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As closing arguments wound down Monday in Epic Games Inc.’s landmark antitrust lawsuit vs. Apple Inc., lawyers for each side covered familiar ground, as they have the previous three weeks.
Under stern questioning from federal Judge Yvonne Gonzalez Rogers, who will decide the bench trial, Epic scored points for lifting a curtain on the massive profitability and sway of the App Store as well as flaws in its review process. Meanwhile, Apple
AAPL,
highlighted the broad competitive landscape of digital ecosystems, its industry-standard commission fee and developers’ overall satisfaction with the App Store.
The back-and-forth — honed after some bare-knuckled lawyering that left executives from both companies badly bruised on the stand — has frequently boiled down to four issues:
Relevant market. Epic hammered with metronomic precision its argument that Apple and Google parent Alphabet Inc.
GOOGL,
GOOG,
lord over mobile operating systems with iOS and Android, respectively.
“Our view is there is no economic substitute for getting an app on the phone,” Epic lawyer Gary Bornstein said Monday. “There are substitutes for the App Store. The substitutes would be direct distribution or alternative app stores. We do not believe that distribution of an app on Android or console is an economic substitute. There is not substitution there to restrain Apple.” (Bornstein acknowledged Google Play is not the same as the App Store, but also restricts in-app payments.)
Bornstein suggested Apple charge developers in a “non-discriminatory way.”
“They can charge some developers more than others depending on how they use the platform,” said Bornstein, who tirelessly pushed the notion of iOS as a narrow, monopolistic market. “They can’t charge in a way that has anticompetitive effects.”
Apple steadfastly maintained through Monday’s closing arguments that Epic is attempting to avoid Apple’s commission fees and put Epic’s own app store on iPhone to enrich its corporate coffers — to the exclusion of other developers. Apple seized on Epic’s Project Liberty as the cornerstone of a PR plan to grow revenue while posing as a faux liberator of developers.
“What they want right now is to put the Epic Game Store on the App Store and they want to do business without [In-App Purchase]. Nothing would be paid to Apple for its IP or use of the platform,” Apple lawyer Richard Doren said Monday.
“The term ‘duopoly’ has been thrown around, but Apple faces lots of competition from Samsung, LG, Huawei,” added Apple lawyer Daniel Swanson. “If you take Epic’s definition, Apple is a monopolist. Xbox is a monopolist. Everyone is a monopolist.”
“And this ecosystem has existed for 10 years,” Swanson continued. “This is not a case where there is one device is out there and you are out of luck unless you get a part for that machine.”
App Store security. Epic poked holes in the App Review process with examples of offending apps that slipped through, proving that Apple’s market dominance did not equate to innovation, or privacy and security for consumers.
The tactic fired up Apple, which prides itself as an innovative pioneer and as a champion of user privacy vs. the likes of Facebook Inc.
FB,
and others.
“We invest like crazy in [research and development],” Apple CEO Tim Cook testified Friday, noting Apple has spent $100 billion in R&D since the introduction of the iPhone in 2007, and $50 billion over the past three years. According to Apple’s 2020 10-K SEC filing, it was $14.2 billion in 2018, $16.2 billion in 2019, and $18.8 billion in 2020.
At the same time, Apple rejects about 40% of apps submitted to the App Store each year. On Friday, Cook warned the App Store would descend into a “toxic mess” if Apple ceased the App Review process.
Epic thinks iOS needs to be completely open, breaking up its price-gouging “walled garden” impact on developers. But an Apple legal strategist late Monday argued this would create a chaotic world of stores within stores that would unwittingly compromise individuals’ data and lead to a free-for-all of app developers in a Wild West-like digital setting.
App Store profitability. Apple talked up the “economic miracle” of the App Store, which launched in July 2008 and, through mid-2018, paid out $100 billion in revenue for developers. At a 70%-30% revenue split, total sales were an estimated $142 billion, with $42 billion going to Apple.
This would seem to buttress Epic’s depiction of the App Store as a money-making behemoth that largely fueled the growth of Apple’s Services division into a billion-dollar business. The division reported a record $16.9 billion in sales during the fiscal second quarter, up 27% year-over-year.
The App Store’s operating margins were nearly 80% in fiscal years 2019 and 2018, feeding the Epic narrative that the store was established as a monopoly as early as 2010.
Apple executives Cook and Phil Schiller refused to acknowledge whether the App Store was profitable, alluding to a series of financial statements and insisting that Apple had poured billions of dollars into building, maintaining and improving the App Store.
This comes as little consolation to the likes of Match Group Inc.
MTCH,
which pays $500 million a year in App Store commission fees, as chief legal officer Jared Sine told a Senate antitrust subcommittee in April.
Apple repeatedly pointed out that about 85% of apps on the App Store are free, with no commission charged to them. Second-year subscriptions or video partners are charged 15%.
Developer satisfaction on App Store. Apple contends that, with the exception of a few outspoken developers — namely, Epic, Microsoft Corp.
MSFT,
Nvidia Corp.
NVDA,
Spotify Technology
SPOT,
and Match — there are hundreds of thousands that are happy with the App Store. There are 1.8 million apps in 27 categories.
Surveys in 2018 and 2017 showed widespread satisfaction in the mid-60-percent range, Apple lawyer Veronica Moye said Monday.
“It isn’t true that Apple hasn’t reduced price in response to competition,” Moye said. “Apple introduced the multi-platform rule in response to game developers so they could sell in-app content without paying Apple. That’s a remarkable price decrease.”
The judge interjected, “Does that mean we have to wait for people to sue Apple? As a federal court, I don’t want to encourage litigation. How can you say that’s a competitive driver?”
Moye, citing Cook’s testimony, said Apple’s decision was influenced by the pandemic.
Epic’s Bornstein rejoined that developer satisfaction is in the 30% level for search and discovery, and profitability. “To say, ‘We’ve done a good job overall’ masks various vectors of competition that could be improved if there were other stores out there,” he said.
Judge Gonzalez Rogers said the complexity and sheer scope of the case — there are 4,500 pages of testimony — will “take me a while” to come to a decision. Her written decision of some 100 to 200 pages is expected in the summer, although it could spill into the fall.
During the three-week trial, Epic has undertaken the Sisyphean task of applying new precedents to major antitrust cases against Microsoft, Eastman Kodak Co.
KODK,
and American Express Co.
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that have not been tested in U.S. courts, antitrust experts said.
The most intriguing example involves a U.S. Supreme Court decision in 1992 that thwarted efforts by Kodak to force owners of its copying machines to use Kodak repair services. Epic’s legal reasoning is that iPhones are a software market that has imposed similarly strict commissions and rules for app developers and consumers.
Although most antitrust experts give Epic a slim chance of winning, they say its longer-term impact goes beyond this case. The maker of “Fortnite,” they assert, was successful in stoking outrage among developers and consumers toward Apple, as well as lighting a fire under federal legislators to change antitrust law.
