(Bloomberg) -- Alphabet Inc. must lift restrictions that prevent developers from setting up rival marketplaces and billing systems that compete with its Google Play Store, a judge ruled, upending the search giant’s dominance in the lucrative Android app market and probably denting its revenue.
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A federal judge in San Francisco on Monday handed a big victory to Epic Games Inc. in its long-running challenge to the technology giant’s app store, another antitrust blow to Google following its recent major defeat in one US Justice Department case and while it’s still fighting another.
The ruling comes after the maker of the popular video game Fortnite convinced a jury that Google abused its power in the Android app market with its Google Play store policies. The changes the company must now make will almost certainly take a bite out of its sales, with one analyst estimating a “worst case” loss in gross profit of more than $1 billion off sales that totaled $14.66 billion in 2020.
Alphabet shares fell as much as 2.5%, closing at $162.98 in New York. They had been up 20% this year through the end of last week.
“The Epic verdict missed the obvious: Apple and Android clearly compete,” Google said in a blog post. “We will appeal and ask the courts to pause implementing the remedies to maintain a consistent and safe experience for users and developers as the legal process moves forward.”
App Store Controls
In a case that started in 2020, Epic argued that Google Play rules and fees stifled competition and blocked app marketplaces launched by developers. The judge’s decision is likely to accelerate the weakening of app store controls held by tech giants Google and Apple Inc. that have been under fire from regulators and lawmakers around the world.
US District Judge James Donato issued an injunction that takes effect Nov. 1 which bars Google for three years from paying developers to exclusively use its app store or prohibit them from telling customers about how to directly download apps. Google also cannot force developers to use its billing features during that time.
The company must also let rival app stores have access to its catalog for the next three years in a bid to help them develop.
The increased use of third-party billing systems by media and gaming companies in light of Donato’s injunction poses a larger threat to Google than rival app stores, Mandeep Singh, an analyst at Bloomberg Intelligence, said in a note.
“In a worst case scenario this could be a 20-30% drag on gross app store sales of around $50 billion, mostly subscriptions, which could be a $1-$1.5 billion drag on the company’s gross profit, based on our estimates,” Singh said.
Evelyn Mitchell-Wolf, an analyst with EMarketer, agreed that Google will take a revenue hit, though she said it will take a while to “fully materialize” because the company’s play store will remain the default choice on Android devices.
“Even if Google Play Store is no longer pre-installed as a result of payments to device manufacturers, it has tremendous brand recognition among consumers,” she said.
Epic Chief Executive Officer Tim Sweeney, who has been fighting both Google and Apple for four years to open their stores, hailed Monday’s decision as a victory in a post on X.
Donato had warned he would be tough on Google after jurors found in December that the company had engaged in anticompetitive conduct and harmed Epic.
“The question at hand is not whether Google violated the antitrust laws by failing to aid rivals, but what measures are necessary to restore fair competition in the face of the barriers found by the jury,” he wrote.
“Requiring Google to allow other app stores to be distributed through the Play Store for a discrete period is a modest step to correct the consequence of unlawfully preventing rival stores from reaching users and developers,” Donato said.
‘Reasonable Measures’
In its defense, Google contended that its partnerships help phones that run on Android better compete against Apple’s iPhone.
The judge said that Google can take “reasonable measures” to ensure the security of its platform, and ordered the parties to recommend three people for a committee to review the technical aspects of those requirements. Developers who find that Google’s security measures are too stringent can challenge them, with the tech giant responsible for proving they are necessary.
Donato said he limited the injunction to three years because “the provisions are designed to level the playing field for the entry and growth of rivals, without burdening Google excessively.”
Google had told the judge it would take 12 to 16 months to add third-party apps to the Play Store, but Donato set a deadline of eight months.
Stanford University law professor Mark Lemley called the judge’s decision “important,” saying it’s particularly significant that Donato ordered Google to make its catalog of apps available to competing stores.
“That isn’t something antitrust law would normally require,” he said. “But the judge correctly noted that once you have violated the antitrust laws, courts can order you to do affirmative things to undo the harm you caused, even though you didn’t have the obligation to do those things in the first place.”
Epic-Apple Fight
Epic had mixed success with a similar antitrust challenge to Apple’s app store. A judge in Oakland, California, concluded in 2021 that the App Store didn’t violate federal monopoly laws. But the judge sided with Epic on an unfair competition claim under California law and directed the iPhone maker to let developers steer customers to their websites for online transactions.
The Fortnite maker claimed in its suit against Google that the tech company monopolized the Android app distribution market for more than a decade by striking side deals with rivals and using its resources to thwart competition.
During trial, Epic presented evidence that Google forged partnerships with phone makers including Samsung Electronics Co. to ensure Google Play was pre-installed on mobile devices. Donato’s ruling would stop Google from using a payment, revenue share or access to Google’s services as conditions in agreements with device makers or wireless carriers in exchange for its Google Play store to be prominently featured on devices.
A Google public policy executive said in the company’s blog post that Monday’s ruling will have “unintended consequences.”
“As we have already stated, these changes would put consumers’ privacy and security at risk, make it harder for developers to promote their apps, and reduce competition on devices,” Lee-Anne Mulholland, the company’s vice-president for regulatory affairs, wrote. “Ultimately, while these changes presumably satisfy Epic, they will cause a range of unintended consequences that will harm American consumers, developers and device makers.”
Federal antitrust scrutiny is also building. In August, Google lost a trial over claims by the US Justice Department that the company illegally monopolizes online search and advertising markets.
The department is expected to detail its proposal Tuesday to alleviate the harm resulting from that misconduct — even as the agency is still sparring with Google in yet another case over the company’s alleged dominance over the technology used to buy and sell online ads. Closing arguments in that fight will be held in November with a decision expected by the end of the year.
--With assistance from Rachel Graf and Julia Love.
