Apple v. Epic antitrust trial closing arguments — Judge grills both sides on competition

The Apple v. Epic Games antitrust trial closed today without closing arguments. Rather, the federal judge grilled both sides on the facts of the case and competition law.

It was a lot less dramatic than other trials, but it did give a lot of insight into the mind of the U.S. District Court judge Yvonne Gonzalez Rogers, who asked questions that revealed either her thinking or her devil’s advocacy.

Epic attorney Gary Bornstein and Apple attorney Dan Swanson (and several other lawyers) were on the hot seat, with the judge asking them questions and commenting on their answers in real time — something that you don’t expect to see in corporate cases where testimony and arguments are often heavily scripted. Both attorneys agreed that the definition of the relevant market for antitrust purposes and the possible remedies were the most important subjects for the final Q&A.

In antitrust trials, the definition of the relevant market is critical because it is used to measure whether a company has monopoly power or not. Since Apple has a small percentage of the overall game market (versus Android, console, and PC games), it cannot be said to have monopoly power in games. But if the relevant market is defined as iOS games, then the situation is different as developers are at Apple’s mercy and it is theoretically not so easy for either developers or users to switch to other platforms.

As for remedies, the discussion was fresh. Epic Games wants Apple’s anticompetitive behavior to be curtailed but it hasn’t asked for any specific damages. Apple wants to preserve the status quo, where it has the right to make critical decisions about the App Store and payment systems for in-app purchases.

Epic’s Bornstein said Apple can charge for apps in its App Store but can’t structure its business in an anticompetitive way on in-app payments and restrictive app distribution practices. The proposed remedy is to put an end to those restrictions.

Above: Tim Sweeney is the outspoken CEO of Epic Games.

Image Credit: Epic Games

As we saw with Gonzalez Rogers’ performance on Friday, when she quizzed Apple CEO Tim Cook pointedly for 10 minutes as three weeks of testimony wrapped up, the questions from the judge gave us a window into what she’s been thinking about as she listened to the witnesses. We don’t know if her questions showed a bias in favor of anyone, or if she was playing devil’s advocate in the federal courtroom for the Northern District of California in Oakland. (Like most followers of the case, I listened on an audio conference call).

“It seemed like the judge was somewhat uncomfortable with the amount of market power that Apple had, or at least with the fact that they didn’t seem to have to compete on some level and in terms of price and in terms of responding to developer criticisms,” said Valarie Williams, an antitrust attorney who is not part of the case, in an interview with GamesBeat.

Williams, a partner with Alston & Bird’s Antitrust Practice team, said, “I don’t know how it’s going to come out but I came away convinced that [Gonzalez Rogers thought that] Epic had made the case that Apple has some level of market power that was not being constrained by competition. I think probably Apple was fairly confident going into this, that they were going to win based on the law. And they may still be. But I would think they’ve got to be a little bit more concerned at this point, given all the questions that she asked.”

Opening salvos for relevant markets

Above: Epic Games launched the Free Fortnite Cup with Apple as the villain.

Image Credit: Epic Games

In its opening argument, Epic said Apple no longer earns the 30% fee it has charged since the launch of the App Store, and that Apple should not get a royalty every time someone makes a purchase in a game they have already downloaded. Epic compared this to Apple getting a share of the purchase price of a car and then getting a 30% share of money paid for gas for the car every time the driver refuels.

During the closing session, the judge began with a focus on the foremarket, or the competition for smartphones, and the aftermarket, the competition for in-app purchases. Both sides said the market was two-sided, where users have some choice over choosing phones and developers have a choice over the stores they will use. Apple argues there is plenty of competition among devices.

“There is no substitute for getting the Fortnite app,” said Bornstein, unless there were an alternative app store available on the iPhone or if direct sideloading was allowed. Apple currently doesn’t allow other app stores, and it doesn’t allow sideloading from an app. (It does allow sideloading via the Safari web browser). Epic has argued that the web experience is limited and there is too much friction to make it easy for players.

Gonzalez Rogers said in reply, “Your formulation seems to ignore the reality that customers choose an ecosystem, right? If you buy the Xbox or you buy into a variety of these particular walled-off gardens, you know that that’s what you’re buying into, and you choose to make that decision.”

