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Apple v. Epic Games opening statements highlight tech antitrust arguments

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Epic Games started its antitrust trial against Apple today with its argument about why Apple’s control of its App Store for mobile games and apps is an illegal monopoly. Apple responded with an opening statement that painted Epic Games as a big corporation that is overplaying the victim role.

The lawsuit started last August after Epic Games, the maker of the popular Fortnite battle royale blockbuster game, tried to circumvent Apple’s payment system and implement a discount for consumers that avoided Apple’s 30% fee for the App Store’s transactions. Apple kicked Epic’s game out of the App Store, and Epic sued for antitrust violations. (Epic Games also sued Google for similar reasons).

In virtual federal court on Monday, attorneys for both sides made their opening arguments (with slide decks) about why their side should prevail. The case is being tried virtually in the Northern District of California in Oakland, with presiding judge Yvette Gonzalez Rogers. Epic Games CEO Tim Sweeney is currently testifying. The trial is expected to last three weeks.

Epic’s opening statement

Epic’s outside attorney Katherine Forrest, an attorney at Cravath Swaine & Moore, said that Apple’s 30% fee for all transactions on its App Store is nothing more than an unfair tax, as she said Apple hasn’t innovated and that it stands in the way of lower prices for both developers and consumers. She alleged Apple has built a walled garden with the iOS ecosystem using anticompetitive tactics. Apple prevents consumers from moving to other systems because they’re locked in by high switching costs from one platform to another, she said.

“The evidence will show that Epic stands behind its decisions every step of the way,” said Forrest in her opening statement. “When they pick up the iPhone, users enter a different world. They are locked into a closed platform where they can only download apps from Apple, and each and every time they purchase in the app, a 30% tax is imposed.”

Forrest argued that Apple’s strategy to limit choices and lock in customers goes way back to the beginning of the iPhone, which debuted in 2007, followed by the 2008 debut of the App Store.

She cited the words of former CEO Steve Jobs in a 2010 email saying that Apple had moved further than others competitors like Microsoft and Google in achieving ways to “lock customers into our ecosystem.” That same memo said 2011 would be a year of a “holy war with Google.” And in March 2008, Jobs said Apple did not intend to make money with the App Store. But it eventually started turning out “extraordinary profits,” Forrest said.

Above: Steve Jobs wrote this memo in 2010.

Image Credit: Epic Games

It’s like Apple is taking a cut at every stop at a gas station, after a car has been purchased, and it requires an Apple payment at that gas station for every tank of gas, Forrest said. She described Apple as the “largest company the world has ever seen.”

Epic said it is not suing for damages, only for justice for developers.

“Developers became trapped inside the [walled] garden,” Forrest said.

She said Apple’s conduct has resulted in the monopolization of two markets, the iOS app distribution market and the market for paying for app purchases.

Epic Games, which generates billions of dollars from Fortnite’s success, argued that Apple has implemented a series of dependencies and restrictions that prevent switching to competitive alternatives. Epic said Apple takes advantage of “attention density” on iOS that makes iOS users so attractive when it comes to games and other apps. Epic argued that the relevant market for antitrust evaluation is the App Store, as opposed to the larger mobile app and gaming market.

In her evidence, she noted that Apple executive Craig Federighi sent an email to current CEO Tim Cook in December 2019, discussing features “to make our platform more sticky.”

Apple has brought up in its defense the need for better security. Epic argued that Apple’s restrictive policies aren’t made for technical reasons, like security, and rather for business reasons. Forrest cited that reason for preventing developers such as Epic Games from using alternative payments or linking to other transaction systems outside of the App Store. Yet Forrest said an Apple engineer testified that it is not unsafe to use a Mac, even though the Mac doesn’t prohibit developers from using alternatives, in contrast to the tighter control on iOS.

Epic’s attorney said that Apple didn’t do a study comparing its own security to that of others. Forrest said that Epic’s game is far more than a game, as it has features like Party Mode and Creator Mode that are more like features of a larger metaverse, rather than a game.

Forrest showed testimony from Ron Okamoto, the vice president of developer relations at Apple, saying that his company does not routinely negotiate terms of its developer program license agreement. But Epic noted that there are exceptions. And in a message from marketing chief Phil Schiller to executive Eddy Cue, Schiller said that he didn’t think Apple’s 70/30 split with developers would last forever, because of competitive concerns. Epic Games has started its alternative Epic Games Store and it is charging only 12% royalties.

Above: Epic’s argument about its antitrust case.

Image Credit: Epic Games

In that email in July 2011, Schiller said Apple should consider lowering its royalty rate if revenues start surpassing $1 billion as a way to stay competitive. Profits are now in the billions of dollars, with a profit margin of 78%. Epic Games also pointed out obvious security lapses in the App Store, such as Schiller himself complaining that an obvious clone of Temple Run became the No. 1 app in the world. Epic also noted that one virus alone infected 20 million Apple devices.

“Is no one minding the store?” Schiller asked in the email sent in 2012.

Epic also said Apple has acknowledged removing 400,000 apps from the store to date. At the same time, Apple has a list of “whitelisted” developers such as Hulu that get special treatment, Epic said. That is an example of an arbitrary enforcement of App Store policies, Forrest said. Players can alternatively play games via web browsers, but Epic said that the performance of games from the App Store is better than the performance of web games.

