized by so much uncertainty, top-down regulation is unlikely to work. Regardless of the specific domain—promoting green technologies, developing new institutional arrangements for home-care workers, deepening domestic supply chains for high-tech manufacturing, or building on successful workforce development programs—government collaboration with nongovernmental actors will be essential.


If it succeeds, the example it sets of markets and governments acting as complements, not substitutes—demonstrating that each works better when the other pulls its weight—could be its most important and enduring legacy.

In all these areas, the government will have to work with markets and private businesses, as well as other stakeholders such as unions and community groups. New models of governance will be required to ensure public objectives are pursued with the full participation of those actors who have the knowledge and capacity to achieve them. The government will have to become a trusted partner; and it will have to trust other social actors in turn.

In the past, each excessive swing in the state-market balance has eventually prompted an excessive swing in the opposite direction. The Biden plan can break this cycle. If it succeeds, the example it sets of markets and governments acting as complements, not substitutes—demonstrating that each works better when the other pulls its weight—could be its most important and enduring legacy.

Biden’s unhelpful framing

In this regard, it is unhelpful to view the Biden plan as a way to restore America’s competitive position in the world, especially vis-à-vis China. Unfortunately, Biden himself is guilty of this framing. The package will “put us in a position to win the global competition with China in the coming years,” he recently argued.

Peter Morici: Biden doesn’t understand how dangerous China is

It may be politically tempting to market the infrastructure plan in this fashion. In an earlier era, the prevailing fear that the U.S. was losing its edge to the Soviet Union in ballistic missiles and in the space race helped catalyze a national technological mobilization.

But there is much less reason for fearmongering today. It is unlikely to buy much Republican support for the plan, given the intensity of partisan polarization. And it diverts attention from the real action: if the plan increases incomes and opportunities for ordinary Americans, as it should, it will have been worth doing, regardless of the effects on America’s geopolitical status.

Moreover, economics is different from an arms race. A strong U.S. economy should not be a threat to China, just as Chinese economic growth need not threaten America. Biden’s framing is damaging insofar as it turns good economics at home into an instrument of aggressive, zero-sum policies abroad. Can we blame China if it tightens restrictions on U.S. corporations as a defensive measure against the Biden plan?

The plan could transform the U.S. and set an important example for other developed countries to follow. But to achieve its potential, it must avoid misleading state-versus-market dichotomies and outdated Cold War tropes. Only by leaving behind the models of the past can it chart a new vision for the future.

This commentary was published with permission of Project SyndicateBiden Must Fix the Future, Not the Past.

Dani Rodrik, professor of international political economy at Harvard University’s John F. Kennedy School of Government, is the author of “Straight Talk on Trade: Ideas for a Sane World Economy.”

More From Project Syndicate

Megan Greene; How the Fed could give a green light to environmentally sustainable investments

James K. Galbraith: Here’s why fears of surging inflation are off-base

Minxin Pei: China sabotages its economic future by escalating tiff with West over forced labor of Uighurs



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Microsoft Is in Exclusive Talks to Acquire Discord


Microsoft Corp. is in advanced talks to acquire messaging platform Discord Inc. for $10 billion or more, according to people familiar with the matter, as the software giant seeks to deepen its consumer offerings.

Microsoft and Discord are in exclusive talks and could complete a deal next month, assuming the negotiations don’t fall apart, the people said.

Originally favored by gamers, San Francisco-based Discord offers voice, text and video chatting. The platform’s popularity has surged since the pandemic took hold as people stay home and connect online—as has that of other chat services, like Facebook Inc.’s WhatsApp and Signal Messenger LLC. Discord has been considering an IPO.

Microsoft, which has a market value of more than $1.7 trillion, has been on the hunt for an acquisition that would help it reach more consumers. Last summer, it held talks to buy the popular video-sharing app TikTok amid a high-profile geopolitical standoff prompted by the Trump administration, before abandoning the effort.

VentureBeat reported this week that Discord was exploring a sale and had entered exclusive discussions with an unnamed suitor.



