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Apple CEO Tim Cook testified as the final witness in the Apple v. Epic Games antitrust trial on Friday, and the poised executive faced a tough round of questioning from the federal judge Yvonne Gonzalez Rogers.
The questions were pointed and gave a rare window into the thinking of YGR, as the judge is frequently referred to, about arguments offered during nearly three weeks of testimony. The 10-minute round of questioning was important because Gonzalez Rogers, who presides over the U.S. District Court for Northern California in Oakland, will decide the case in lieu of a jury.
During her questioning, she brought up a survey that found that 39% of Apple’s developers were unhappy with Apple. Cook shook that off as he said that Apple rejects 40,000 of the the 100,000 apps that it gets every week and that can put it on an adversarial footing with developers. She also noted that the majority of revenue for the Apple App Store comes from games, which are monetized through in-app purchases. Apple doesn’t charge for a cut of advertising in games and apps, and so those developers don’t contribute toward alleviating the costs of running the store.
The judge then 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.
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“It’s almost as if they’re subsidizing everybody else,” Gonzalez Rogers said.
Of the 1.8 million apps in the App Store, about 85% are free. Cook replied free apps have value, as those free apps generate a huge amount of traffic for the store. That benefits everybody, including Apple and game developers, who can get more downloads and eventually more paying users out of the people who are drawn to the free apps. But among those free apps are those like Wells Fargo’s banking app, the judge replied.
“You use gamers to subsidize Wells Fargo,” she said. “It’s disproportionate.”
And she noted that Apple may bring a lot of customers into the store as they download free apps. But after that first time that someone opens a game, the game developers are on their own after that. In other words, she said the game developers are keeping the customers in the games. They’re creating commerce at scale, she said.
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.
This part of the case was important because it exposes some of the narrative that Apple has been espousing in the trial as flip-flopped. Apple has argued that it spends a lot of money on 150,000 application programming interfaces, store maintenance, security, app reviews, and other platform responsibilities. The 30% fees that Apple charges helps it recover those fees and a return on its intellectual property investment, which Cook said amounted to more than $100 billion since the launch of the iPhone. He noted Apple has never raised its royalty rate since it created it, and he noted that the store would be a “toxic mess” without reviews.
How much does the App Store make?
Still, Cook steadfastly denied that he knew how much money Apple makes in profits on the App Store. Epic’s legal expert estimated that Apple’s profit margin on the App Store was 78%. In other words, those are monopoly profits, from Epic’s view.
Gonzalez Rogers’ questions noted that she is aware it’s a two-way street. Games bring enormous value to the iPhone by creating something interesting on the smartphones that people will actually pay for, above and beyond paying for the phone. How Apple treats those game developers, who she noted are not happy with Apple, is a matter for antitrust consideration.
Asked why Apple does not permit apps to advertise a better deal for in-app purchases outside of the site, Cook brought up an analogy.
“It would be akin to Apple down at Best Buy saying ‘Best Buy, put in a sign there where we are advertising that you can go across the street and get an iPhone,’” said Cook.
Cook noted that developers can ask for a user’s email address and make that offer over email. Others observing on Twitter would note that the extension of the analogy would be that Best Buy would also be able to get a royalty every time someone used a Best Buy product to make an additional purchase, like buying blades for a razor.
Cook and other Apple executives Phil Schiller, Craig Federighi, and Tristan Kozmynka said in their testimony that Apple is a good steward of the platform that enables games to reach a much larger audience than was possible on just consoles and PCs. They also said that they face a lot of competition from makers of rival smartphones such as Samsung and others such as Google’s Android platform and Google Play store. Cook referred to Android as the “dominant” mobile ecosystem. Google should take that quote and run it in an ad.
Most of the day had no such fireworks, as Apple’s attorney started with gentle questions that focused on Apple’s prestige and its regard for privacy, safety, and security. Apple has argued that it makes policy decisions on the basis of protecting users from a privacy and security standpoint, rather than how it can make more money. He said that Apple’s $50 billion in research and development spending over the past three years came from its “maniacal focus on customers.” Apple spent $18.8 billion on R&D in 2020.
He said that Apple makes decisions on behalf of the user — something that Epic’s lawyers calls taking away choices — because Apple wants to “take a lot of the complexity away from the user” when it comes to safety, security, and privacy. These decisions help Apple make the best products in the world, he said. He said that privacy in a world where everyone watches your every move affects your freedom of expression.
Competing needs between users and developers have created tension, but Cook said that the company focuses on the users in its decisions. That is, it doesn’t reject a lot of apps because it’s anti-developer, but because those apps represent some kind of risk to users. Cook echoed earlier testimony that Apple’s malware risks on iOS are far lower than it is on Windows and other platforms, with Apple account for 1.7% of malware incidents compared to more than 40% on Windows. Cook said this is how Apple delivers on a “brand promise of privacy, security, and safety.”
