Microsoft Warns Of Significant Fallout From Apple’s Battle With Epic Games

Microsoft warned that Apple’s threat of shutting off Epic Games’ account would hurt the tech giant’s game business as well as other game creators.

Don't Miss our Black Friday Offers:

Unlock your investing potential with TipRanks Premium - Now At 40% OFF!
Make smarter investments with weekly expert stock picks from the Smart Investor Newsletter

Microsoft (MSFT) on Sunday filed a court document after Epic Games said that Apple threatened to take off some of its titles from its app store and block its ability to support the so-called “Unreal Engine,” software that many game developers license to create better graphics. In the filing, the tech giant argued that developing a game using different game engines for different platforms may be prohibitively expensive and incur significant costs.

“Denying Epic access to Apple’s (AAPL) SDK and other development tools will prevent Epic from supporting Unreal Engine on iOS and macOS, and will place Unreal Engine and those game creators that have built, are building, and may build games on it at a substantial disadvantage,” Kevin Gammill, Microsoft’s general manager of gaming developer experiences wrote in the court filing. “Epic’s Unreal Engine is one of the most popular third-party game engines available to game creators, and in Microsoft’s view there are very few other options available for creators to license with as many features and as much functionality as Unreal Engine across multiple platforms, including iOS.”

Gammill added that Epic’s Unreal Engine is critical technology for numerous game creators including Microsoft. The tech giant has an enterprise-wide, multi-year Unreal Engine license agreement and has invested significant resources and engineer time working with and customizing Unreal Engine for its own games on PC, Xbox consoles, and mobile devices (including iOS devices). For example, Microsoft’s racing game Forza Street is currently available on iOS and utilizes Unreal Engine.

If Unreal Engine cannot support games for iOS or macOS, Microsoft would be required to choose between abandoning its customers and potential customers on the iOS and macOS platforms, Gammill said.

Shares in Microsoft have gained about 35% so far this year as the tech giant benefited from increased demand for remote services and cloud solutions during the coronavirus pandemic. (See Microsoft stock analysis on TipRanks)

Meanwhile, Microsoft is currently in acquisition talks for TikTok’s operations in the US from ByteDance. President Donald Trump this month formally ordered the Chinese owner of TikTok to divest its US assets setting a 90-day deadline or face a ban.

Wedbush analyst Daniel Ives reiterated a Buy rating on the stock with a $260 price target (22% upside potential), saying that Microsoft has the treasure chest, infrastructure, and distribution to get a deal like this done .

“With the White House’s green light key in the approval of an eventual sale of TikTok to Microsoft, we believe this extra time now makes the chances of Redmond acquiring TikTok at north of 80%,” Ives wrote in a note to investors. “While deal negotiations will be complex with a number of technology and data privacy issues that need to be worked out (national security concerns to be met between Chinese and US data) before an agreement is inked, we believe ByteDance is playing a game of high stakes poker with Microsoft looking like the only white knight around.”

Ives added that “Microsoft buying TikTok would be like Christmas morning coming early for investors, especially at a valuation in the ~$40 billion range (or lower) which in a few years if navigated the right way could reach a valuation in the $200 billion area code given the steep user and engagement trajectory of TikTok”.

Overall, Wall Street analysts have a bullish outlook on the stock. The Strong Buy consensus scores 27 Buy ratings versus 3 Hold ratings. The average price target of $228.54 still implies 7.3% upside potential over the coming year.