By Jon Swartz
Before Epic Games Inc. put the finishing touches on its historic antitrust case against Apple Inc. on Friday, the iPhone maker offered a preview of what should be a vigorous defense next week.
In a strongly worded letter to a Senate Judiciary subcommittee Friday, Apple (NAS:AAPL) Chief Compliance Officer Kyle Andeer, who testified last month to the Senate on the influence of app stores, pushed back hard on anticompetitive claims.
“The developers who testified at the hearing were among some of the largest and most successful on the App Store, and their testimony was focused more on grievances related to business disputes with Apple than on competition concerns with the App Store,” wrote Andeer. “Rather than demonstrating a problem with competition, these witnesses—representing companies that have thrived in Apple’s ecosystem—showcased how Apple and the iOS ecosystem foster competition.”
The letter, which pointedly called out the testimony of executives from Spotify Technology (NYS:SPOT) , Match Group Inc. (NAS:MTCH) , and Tile, could just as well included Epic Games, which is suing Apple in federal court in Oakland, Calif.
Epic has spent the better part of two weeks making its case that Apple and its ultra-successful App Store gouges developers with an onerous 30% commission fee and it suppresses competition from rival apps.
Through witnesses that included its chief executive Tim Sweeney, executives from Microsoft Corp. (NAS:MSFT) and Nvidia Corp. (NAS:NVDA) , and a string of economic experts, Epic sought to establish three primary goals.
Defining a relevant market. The crux of the bench trial, which will be decided by federal Judge Yvonne Gonzalez Rogers, rests on whether Epic can establish Apple leveraged a monopoly in the smartphone operating system via its iOS app distribution market.
Read more: Epic takes aim at Apple’s financial advantage in App Store model
“Apple has substantial market power” in smartphone operating systems, Epic’s main economic expert, David Evans, chairman of Global Economics Group, said. Apple and Google’s (NAS:GOOGL) (NAS:GOOG) Android, he asserted, are a duopoly that have controlled 100% of the smartphone OS since 2013. Globally, excluding China, the split is 60%-40% Android; in the U.S., it’s about even, he said.
“Developers need to be where customers are,” Evans said. “They have to create iOS apps to reach iOS users and have to have an Android app to reach Android users.”
“My opinion is Apple has monopoly power in the iOS app distribution market” based on “high and persistent profit margins,” Evans said. (Those numbers, calculated by Evans based on data Apple provided in the lawsuit, were only shown to Gonzalez Rogers.)
“Apple’s restrictions harm competition” for app developers and consumers, leading to higher prices, poorer distribution and slower innovation, Evans concluded.
Apple has consistently countered that the App Store is piece of a constellation of digital-distribution platforms — Sony Group Corp. (NYS:SONY) , Samsung Electronics Co. Ltd. (KRX:KR:005930) , Nintendo Co. Ltd. (TKS:JP:7974) , and Google Play are among other options — that charge an industry-standard 30% commission fee for most developers.
Restricting the cloud-gaming market. Microsoft and Nvidia officials buttressed Epic’s contention that App Store restrictions created a lopsided competitive landscape for Apple Arcade, a videogame subscription service available on iOS.
Lori Wright, vice president of business development at Microsoft, revealed the software giant spent four months discussing with Apple how to launch xCloud as a native app, only to claim Apple demanded Microsoft, Nvidia, and others list cloud games as separate apps.
Submitting Xbox games one-by-one was burdensome, forcing Microsoft to resort to making a web app, Wright testified. This not only represented a technological hurdle for Microsoft, she said, but also inconvenienced consumers. Users aren’t used to installing apps from the web on their iPhones.
Read more: Apple vs. Epic: Why cloud gaming became a hot topic at landmark antitrust trial
Aashish Patel, Nvidia’s director of product management, earlier explained how the company had tried to get its GeForce Now cloud gaming service into the App Store, but faced the same restrictions as Microsoft. “There are less controls over the streaming, so you could argue in some ways it’s worse,” than a native app, he said.
A member of Apple’s legal team characterized the criticisms as the “cherry-picking” of a few disgruntled developers, then leveled a broadside at Microsoft. He called out the company’s “hypocrisy” for its posture on the case in light of its yearslong case with the Justice Department over anticompetitive business practices.
(Late Friday, a member of Apple’s legal team noted that five Epic witnesses had ties to Microsoft — more than the total number of witnesses from Epic. The Apple rep jokingly referred to the case as a Microsoft trial with Epic as plaintiff. )
“I might be biased, but I think that what we do is incredibly unique,” Matthew Fischer, vice president of the App Store, said under questioning from an Apple lawyer. “I have not see any marketplace that distributes apps or games do what we are doing in terms of providing marketing and editorial support like this to developers.”
Fischer detailed a largely positive relationship with Epic Games since 2010, but said he had not talked to a company representative since June 2020 and was “blindsided” by Sweeney’s email in August 2020 critical of Apple.
Create public pressure for antitrust legislation. Apple has long contended that Epic’s lawsuit is a PR campaign in search of a legal strategy, and at least two legal experts agree.
Florian Ederer, an associate professor of economics at Yale School of Management, lauded Epic’s legal team but expects Apple to win the case. The longer-term strategy for Epic, he told MarketWatch, is to “get some form of long-term regulation” on commissions demanded by digital platforms.
“This is about lining up other participants [such as Sony and Microsoft] in the ecosystem against Apple, to upset consumers, and force Washington to enact legislation,” Larry Downes, project director at the Georgetown’s Center for Business and Public Policy’s Evolution of Regulation and Innovation project, told MarketWatch. Downes, too, anticipates an Apple victory in court.
Read more: Apple v. Epic: Time is running out for Epic to make its antitrust case
Apple, which has benefited from a ruling that let it present its expert witnesses immediately following Epic’s witnesses, could begin its defense as early as Monday. Expect the company to present arguments that mirror some of the points in executive Andeer’s letter to the Senate on Friday.
Apple Fellow Phil Schiller, who helped oversee Apple’s products and marketing for 30 years, is expected to be the company’s first witness. His task is likely to narrate the success story of the App Store, from its inception in 2008 to what Apple now calls an “economic miracle” for thousands of developers.
Earlier this week, one Apple expert witness reinforced that notion that competition and output is thriving on the App Store.
Between 2010 and 2018, the number of transactions increased 1,200% on the store and revenue skyrocketed 2,600%, asserted economics professor Loren Hitt, of the University of Pennsylvania Wharton School of Business, who examined 60 billion transactions in the App Store during those eight years.
Apple’s list of witnesses next week will most likely culminate with CEO Tim Cook. Following a short rebuttal from Epic, the trial should conclude the week of May 24.