The judge said there seems to be competition and that’s a dynamic area now, as competition is good and people are figuring out ways to access consumer choices. But she noted your “economic substitutes destroy that consumer choice.”

Bornstein elaborated on that thinking by saying people aren’t aware of the kind of costs they incur inside the app store, as they are aware they may be paying $1,000 for an iPhone but may not be aware that they are paying 30% of their in-app purchases to Apple for life.

But the judge butted in again and said she hasn’t seen evidence that people are making uninformed choices.

“They’re two different ecosystems that they’re moving into,” she said, and consumers know this. But Bornstein disagreed and said customers are not terribly aware of these “downstream costs.” The judge said they wouldn’t think about it because the costs are all the same between iOS and Android regarding the 30% commission.

But Bornstein said that if one platform changed its commission from 30% to something lower, there is little reason to believe this would cause someone to switch platforms. And Apple’s Swanson weighed in that it didn’t matter as the evidence shows that iPhone owners all have a “boatload of devices.”

As if to cut down the Apple lawyer, the judge said, “The 30% number has been there since the inception. And if there was real competition, that number would move. And it hasn’t.”

She added, “If the relevant market here includes developer-side competition, so far there doesn’t seem to be anything that is in the market itself that is pressuring Apple to compete for developers.”

Competition or not?

Above: Apple’s Phil Schiller introduces the iPhone X during a September 2017 launch event in Cupertino.

Image Credit: Reuters / Stephen Lam

Swanson said the prices have changed. Subscriptions in the second year have commissions that go down from 30% to 15%, and as of this year, small businesses are charged 15% instead of 30%. But the judge noted that Apple made that change after it got into antitrust trouble. Swanson noted that the prices for commissions have never gone up, as can happen when a firm has a monopoly.

He also noted that Apple innovated. It enabled new kinds of games (like Fortnite) to run on the iPhone as it raised the quality of the hardware, making iOS games competitive with console and PC games, Swanson said.

Last Friday, while questioning Cook, the judge noted that it seems that Apple is putting the burden of paying for the costs of the store and other investments on the backs of the game developers in a disproportionate way.

“It’s almost as if they’re subsidizing everybody else,” Gonzalez Rogers said.

Replying to that argument, Apple’s Swanson said, that it may not seem fair that some people are paying more than others in terms of a royalty fee, but he said that does not mean an absence of competition in the market. The judge noted that Apple is being sued by many developers, not just Epic. Swanson noted that Apple is making the same 30% fee that others stores like Steam make.

Of course, we don’t know if Apple is making “monopoly profits” in its app store, as Cook and other Apple executives testified that they did not know how much money the App Store makes. Epic’s legal expert estimated that Apple’s profit margin on the App Store was 78%. Apple said that was wrong, but offered no number.

“The numbers are the numbers, and the numbers don’t lie,” Bornstein said.

Epic’s Bornstein said that Apple doesn’t feel the competition, as there was only one occasion back in 2011, when executive Phil Schiller brought up the possibility of lowering the App Store commission.

The judge shot back, “But you can’t ignore the quality issue.” She noted Sweeney acknowledged that the iPhone supports many more games now than it could before, based on that quality of the hardware. Bornstein said that while Apple may innovate with the iPhone to sell more iPhones, it doesn’t innovate on the App Store itself.

Mobile gaming market

But the judge noted that the iPhone market helps developers with things (like featuring games and providing access to application programming interfaces (APIs).

The judge asked Apple what would happen if she defined the relevant market as the mobile game market.

“That would make me very sad,” said Apple attorney Swanson.

Epic’s Bornstein preferred that definition, but he didn’t want the Nintendo Switch to be included in the definition of mobile games, as the games on the Switch are very different ,and it doesn’t have a cellular connection all the time. The judge noted that the iPad often doesn’t have a cellular connection.

One reason for Apple’s answer is that Epic Games showed that when it comes to Fortnite, most of its $631 million in revenue came from iOS, while only $47 million came from Android for a similar number of downloads, around 80 million. That represents a monopoly market share in Epic’s view. The judge indicated she was happy with the relevant market being mobile gaming.