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As Apple releases its new line of Macs, the biggest beneficiary may be Microsoft


Apple is set to launch its next generation of MacBooks this week. For the first time since the surprise 2005 announcement by Steve Jobs that Apple was moving from PowerPC to Intel (x86), the company is set to take on chip-making responsibility for the Mac.

With Apple
AAPL,
-0.37%

coming off strong earnings that included better-than-expected growth for its Mac line, which grew 7.3%, more than double the PC market’s 3.6%, it would seem like the perfect moment for its new launch of improved MacBooks.

However, I believe the launch could test Apple, as it is essentially deriving the silicon for its new Macs from the iPhone. In time this may pan out well, but there is a good chance this show could get off to a rocky start.

Apple has made many claims about its new MacBooks, and while we will have to wait until Tuesday’s event to get the full picture, there have been plenty of leaks on what to expect from the company.

It’s the same old-new normal for Apple, which CEO Tim Cook alluded to at this year’s WWDC event, including promises of a whole new level of performance, with the lowest power consumption, maximizing battery life to be better than ever before. Also, a new level of graphic performance and even more market innovation.

In the WWDC transcript, Cook’s exact words were: “The Mac will take another huge leap forward.”

All of this will remain TBD until broad benchmarking and compatibility testing for software and peripherals is available.

Challenging transition

My biggest concern, though, isn’t the promises, but rather the potential vulnerabilities for Apple. The transition from Intel
INTC,
+1.87%

to its new Arm-based silicon is almost certain to be a challenging transition that will impact both consumers and developers.

The company’s entire software ecosystem will have to be rewritten to work on this new architecture, and this takes time. Microsoft
MSFT,
-1.02%
,
for instance, has been working for a decade on building its software ecosystem to run smoothly on Arm-based variants, both of its Surface Pro X but also other Arm-based notebooks from the likes of Samsung and Lenovo. The improvement has been material, but it has been markedly difficult to meet all the developer and consumer needs.

More specifically, the transition from Intel to Apple’s new silicon will likely break applications, and create compatibility issues with peripherals. While I expect Apple to have a set of “hero apps” that will work flawlessly, this certainly won’t be the case across all the apps, tools and games used by Mac consumers.

Reaction of consumers, developers

This will leave consumers frustrated with their new Macs, perhaps more so than Mac’s constant quality issues with its keyboards in recent generations. Furthermore, this creates more work for developers, who will now be required to support disparate apps for the Intel version and the Arm version — this is anything but straightforward.

Perhaps Apple’s biggest mistake is its claims that this transition will be seamless. Sure, that is good marketing, but the more realistic approach should be: “Bear with us while we make the Mac experience even better.”

Another big question mark for Apple will be around support of its current generation of Intel-based Macs. The company was heavily scrutinized for its short period of support for PowerPC after shifting to Mac. The support period lasted only three years, and that left some Apple customers dissatisfied. Many Mac users stay with a device for five to eight years, and certainly won’t want to be forced to buy another $2,000-plus device prematurely if Apple decides to stop supporting its Intel-based Macs after three years. This will be something to watch closely.  

If Apple does stumble for a period while it seeks to perfect its new silicon, the next question is where do consumers seeking an alternative to Mac turn?

Microsoft stands to gain

I believe Microsoft could be the big winner during this transition for the Mac. The Microsoft Surface has seen its growth rates up 37% in its most recent quarter, tracking over $6 billion in its trailing four quarters. This number is still much smaller than Mac, which saw its Mac revenue at $9 billion in its most recent quarter, reflecting its best quarter ever, growing 28% year over year. Still, I believe there may have been some padding with buyers seeking to upgrade before Apple moves away from the Intel-based silicon.

Maybe more than just Microsoft and Surface’s growth momentum is the brand strength and ultra-premium branding that comes with Surface. I have long believed Microsoft’s endeavor into Surface had much less to do with competing with its large software OEM’s like Dell
DELL,
+0.55%
,
HP
HPQ,
+3.40%

and Lenovo, and much more to do with building a true competitor to the Mac.

