Legal and Management

Apple, Epic Grilled by Antitrust Judge at App Store Trial

Fortnite
Andrew Harrer/Bloomberg via Getty Images

Fortnite video game is displayed on a phone.

A two-week proceeding over Apple’s practices with respect to its App Store — including the insistence upon a 30 percent commission that led to ousting of Epic's 'Fortnite' — nears its conclusion.

On Monday, near the conclusion of an antitrust trial in Oakland, California that focuses on Apple's dominance over a thriving app market, U.S. District Court Judge Yvonne Gonzalez Rogers sharply questioned dueling attorneys.

The suit comes from Epic Games, producer of Fortnite, which was booted from Apple's App Store last year upon its attempt to bypass the 30 percent commission that Apple takes on in-app purchases. As trial testimony has showcased, those commissions are lucrative to Apple. The computer giant has reaped $100 million just from Fortnite (and an estimated $20 billion overall from all app developers since 2017). Epic alleges that Apple is abusing a monopoly with anticompetitive rules and restrictive practices that benefit no one but Apple.  During closing arguments today, Epic's attorney took issue with Apple's attempt to position itself as the app world's "benevolent overlord," saying that only competition could result in lower costs and greater innovation.

In defending its "walled garden" approach, Apple says it has delivered a platform that's safe, reliable, and vibrant. "I think it's been an economic miracle," said Apple CEO Tim Cook about iOS apps during his testimony on Friday. Although not all developers would agree with Apple's practices, Cook added, "There's a conflict between what the developer may want and what the consumer may want."

Much of the testimony from witnesses during this trial has focused on why Apple does what it does — and its failings too. For example, in questioning top executives like Apple's Phil Schiller, Epic has pointed to dating apps that seemingly have slipped past Apple's nudity monitors. Other executives at the company were forced to touch upon everything from malware to the digital tracking of users. And when Cook was on the witness stand, Judge Rogers had him address App Store profits that seemed "disproportionate" to what Apple was contributing.

The antitrust trial has also featured a heavy dose of experts including MIT economist Richard Schmalensee, Global Economics Group chairman David Evans, Stanford economist Susan Athey, and University of Michigan economist Francine Lafontaine squaring off in an attempt to define a relevant market for antitrust purposes. Is the App Store a market in and of itself, as Epic contends, or should the frame be something more specific like gaming transactions, where the App Store is just one platform among many? The answer could go a long way in determining the forthcoming analysis from the judge with regards to alleged monopolization and abuse.

Today, Judge Rogers pressed Epic's attorney about the issue of market substitutes.

Gary Bornstein, the Cravath attorney representing the gaming company, responded by disputing Apple's view that consumers could easily access apps elsewhere. That never happens, he said, because of the high costs of switching between ecosystems — from iOs to Android or vice versa.  "There is no substitute for getting the Fortnite App or Starbucks app on your phone other than an iOS distribution path," he said, pushing the notion that the more appropriate substitute might be other app stores or sideloading.

"Your formulation seems to ignore the reality that customers choose an ecosystem," said Judge Rogers. "There has been a lot of evidence at the trial that in the foremarket of devices, it is Apple's business strategy to create a particular kind of ecosystem that is incredibly attractive to its consumers. So if those consumers choose to enter into that ecosystem, then your economic substitute destroys the ecosystem in which which they have chose to enter."

Although such comments might indicate a judge leaning Apple's way, she was equally tough when taking on its attorney.

"If the relevant market here includes developer side competition, so far there doesn't seem to be anything in the market itself that is pressuring Apple," noted Rogers.

Daniel Swanson, the Gibson Dunn attorney representing Apple, didn't so much as dispute the judge on this point as note that a 30 percent commission was chosen by Steve Jobs about 15 years ago, that the commission was less than what formerly existed within the gaming sphere (referring to a time when Nintendo and Sega controlled key platforms), and that the price has never gone up. "Epic's expert said it wasn't a monopoly price; it's a competitive price," said Swanson.

"I guess what you are saying is that qualitatively, the price has gone down, but it hasn't gone down to justify supracompetitive profits," responded Rogers.

Swanson resisted here. Arguing that Apple's broader costs to develop and improve its phones and software should count, the attorney said, "To allocate or not to allocate cost and treat it as a standalone revenue number without taking into account enormous costs of whole ecosystem is just not right."

A decision from Rogers may take months, and in the meantime, the judge is walking a middle line that may tip her thinking if not any ultimate conclusions. "If I decide relevant market is gaming but there are other factors showing anticompetitive conduct, how it would it impact your analysis?" she asked of Apple at one point.

Swanson responded, "That would make me very sad."

This article was originally published by The Hollywood Reporter.