The Breakdown - Fortnite vs. Apple/Google is the Internet's First ‘World War’

Episode Date: August 15, 2020

Today on the Brief: Jobless claims down and retail sales up The U.S. Federal Reserve is running distributed ledger technology experiments  The end of an era, as BitMEX begins KYC Our main discussion: the big battle brewing between Epic Games and Apple/Google. NLW looks at: Why Fortnite got kicked off the Apple and Google app stores  Why Epic Games is suing in response Why this was all very clearly planned by Epic Games Why Apple and Google should be nervous about anti-trust  Why this is about a much bigger future than just a single game 

Here's the way that Angela Dalton from Signam sum this up. She wrote, step one, let Apple and Google know that you won't be paying their 30% tax to them on the Fortnite mobile app anymore. Step two, wait for both to play along by cutting you off from their app stores. Step three, slap a couple of brilliant antitrust suits on the table, complete with violations of both the Sherman Act and California's Cartwright Act and an entertaining trailer of content, 1980 Fortnite, that would bring a smile of yes to most faces. Move over, Elizabeth Warren and your big tech is bad medium post, are we witnessing the most creative execution of an activist moment we have seen from a company in history? Welcome back to the breakdown with me

NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, BitStamp, and nexo.io, and produced and distributed by CoinDess. What's going on, guys? It is. Friday, August 14th, and today we are talking about the Internet's First World War, the battle royale between Fortnite, Apple, and Google. First, however, let's do the brief. First up on the brief today, our regular check-in around COVID economic indicators. So the first has to do with jobless claims. Initial jobless claims came in under one million for the first time since the crisis began. Now, they're only down to the 960,000 range, so you're still seeing nearly a million

jobless claims even this far into things. But what you're not seeing is a return to increase numbers, which we had a couple weeks ago. The same applies to the continuing claims, which are in the 15 to 16 million range now, down from 20 million just about a month ago. Now, it's kind of hard and weird in some ways to think about being excited about such huge numbers, and I think on the one hand, we could be dogmatic and point out reasonably that these numbers are insane. On the other, though, we're kind of stuck trying to figure out how to live with COVID-19 and just adapt to it, at least until we have a vaccine and assuming that a lot of people take that vaccine. So in that context, we kind of have to stick to trend lines, and so at least we

are edging down. Another indicator was retail sales, and retail sales for July were up 1.2% even as new cases climbed. This is the third straight month that retail sales have risen, however, it is also by far the smallest rise. June, for example, saw something like an 8% rise from May. Now, all of this data is incredibly noisy and complicated, and I think the key takeaway, at least from this, is that The trend line is kind of flat to very barely good, and that's the best it's been for a little while. Now, the thing to watch going forward will be how the end of benefits, the $600 additional unemployment benefit, for example, ended in July, impacts this going forward. Will we see these jobless claims numbers continue to decrease, and will we see retail sales continue to rise in August, even though that subsidization is now gone? Next up on the brief today, the Fed is actively testing distributed ledger technology.

Fed Governor Lail Brainerd said that the U.S. Central Bank has been actively testing DLT with the potential use case of digital currencies. She said this during the San Francisco Fed's Innovation Office Hours and cited the pandemic and the need for, quote, immediate and trusted access to funds as a reason that this has gotten more important to them. In the past, Jerome Powell has said that the Fed was interested, but this seems to suggest that they're actually farther along than he let on. As part of the conversation, Braynard said that, quote,

to enhance the Federal Reserve's understanding of digital currencies, the Federal Reserve Bank of Boston is collaborating with researchers at the Massachusetts Institute of Technology in a multi-year effort to build and test a hypothetical digital currency oriented to central bank uses. A last interesting note here has to do with the fact that Braynard singled out China, saying that they had, quote, already moved ahead rapidly with their version of a CBDC. So potentially that pressure from the East is getting under the Fed's skin just a little bit. Last up on the brief today, KYC comes to Bitmex.

Starting on August 28th, Bitmex will require know-your-customer identification. Now, on August 28th, they will begin a six-month grace period to help unverified users complete the process. And the reason they give is, quote, the exchange's primary motivations for this change are to remove barriers to entry for some of its target users, improve the security of the platform, and get ahead of evolving regulation in the cryptocurrency industry. The reason that this is interesting is that I think it's something of an end of an era in the early phase of crypto exchanges. This is not surprising to anyone who's been watching the state of regulation around crypto and crypto exchanges. the more and the longer that this thing survives, the more that existing regulatory regimes are going to

demand that it complies. As Arthur Hayes put it in a tweet, the game has changed and so have we. Keep a stiff upper lip. So there it is. End of a beginning unregulated era in crypto exchanges. And with that, let's shift to our main discussion. Our main topic today is the Internet's First World War. and this is all about Fortnite versus Apple and Google. Epic Games, the maker of Fortnite, announced that it would allow users to make purchases directly within its own app. Within hours, Apple kicked Fortnite off its marketplace, saying that this announcement violated the 30% App Store tax, the fee that all developers agree to pay to Apple for using its app store as a means of distribution. In their statement,