This has been visible in the entire approach to Surface, including acute attention to details such as the packaging, the branding on the notebooks, the construction materials and the premium pricing. Microsoft has also been wise in its development of the Surface to include Intel, AMD
AMD,
-1.64%
,
and Arm-based variants, giving customers a choice while taking advantage of its ability to support all three chipsets’ software compatibility nuances.

Tuesday’s launch has a lot at stake for Apple. Apple’s move away from Intel has long been touted as a big problem for Intel, but it could be equally, if not more problematic, for Apple. With Microsoft Surface continuing to gain momentum for its ultra-high-quality notebooks, Mac faces more competition and will be under pressure to get this right— sooner than later.

Daniel Newman is the principal analyst at Futurum Research, which
provides or has provided research, analysis, advising and/or consulting to
Qualcomm, Nvidia, Intel, Microsoft, Samsung, ARM, and dozens of companies in
the tech and digital industries. Neither he nor his firm holds any equity
positions in any companies cited. Follow him on Twitter 
@danielnewmanUV.





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Apple’s 5G iPhone Will Need to Be More Than 5G


Apple Inc.


AAPL 1.74%

is master of the upsell, but 5G might present the company with its biggest challenge yet.

The tech giant has scheduled an event for Oct. 13, when it is widely expected to unveil this year’s iPhone lineup. As is typical, the company has said nothing about its plans for what would be the 20th iteration of its iconic smartphone, not counting large-screen variants of the same models. But leaks and supplier reports all have confirmed that the next-generation 5G wireless standard will be included in at least some of this year’s designs, and Apple itself dubbed the event “Hi, Speed” on its announcement.

Nearly all of the company’s competitors—including the largest,

Samsung

—already have 5G phones on the market. But most of the world’s 5G action has been taking place in China, which accounted for more than three-quarters of 5G device shipments in the second quarter, according to Counterpoint Research. In the U.S., 5G coverage is still limited, even in major cities. That has hampered the uptake so far. IDC estimates that 4.2 million 5G smartphones were sold in the U.S. in the first half of this year—about 7.5% of total domestic smartphone shipments in that time.

Apple is widely expected to boost that. Counterpoint analyst Jeff Fieldhack predicts this year’s new iPhones will sharply increase the market share of 5G devices, resulting in such phones accounting for 20% of domestic smartphone sales by the end of the year. And several equity analysts have started redeploying the “supercycle” term used to predict strong iPhone cycles in the past—though not always accurately. Analysts project total iPhone unit sales will rise 10% in Apple’s current fiscal year ending next September, following two straight years of declines, according to consensus estimates from Visible Alpha.

That in turn has fueled Apple’s stock, which has jumped 59% so far this year even after retreating from its Sept. 1 peak. At more than 31 times forward earnings, the stock remains in its most expensive valuation range in more than a decade.

Is a 5G iPhone worth that? Probably not—if that is the only selling point. Past comparisons are problematic. The last major network transition to the current standard known as LTE took place in the 2010-12 time frame, when smartphones were still a fast-growing business globally. Apple’s first LTE device was the iPhone 5, which launched in late 2012. That device also sparked “supercycle” projections, though sales and the phone’s lower profit margins didn’t quite live up to the hype. Apple’s share price had surged 65% that year ahead of the iPhone 5 launch—and then slid 24% in the remainder of the year.

Smartphone buyers tend to be more motivated by improved features such as screen size, better cameras and longer battery life. The iPhone 6 cycle that kicked off in late 2014 turned out to be Apple’s best ever, thanks to the significant display-size boost that device delivered. And last year’s iPhone 11 Pro models with their triple-lens cameras turned out to be more popular than expected. Analysts believe those models accounted for 28% of Apple’s total iPhone sales volume for the fiscal year that ended in September, compared with the 23% for the previous year’s top-of-the-line iPhone models, according to Visible Alpha.

The success of last year’s iPhones is actually another challenge for this year’s, as smartphone buyers now tend to hold on to their devices for three to four years. Apple still has a strong base of fans willing to line up for whatever the company comes up with each year. Getting enough of them to justify a market value of $2 trillion will be a tall order.

Write to Dan Gallagher at [email protected]

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



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