Anticompetitive conduct

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

Image Credit: Apple

As for anticompetitive conduct, Gonzalez Rogers said that California had a case that was a possible legal precedent, as it noted that violating the “spirit of the antitrust laws” can be a problem even without a strict definition of a traditional monopoly under the U.S. Sherman Antitrust Act. In that case, Apple might be found violating the spirit of antitrust laws in California.

They also discussed the Federal Trade Commission v. Qualcomm, a case where an appeals court reversed a victory for the FTC. The appeals court found that the FTC didn’t prove that Qualcomm’s policies didn’t result in a negative effect on consumers in the relevant market.

The question is whether a less restrictive alternative behavior would have produced the results Apple wanted while being less anticompetitive. And the judge noted antitrust law focuses on aggregate markets, not individual companies.

As for Apple’s conduct that hurts competition, Bornstein raised complaints that developers of free apps don’t have to pay commissions, even if they reap ad revenues. Rogers herself brought this up on Friday while grilling Cook.

Apple’s second lawyer, Veronica Moye, offered a rebuttal to a 2017 survey the judge brought up on Friday where she saw that 39% of Apple’s developers on iOS were unhappy with Apple. Swanson produced a study that showed the number was much lower at 22%. Swanson said devs were still happy with the App Store. Williams said that the judge may see this important as Apple’s conduct is not constrained by competitors and the developer unhappiness is a sign of Apple throwing around its weight.

Moye noted how Apple changed commissions on its own, leaving out the fact that Epic sued and then Apple gave the discount to small businesses.

“Does that mean that we have to wait for people to sue Apple?” the judge asked. “How can you reasonably say that should be a competitive driver?”

The judge noted that Epic has complained about the lack of a price decrease for the Apple commission on the App Store, but Epic had ignored other factors like the improving quality of the hardware. He noted the results should be lower prices and higher quality together. Apple and Epic also argued about whether Apple’s developer tools should be considered part of the App Store. Apple argues it invests heavily in them.

“These tools are provided to developers so they can have apps on the store,” Moye said. She said that consumers buy an iOS device because of the brand promise of safety, security, and reliability. If they don’t want it, they can get an Android device.

Anti-steering

Above: The Epic Games Store competes with the App Store.

Image Credit: Epic Games

The attorneys also discussed Apple’s “anti-steering” policies where it said developers can’t advertise a lower price for in-app purchases off the device, like on a website, as Epic advertised with Fortnite before it got booted off the App Store. The U.S. Supreme Court ruled in a case between the State of Ohio and American Express that the company did not violate antitrust law due to a failure to show harm to both sides of a two-sided market, meaning consumers on one side and other merchants on the other.

In this part of the case, the judge said that Apple “hiding” alternative payment options could be anticompetitive based on the ruling in that American Express case. Moye said that the rules were done for efficiency, and Gonzalez Rogers pointed out that Cook said the reason had to do with protecting Apple’s intellectual property.

“We believe it’s a legitimate business justification to not have people have links on the App Store,” Moye said, meaning you can’t link to discounted prices off the App Store.

The judge said that there could be a message saying there are more pricing options online. Moye said that would be like having a sign at Nordstrom’s directing people to buy at Macy’s. The judge noted stores frequently advertise different ways to pay with credit cards or cash, while Apple does not allow alternative payment processing.

Apple also said that developers can email consumers with promotional deals off the App Store. But that’s another point of friction. The judge will have to decide whether matters of market friction are unlawful barriers set up by a monopoly to protect its position. Bornstein said the process for obtaining email addresses is burdensome and that Apple is really trying to limit competition. Moye said there was no evidence that Apple was harmed by the anti-steering rules and she said the very existence of those rules proves Apple has competition.

Bornstein called that “economic nonsense.”

Remedies

Above: Tim Cook, CEO of Apple, is a big advocate for privacy.

Image Credit: Apple

The judge asked about what kind of remedies Epic wanted for the alleged anticompetitive behavior. Epic’s Bornstein said Apple doesn’t need to give away access to the App Store for free. But he said they should be barred from structuring charges in a way that is anti-competition.