“Apple argues that all this confidence is firmly behind the protective barrier of IP rights. There are real legal arguments here that I will not get into except to say that the evidence will show that IP rights do not override competition law as Apple’s own primary witness on this topic already acknowledged in this case,” Forrest said.

Apple’s opening statement

Above: Apple cited Steve Jobs’ words about the App Store from 2007.

Image Credit: Apple

In an opening statement, Karen Dunn, an attorney at Paul Weiss Rifkind Wharton & Garrison and legal representative for Apple, said the company has unleashed a decade of economic growth for developers of games and apps. It described Epic Games as a huge company that no longer wants to pay for Apple’s innovations in creating the iPhone and the App Store. It noted Cook described the App Store as an economic miracle. Apple said there have been more than 180 billion app downloads since 2008.

“Businesses have been launched that would not have otherwise existed,” were it not for the App Store, Dunn said. “Jobs have been created worldwide. … A $20 billion company has decided that it doesn’t want to pay for Apple’s innovations anymore. So Epic is here, demanding that this court force Apple to get into its App Store untested and untrusted apps — something that Apple has never done.”

Apple implemented a 30% fee in 2009. Previously, publishers typically took a 70% fee, Dunn noted. And she noted that almost everyone else in the industry charges a 30% royalty or more now. (Apple amended its rate to 15% for apps with small numbers of downloads, and for the second year of subscriptions).

The Apple attorney said that it created a family-friendly, secure, and reliable app store. Apple noted it handles security well, not to keep people out but to invite developers in because that good security is what consumers wanted. It noted that Epic’s unilateral move to enable linking to other payment systems opened up the App Store to security risks. Apple said allowing “sideloading” to let developers put untested apps into their App Store apps would circumvent security. Apple noted that its iOS devices accounted for only 1.72% of all malware infections, compared to 26.6% for Android and 38.9% for Windows infections.

Above: Apple argues its store has been great for developers.

Image Credit: Apple

Apple’s Cook, Federighi, and Schiller will testify why its policies are needed to protect privacy, security, and other matters. Apple’s attorney said that Epic has dismissed its intellectual property, but it cited Epic’s praise for Apple’s Metal application programming interface (API) for game graphics. Apple noted it listened to developers to institute the freemium model, where apps could be provided as free-to-play with in-app purchases. Apple said that model enabled Epic Games’ riches with Fortnite in-app purchases.

Apple also said that Epic asked for a “side deal” that lowered the royalty rates for Epic, asking for special treatment in the summer of 2020. (Epic noted that Sweeney’s email asking for that side deal asked for the same royalty rates for other developers). Apple characterized Epic’s “hotfix” change that implemented the changes in Fortnite on iOS that enable alternative payments as a kind of sneak attack, as Epic informed Apple of the changes at 2 in the morning on the day it happened.

Above: Apple says there is plenty of competition to its App Store.

Image Credit: Apple

Dunn said that Epic deceived Apple, but gave Microsoft a heads up about the change as an opportunity to highlight the practices on the PC and consoles as opposed to restrictions on mobile devices. Dunn said that suggests that Sweeney viewed the makers of consoles and PCs as competitors to Apple when it comes to app stores.

“There’s a stack of competition (of) winners and losers who will be determined not by monopoly power, but by who picks the right direction that successfully executes on them,” Dunn said. “This is truly remarkable.”

Apple referred to Epic’s move to change Fortnite’s pricing as a security breach itself. During what Epic said was a “hotfix,” Epic enabled its iOS Fortnite app with sideloading of a lower pricing offer on its own Epic Gamessite. That led to the banning. Apple said it would allow Fortnite back onto the App Store if Epic would disable the sideloading.

Apple said it has a host of pro-competitive policies, Epic cannot show that Apple’s policies are anti-competitive or have anti-competitive effects, and that Epic is not right about the relevant market definition, as it is “twisting itself into a pretzel” with its argument. Dunn noted that, after Fortnite was banned on iOS, Epic said that the “party continues” on the PC, Android, Sony, Microsoft, and Nintendo platforms. That means that Apple doesn’t control the distribution of Fortnite, Dunn said.

Dunn said that evidence shows that platform-switching does happen, sometimes as much as 26% of the time when people buy new phones. There are also many alternatives to Apple for digital game transactions, Dunn said. Apple said 95% of its customers can use alternatives to iOS in the home, based on a survey. And it noted that 46.8% of Fortnite revenue comes from the PlayStation platform, compared to just 7% from iOS. And Apple said it accounts for only 23% of all gaming transactions. And it notes that the number of apps on iOS has climbed to 1.8 million and the number users is now at a billion and developer revenue has dramatically increased.

Above: Apple argues that web apps work as well as App Store apps.

Image Credit: Apple

Apple also noted it rejected 150,000 apps last year because they violated its privacy guidelines, and it has removed two million apps because they don’t follow guidelines or don’t work with the latest version of its operating system. Dunn also argued that Apple does not tie its products, meaning you are not required to adopt one product in order to get access to another. Apple also noted that if Epic prevails, other app ecosystems that require a 30% royalty will also fail.

Apple also noted that it dropped royalty rates from 30% to 15% for the second year of a subscription, and also dropped rates similarly for apps from small businesses.

Dunn said that Apple has a host of reasons — security, reliability, protecting intellectual property, quality, preventing liability — for enforcing its policies that Epic wants the court to get rid of. Those reasons are important to everyone, from parents to businesses, Dunn argued.

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Author: Dean Takahashi
Source: Venturebeat

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