and Apple reminded Epic Games that it had signed this and it had benefited from all of the tools that Apple had built, so they should pretty much shut up and agree to just do what they said. Epic Games immediately called BS, saying, thousands of apps on the App Store approved by Apple except direct payments, including commonly used apps like Amazon, Grubhub, Nike sneakers, Best Buy, DoorDash, Fandango, McDonald's, Uber, Lyft, and Stubhub. We think all developers should be free to support direct payments in all apps. If you're hearing that and thinking that it sounds like Epic Games was pretty prepared for this response, you would be right. In fact, it looks to me and to many others like this was a planned

declaration of war. In the immediate aftermath of the Apple statement, Epic Games filed a lawsuit. And when Google followed Apple's example just a little bit later, Epic Games, was ready to file a lawsuit against them too. Here's the way that Angela Dalton from Signum summed this up. She wrote, step one, let Apple and Google know that you won't be paying their 30% tax to them on the Fortnite mobile app anymore. Step two, wait for both to play along by cutting you off from their app stores. Step three, slap a couple of brilliant antitrust suits on the table,

complete with violations of both the Sherman Act and California's Cartwright Act and an entertaining trailer of content, 1980 Fortnite. that would bring a smile of yes to most faces. Move over Elizabeth Warren in your Big Tech is Bad Medium Post. Are we witnessing the most creative execution of an activist moment we have seen from a company in history? The trailer that Angie is talking about is that Epic Games made a version of Apple's absolutely famous 1984 commercial, arguably the most famous commercial and television history. Only in this case, instead of it being someone else with Apple being the disruptive hammer thrower who's breaking the masses free of their consumer slavery, it's Fortnite

characters who are breaking consumers free of their dependence on Apple. It is the perfect metaphorical bookend to where Apple started to where it had come. And certainly whether you like the trailer or not, And based on Twitter, most people do. This has to be the first antitrust lawsuit that actually comes with its own digital trailer. What's going on, guys? I'm excited to share that one of this month's breakdown sponsors is Crypto.com. Crypto.com offers one of the most cost-efficient ways to purchase crypto out there, as they've just waived the 3.5% credit card fee for all crypto purchases.

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Their platform is powered by a NASDAQ matching engine, and their APIs are recognized as the best in the industry. Download the BitStamp app from the App Store or Google Play or visit BitStamp.net slash pro to learn more and start trading today. That's bitstamp.net slash pro. In this crisis, many investors aim to keep and grow their digital assets. Others seek to maximize the yield on their cash. NXO allows you to achieve exactly these two goals.

The company offers instant crypto credit lines against all major cryptocurrencies, with interest rates starting from only 5.9% APR. NXO also lets you earn up to 10% annually on your Fiat and digital assets. What's more, interest is paid out daily and you can add or withdraw funds at any time. Get started at nexo.io. Fundamentally at issue here is Apple's control over the developer ecosystem and its ability to demand a 30% fee for anything that developers sell from apps that go through the Apple App Store. This model has been coming under increased pressure, and that's both

general and specific. On the general side, M.G. Siegler, who's an investor formerly at TechCrunch, wrote about this in June, basically arguing that 2008, when the first policy was written, was a fundamentally different time in internet history, and that Apple had to update the policy for a new era, that it couldn't keep just kind of bandaging it over and over and over again. In July, Tim Sweeney from Epic also pointed out how absurd this control was using the context of some companies that it started to sell virtual classes because of the pandemic. When Airbnb and ClassPass started selling classes online, Apple came with their handout wanting a cut. Tim Sweeney wrote then, Apple has gone crazy. If colleges hold virtual,

classes through an iPhone app, Apple could demand 30% of the tuition. Truly, Apple has no right to take any percent of any company's revenue just because they made the phone people use to access the stuff. Now, what makes this more than just a spat between some companies is that it comes at a time when there are fundamental questions of how internet business is organized, and in specific, how these centralized platforms at the core of so many parts of our digital experience are or not allowed to police, to control, and to profit from the platforms that they created. This is a conversation that has recently had more focus on the policing of speech aspect, because it's very politically popular to talk about, than it has on the actual antitrust and

business practice control. but this case has the potential to shift that focus again. That's why Angela Dalton, who I mentioned before, referenced Elizabeth Warren's medium post, and that's why Input MAG put the whole thing this way. Epic knows that these practices won't look good in any court case against Apple, especially with the current antitrust political wins whipping through Washington. Epic strategy here is clear. Break the rules, get punished by Apple, show consumers and politicians,

exactly the kind of power Apple can flex over developers and consumers and declare war. But the masterstroke itself is that Epic is positioning this as a way for consumers to save money. By the lowering the price of its in-game V-Buck currency in accordance with the removal of Apple's 30% fee, and not just the shameless cash grab on their own part. So I have a few different reflections on this. First, I agree with M.G. Sigler that some version of this was absolutely inevitable. There have been grumblings for so long around this power imbalance between app stores and developers, and all it was going to take is someone with the consumer power and marketing savvy to take up the fight,

