Before it wrapped up earlier this week, the antitrust trial between Epic Games and Apple reached a dramatic conclusion on Friday when Tim Cook, Apple’s CEO, took the witness stand. Sitting behind a plexiglass barrier, Cook faced a barrage of skeptical questions from both Epic’s lawyer and the judge presiding over the case. Cook’s tenuous answers to Judge Yvonne Gonzalez Rogers, in particular, raised serious doubts about whether the Apple App Store will emerge from this case intact.
Epic, the video game company behind Fortnite, claims that Apple is violating federal antitrust laws by forcing iPhone apps to be distributed only through the app store and by requiring app developers to pay an “Apple tax” of up to 30 percent of their sales of apps and in-app products on iOS devices. Last year, Epic balked at these restrictions and let Fortnite players buy the in-game currency V-Bucks at a discounted price within the game itself. Apple then ejected Fortnite from the App Store, leading Epic to bring this lawsuit.
Through 15 days of trial, including three hours of Cook’s testimony, Apple pushed back on Epic’s allegations, framing its control of the app store as the only way to ensure security and privacy on iPhones. Cook warned that without this “curated” approach, iPhones would “become a toxic kind of mess.” It has “nothing to do with money,” he added.
The judge didn’t seem convinced. Noting that games like Fortnite made enormous amounts of revenue for Apple without much effort on Apple’s part, she suggested to Cook that, in fact, it was all about the money: “Apple is just profiting off that, right?”
This lawsuit has been billed as one of the biggest antitrust cases in decades. “I can’t remember a case that has received so much media attention. It could potentially be a watershed moment in antitrust because we haven’t had a trial like this one maybe even since the Microsoft trial,” said Florian Ederer, an associate professor of economics at the Yale School of Management who specializes in antitrust and has been closely following the case.
But the trial often lapsed into farce and absurdity. The chaos began on the first day, when the court couldn’t figure out how to mute the public audio feed and several kids gate-crashed the opening arguments, yelling, “Free Fortnite.” (One fan even shouted, “I would suck all of you to get Fortnite mobile back.”) In the ensuing days, there were endless debates about the definition of a game and a comical digression about whether it would be appropriate to show a picture of a naked banana in federal court (in reference to the Peely character from Fortnite). At one point last week, Epic’s attorney stood in front of an Apple executive, showing him screenshots of various sex-related searches she had done in her iPhone’s app store, with results like “Kinkoo,” “Fingering Secrets,” and “Sex Positions 3D.” Epic was trying to make the point that Apple allowed sexually explicit material on iPhones. But after 10 minutes of the attorney tediously going through the apps and the witness confirming in a monotone voice that, yes, they were from the app store, the point had lost its punch.
Through it all, Apple approached the case with a seriousness that underscored its significance to Apple’s reputation and bottom line. Steve Jobs once thought that the app store wouldn’t make any money, but it’s now one of Apple’s main sources of revenue. According to Bloomberg, Apple’s commissions from the app store reached $22 billion in 2020.
“One thing that has quite clearly come to light is how profitable the app store is for Apple, and as they are trying to wean themselves off the big profit margins coming from hardware, the app store is even more important to the continued success of Apple,” said Ederer.
To justify its app store policies, Apple trotted out an all-star team of executives, including Cook (who was making his first appearance in litigation), Phil Schiller (Apple’s former head of marketing and the guy who invented the iPod click wheel), and Craig Federighi (the head of iOS). They all heaped praise on the app store. An “economic miracle,” Cook called it. He noted that it had grown from 500 apps at inception to more than 2 million now, hosting nearly half a trillion dollars of transactions annually. Apple’s witnesses claimed that app developers like Epic benefited most from the iOS ecosystem because, in Schiller’s words, it lets them “unleash their visions around the world.”
Apple’s witnesses also portrayed the company as obsessed with safeguarding iPhone users’ information. “Privacy, from our point of view, is one of the most important issues of the century, and safety and security are the foundation that privacy is built upon,” Cook testified. Federighi added that Apple’s vetting process for the app store was the “single most important” factor in iPhone security and iPhones would be “incredibly dangerous” without it. Apple contrasted iOS with other operating systems, like Android or even the company’s own macOS, that are plagued by malware. “With iOS, we were able to create something where children—heck, even infants—can operate an iOS device, and be safe in doing so,” said Federighi.
As for all that money Apple made from the app store? It was apparently an afterthought. Witness after witness said Apple didn’t even know how much money the app store brought in. Epic’s attorneys were incredulous. “Doesn’t anybody ever wonder, ‘Hey is the app store profitable?’ Doesn’t that ever come up?” Schiller was asked. “No, it doesn’t come up,” he responded. “That’s not how I look at the business.”
When Epic first decided to take on Apple last year, its CEO, Tim Sweeney, claimed that Epic was fighting for the “basic freedoms of all consumers and developers.” And throughout the trial, Epic painted Apple as a dictator, bullying developers and consumers alike in the pursuit of revenue. Epic argued that the app store has no real competition and that Apple’s profit margins on the app store are unseemly (approximately 80 percent, a number that Apple disputes). Epic also described Apple’s safety and privacy procedures for the app store as something of a joke. The policies were inconsistently and arbitrarily applied, and the app review process wasn’t good enough to stop many fraudulent and inappropriate apps (here’s looking at you, Sex Positions 3D). According to Epic, Apple also gave preference to its own products on the app store, negotiated sweetheart deals with other tech giants like Netflix, and—contrary to its professed devotion to privacy—collected reams and reams of data on unwitting consumers.