But the judge said the effect of barring such moves would mean Epic would pay Apple nothing. Bornstein said Apple could come up with a different way of charging businesses that doesn’t have anti-competitive effects.

He said Apple should be “driven by the market rather than being driven by the monopoly.”

Apple lawyer Richard Doren said that Epic effectively wanted a “compulsory license of all Apple’s intellectual property, where Apple would be paid nothing for the intellectual property that is part of its platform.” If forced to admit third-party app stores on the iPhone, Apple would be prevented from doing a meaningful review of those stores when it comes to things like security and safety. This is what Cook said in his testimony would be a “terrible” outcome. Gonzalez Rogers said that Google has many stores but Epic “sued them anyway.”

But Bornstein said that protecting IP is important but should not protect Apple from antitrust scrutiny. Doren said such scrutiny should only kick in when warranted, like when someone is deemed to be a monopolist. Bornstein said it was “shocking” that Apple’s lawyer wanted Apple to be able to do whatever it wanted.

“Mr. Bornstein, I don’t hear him saying that,” the judge said.

Doren added, “Apple does not claim that IP is a global immunization, a vaccine, one might say, from liability.” But he said it still matters.

The judge seemed to suggest she wanted more guidance on remedies, driven by the law.

“Courts do not run businesses,” she said. “In the cases where courts have found antitrust conduct, how have the courts fashioned remedies to deal with the antitrust conduct?” Should the court order a trillion-dollar company to change its business model, she asked.

Bornstein noted the U.S. government managed to win remedies against Microsoft in its antitrust case without taking over Microsoft. He said the problem was that Apple runs the store that matters. Boren said Epic would turn Apple’s store into a poor imitation of Android with lots of stores.

“Pretty consistently, the courts have tried to stay away from the kind of remedies where they have to monitor the contracts or ongoing business,” Williams said. “So they like structural remedies better where you can do something like divest that business and be done with it. The markets change very quickly in this space.”

Regarding motives, the judge said, “Be clear, right? Epic is here because if relief is granted, they go from a multibillion-dollar company to a maybe-trillion-dollar company, who knows. But they won’t do it out of the kindness of their heart.”

But Bornstein said that Sweeney and Epic have a commitment to helping other developers too, not acting solely in self-interest.

Closing remarks

Above: Epic takes a swing at Apple.

Image Credit: Epic Games

Apple’s Doren brought up security threats again as a reason why Epic shouldn’t be allowed to bring its store to the iPhone and that Apple was doing a good job as the “benevolent overlord of this ecosystem.” But Bornstein said that wasn’t a defense in an antitrust case.

The judge thanked the lawyers and said “you can be fierce advocates and still be professional.” She said she wasn’t sure if she could get the case done by August 13, which was the day that Epic sued Apple in 2020. But she wanted to review the case while the memory of the testimony was fresh. She pointed out she had thousands of pages of testimony to review and that her decision would be in writing.

It’s going to be a complicated decision, Williams said. The judge has to decide what the relevant market is and if Apple has monopoly power. Then she has to look at the anticompetitive acts and if there are pro-competitive benefits in the behavior, and then she has to find a remedy.

“She’s got a job on her hands,” Williams said.

And even if Apple wins the trial against Epic, its woes may not be over. Epic helped round up other app makers who were not happy with Apple in the Coalition for App Fairness. They brought up that Apple faces regulatory scrutiny from the U.S. Senate and the European Commission, as well as regulators in Australia.

Meghan DiMuzio, the executive director of CAF, and Public Knowledge’s John Bergmayer wrote in an op-ed in Wired that Apple’s App Store is anticompetitive.

“The App Store’s draconian demands prevent app creators from making changes that would help consumers, or from making helpful apps in the first place,” they wrote. “Apple and Google representatives recently found themselves in front of a Senate antitrust hearing about their app store practices. Apple, in particular, came under fire because it has turned on the developers that made the platform so valuable, and consumers are paying the price. For example, the dating app company Match testified that App Store fees are its single greatest expense. Spotify shared how Apple’s fees forced them to raise prices on consumers as Apple launched a competing streaming service, Apple Music. And Tile argued that Apple has used its platform to disadvantage Tile’s products and pave the way for Apple’s competing AirTags.”