The judge also tipped her hand asking why Apple decided to cut the royalty rate for small businesses, those generating less than $1 million in revenues, from 30% to 15%. Apple did that earlier this year, and the judge noted that it wasn’t competition that caused Apple to do that. Cook said the reason was that Apple wanted to do something for small businesses in the pandemic. But the judge wondered whether it was the pressure from antitrust litigation and talk of more regulation, rather than fear of competition, that caused Apple to make that change. Cook repeated his answer and he noted the mindshare of developers has huge competition.
During the trial, Epic’s attorneys tried to make Apple look incompetent when it comes to security. The litigation started last August after Epic broke Apple’s rules and advertised inside Fortnite that users could get a better deal on Vbucks, or the virtual currency of Fortnite, on Epic’s store. It also included in the game a link to sideload the site for making the purchase. Apple prohibits such sideloading on iOS for security reasons.
Epic’s attorneys pointed out that Apple permits sideloading on MacOS, and Apple executive Federighi made a remarkable admission, throwing the Mac under the bus. He said that the level of malware on the Mac is at “unacceptable” levels. Epic’s lawyer probably should have followed up with the question, “Then why are you still selling Macs?” Sadly, those fireworks did not happen. But Apple did extract plenty of evidence suggesting that Epic wasn’t so good at security itself, even to the point where Sweeney had to apologize to Ubisoft Yves Guillemot for having so much download fraud associated with sales of Ubisoft’s The Division 2 game on the Epic Games Store.
When it comes to privacy, Epic’s lawyers noted that Apple will share information about users with the Chinese authorities. Asked why Apple did that, Cook said, “We have to comply with the laws and the restrictions in each of the countries where we operate.”
Asked if Apple would allow Epic Games’ Fortnite back on the store, Cook said, “I think it would be to the benefit of users to have them back on the store, if they abided by the rules. The user is caught in between two companies here, and it’s not the right thing to do to the user.”
Epic is our friend
At the same time, I got the vibe that if Apple operated by an “omerta” code, Sweeney would be on the hit list. Cook said that Epic’s action of pulling a sneak attack and changing the Fortnite app in a “hotfix” update was “malicious” and a “terrible thing to do.” But Epic justified that by saying Apple had tied its hands and that this was the way to demonstrate that Apple’s policies really were draconian and that users had real demand to buy items on an alternative store at lower prices.
A lot of the case has revolved around whether Sweeney was seeking a special deal just for Epic. Apple steadfastly said that it treats everyone fair, including developers of all kinds. Epic pointed out that Apple does not charge a 30% royalty to companies that use apps to sell physical goods, like Amazon or Uber. Phil Schiller said in his testimony that Apple does not want to take responsibility for those purchases and deal with things like safety ratings for children or returns. He also noted that those kinds of companies generated $400 billion in sales of physical goods via apps on Apple in 2019. Otherwise, Apple said it treats everyone fair.
Epic’s lawyer picked that apart, noting that Apple allowed Google to pay a lot of money to be the default search app on iPhones. A government antitrust case has alleged that Google has paid more than $10 billion for that privilege.
Asked about that, Cook said he didn’t remember the exact number.
What’s a game?
Epic also noted that Roblox doesn’t pay the same kind of royalty for games played and purchased on the Roblox platform, when accessed through an app on iOS. Apple’s Kozmynka tried to make the absurd argument that Roblox and the “experiences” on it were not games. He said a game has a “beginning, an ending, and challenges.” That started a whole round of silly and serious questions about what is a game. Roblox even changed reference to it as a platform for experiences, as Roblox doesn’t want to get charged an extra 30% for every iOS transaction.
Apple’s Schiller eventually relented on that absurd argument and conceded Roblox is a game. That wasn’t the only concession in the case, as Epic’s Sweeney made a major admission as well. He had noted that Epic wasn’t asking for damages in the case and wanted fairness for all developers and for Apple to do the right thing and lower royalty rates for everyone. But asked under oath if he would have taken a special deal from Apple to lower the royalty rates on Fortnite, Sweeney said yes.
Friction was a big topic. Sweeney said it was unfair for Apple to push people to the web browser for off-App Store purchases. He said that was inconvenient and it added friction to the process. Cook and others from Apple noted that the web browser was a way for others, such as cloud gaming applications, to avail themselves of iOS users even if their apps went against Apple’s policies and weren’t allowed in apps.
Game dev reactions
I asked for reactions from game developers. Seamus Blackley, a former game maker and co-creator of the Xbox, said, “Cook reinforced my notion that Apple could give a fuck about games outside of the revenue. The respect for the art form and artists that they at least feigned for iTunes isn’t even apparently worth attempting. Not what you were looking for, but that’s what I heard. Made me sad.”
And Larry Kuperman of Night Dive Studios said, “I have been both entertained and embarrassed by some of the things that have come out, but my heart is with Epic on the issue of platforms. They are monopolies, they do act in restraint of trade, and not in the interests of the industry.”
Kenny Rosenblatt, the cofounder of Arkadium, said in a message, “I find it absolutely impossible that Cook said he did not know the profit margin on the App Store business. If that’s true, he is doing his shareholders a disservice.
“If it’s false, he lied on the stand.”
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