Judge Yvonne Gonzalez Rogers was often frustrated with Epic’s strategy of loading the evidentiary record with anecdotes, but—as her questioning of Cook suggests—she was genuinely troubled by some of Apple’s conduct, particularly its “anti-steering” policy, which prohibits developers from using their apps to advertise lower prices outside the app store. “What is the problem with allowing users to have choice, especially in a gaming context, to have a cheaper option for content?” (Cook was blunt in his answer: “If we allowed people to link out like that, we would in essence give up our total return on our IP.”) She also noted that many transactions on iPhones did not trigger the “Apple tax”—banking apps, for example—and wondered why gaming apps were disproportionately affected. She was also moved by a survey of app developers that showed high dissatisfaction with Apple. “It doesn’t seem to me that you feel under pressure or competition to actually change the manner in which you act to address the concerns of the developers,” she scolded Cook.
It’s not certain that Gonzalez Rogers will ultimately rule against Apple. The legal questions in the case are complex and may ultimately be decided on technical details that favor Apple. And during closing arguments on Monday, the judge expressed some reluctance to require Apple to overhaul its business model. “Courts do not run businesses,” she said.
But if Apple were to lose, it would likely be forced to make some changes to the App Store, for instance by allowing app developers to host their own storefronts on iPhones or at least letting them inform consumers that they can find lower prices elsewhere. In its annual report last fall, Apple even warned investors that its “financial condition and operating results could be materially adversely affected” if it had to revamp the app store. Indeed, after Epic filed its lawsuit, Apple cut its commission rate for developers making less than $1 million a year.
“I think Apple has more to lose here, because it has a very lucrative business model at stake. And if Apple loses, other apps are likely to challenge its policy,” said Mark A. Lemley, a law professor at Stanford University. That could cause Apple to lose further control of the app store and its profits.
This case is also a public relations nightmare for a company that has been carefully crafting its image for years and become the most valuable business in the world. As Cook put it during the trial, Apple sees its mission as making “the best products in the world that really enrich people’s lives.” Apple considers itself an upstart—after all, it’s the company that came up with the “Think Different” campaign, directed at “the crazy ones, the misfits, the rebels, the troublemakers.” In that vein, Apple has resisted comparisons to the other Big Tech companies in Silicon Valley. When Facebook was ensnared in the Cambridge Analytica scandal, Cook was asked how he would handle it were he in Mark Zuckerberg’s shoes. “I wouldn’t be in this situation,” he said.
But now Apple is fending off the rebels and troublemakers. And Epic isn’t alone in taking on Apple. The app store is under fire from all directions. In the past couple of years, Apple has reportedly been the target of antitrust investigations in an ever-growing list of countries, and already been fined by some regulators. Most notably, on the eve of the Epic trial, the European Commission charged Apple with antitrust violations related to music streaming apps. An investigation by the United States Department of Justice is also reportedly in the works. There are also class-action lawsuits from developers and consumers, and a recent investigative report by the New York Times uncovered that Apple removes apps that are inconsistent with Chinese government policy.
Legislators in America and Europe also have the app store in their sights. Both the Senate and House have recently held hearings in which app developers testified about Apple’s app store practices. Legislation may be proposed in Congress soon. Europe is moving even faster: The European Parliament is already considering the Digital Markets Act, which would likely prohibit some of Apple’s practices at issue in Epic’s lawsuit. State legislators in the U.S. have also gone after Apple.
“This lawsuit isn’t just for the confines of the courtroom. It’s clearly also a ‘courtroom of public opinion’ case,” said Ederer. “That could be the endgame for Epic. Maybe they don’t get anything out of this trial other than lots and lots of attention on the big profits that Apple is making and then somehow they are going to be regulated.”
“We are really encouraged by some of those actions that are taking place,” said Meghan DiMuzio, executive director of the Coalition for App Fairness, a group of app developers (including Epic) that is pushing for legislative and regulatory action against Apple. (The coalition includes Digital Content Next, a trade association for digital media companies, including Slate.) “It will be very interesting to see how the next couple of months play out, regardless of what happens with the Epic trial. I think we’re reaching a tipping point, and I do think there’s going to be increased attention and increased activity both in the United States and abroad. This is not an issue that’s going to go away anytime soon.”
A decision in this case is unlikely to come until late summer at the earliest. And the loser will certainly appeal, meaning that final resolution is probably years away. In the meantime, there are plenty of other antitrust battles involving Big Tech on the horizon. Facebook and Google are facing lawsuits from the federal government, Amazon just got sued by D.C., and Epic has another matchup with Google (which also threw Fortnite off its app store). As Ederer put, this case is only “the first battle in this prolonged Big Tech antitrust war.”
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May 27, 2021 at 01:12AM
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The Apple Trial Was Absurd. Apple Really Might Lose It. - Slate
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