and Epic Games has both of those in spades. It is built perhaps the most popular game platform of all time, and it absolutely crushes its sense of consumer and popular storytelling and narrative. The fact that they were ready to launch with the, 1980 Fortnite trailer just shows how sophisticated these guys are. Second, Apple is facing serious headwinds in court. The mood of this moment is incredibly anti-tech. And although we've gutted antitrust over the last 10 or 15 years,

this seems like an incredibly easy win for everyone but Apple. It's far less complicated than figuring out where you're going to draw the lines around something like Amazon. In many ways, it's even less complicated than drawing the lines around something like, does Facebook get to acquire Instagram? So if I'm Apple, I'm worried that they're seen as a very easy sacrificial lamb, frankly. Third, Apple should stop being stupid about this. Let's just call a spade a spade. Apple is Apple because it wasn't afraid to cannibalize its own business. Its highest authority, its highest focus was always on what was actually next, not what they could keep claim on

from the past. As everything goes online, they're simply not going to be able to capture a piece of everything as they were when they were the inventor of the smart mobile genre. It's just not going to work. This shows incredibly backward thinking from a company which has historically been itself because it wasn't backward thinking. Stop doing this apple. You're being idiots. And because you're being idiots, you're losing your chance to actually get out ahead of it and figure out how to make money on whatever comes next. My fourth thought is a complicated one around whether this shows the need for decentralization or not. You saw a lot of tweets yesterday like this one from Pomp where he said, Apple and Google removed Fortnite from their mobile app stores today. The future will be decentralized,

not because it is cool, but because it will be necessary. On the one hand, I do think that this validates the idea that a decentralized, organized world, this wouldn't happen. Different ecosystems would be able to control their terms in different ways. You would have the ability for people to use Bitcoin inside Fortnite, et cetera, et cetera, et cetera. At the same time, I'm a little wary of saying that this is the big star moment for decentralization, given that really what this could also be seen as, as centralized power eclipsing centralized power, Fortnite is building something much bigger than just a very valuable game property, as I'll get into in a minute. And they are doing this not because they're offering a decentralized alternative, but because they believe

that they have the right and the might in this moment to start to eclipse the other centralized power. And if you need any indication of what their centralized power means, their whole in-game ecosystem is run on a proprietary currency called V-bucks that has nothing to do with outside applicability. They're not using Bitcoin. They're not using Frigan ripple. They're using V-bux. This is a centralized company. Not that there's anything wrong with that, but I think that we should be wary and a little skeptical of saying that this is a flagship moment for decentralization. The last observation has to do with what comes next and really breaking out of the framework of thinking about Fortnite as just a game. I want to go back to that piece from Angela Dalton

and Sigmundum and read an excerpt from it that's about the underlying technology and what the implications might be. In the same way that it is cute to think that Steve Jobs would even care to throw stones at IBM for their dominance of the computer industry in 1984, Tim Sweeney is attacking companies who may one day stand in his shadow as a leader in tech innovation. In the same way that some might have laughed in 1984, at the suggestion that Apple's Mac OS upgrades could dominate the headlines over IBM's new mainframe cycle, I think we need to take a minute to imagine a world in which Epic's Unreal Engine 5 is the operating system that dominates the headlines. Unreal Engine 5 will allow games to look more like movies

by bringing more cinematic quality, specifically lighting, tech to gaming. It sounds cool, but what is more exciting is a concept I've been writing about since 2018. Gaming is the first digital hangout space, but as we can do more and more in digital worlds, we will migrate to doing more than just playing games. Meeting up in a digital space to do work isn't too far away. In fact, it could be a natural next step in Zoom's user interface. Spending hours on end in front of a screen full of little boxes will surely get old.

Wait, isn't it already old? Of course, this behavior will require financial transactions along the way, and we have already seen this behavior happening in gaming for decades. So the point here is that what's underpinning Fortnite is an engine that has massive potential to create a different computing paradigm that actually isn't just even a computing paradigm, but a social paradigm, an entertainment paradigm, a time spending, work doing where you live paradigm. This battle isn't about whether Fortnite can change the price of its V-bucks or has to give some of them to Apple. It's about who has the power to shape the future.

And that is why I'm calling this the Internet's First World War. Anyways, guys, a lot more to dig into here. A lot of people who know a whole hell of a lot more about this than I do, but I hope you enjoyed this little trip into this challenging moment in the internet's history. I think it's going to be fascinating to watch play out. I think it's going to tell us a lot about the anti-tech mood, the antitrust mood. It might have impacts on what happens in very different antitrust cases in technology. So get your popcorn. It's going down.

Anyways, guys, thanks for listening. And until tomorrow, be safe. of each other. Peace.