Epic Games and Apple are battling it out in what's being called one of the most important tech antitrust cases in years.
Josh Miller/CNETFortnite maker Epic Games says Apple has lost its way. The company co-founded by Steve Jobs positioned itself as an underdog to market leaders like Microsoft. But Apple's hold over the 1 billion active iPhones in the world has made it a monopolist, Epic argued, that needs to be forced to change. Apple, meanwhile, says Epic just wants a free ride on its innovative technology. It's now up to a US District Court judge in California to decide.
The two tech giants on Monday made their final pitches to US District Court Judge Yvonne Gonzalez Rogers, who peppered them with questions undercutting each of their arguments as she sought answers to some of the toughest antitrust questions the tech industry has faced in years.
She pressed Apple on the 30% commission it takes on purchases inside apps for digital items like a subscription to a music service, or a new look for a video game character. Throughout the trial, she's frequently expressed concerns about Apple's lack of competition for those in-app purchases, which she's suggested kept the up to 30% commission where it was for so long.
At the same time, she said that if Epic were allowed to run its own app store on the iPhone, or offer an alternative in-app payments system, it would hurt Apple's ability to recoup costs for its research and development. At one point, she even pressed the lawyers for answers about how to fashion a ruling with "remedies" that would answer both company's concerns.
"How have the courts fashioned remedies to deal with the antitrust conduct?" she asked. "Have they in fact said, 'You billion-dollar company, trillion-dollar company, you must fundamentally change the business model under which you are operating.' Have they ever done that?"
The nagging question Rogers and both companies face have larger ramifications beyond the courtroom. Neither company has been able to agree on a settlement, and the fundamental questions Epic has raised by asking the court to upend the way Apple's App Store works almost certainly means whoever loses this case will appeal.
The debate capped three weeks of trial, where Epic and Apple used the court to air grievances and knock one another's businesses while promoting their own. Apple executives used their time on the stand to defend their company's approach as providing security and reliability, in addition to offset costs for regular software upgrades it gives to developers and customers for free. They also said the payment processing and strict app store rules help it stand out from Google's competing and more widely used Android software, which allows "side-loading" apps and alternative app stores.
Fortnite is one of the most popular games in the world.
EpicAs the executives argued, Apple is not a monopolistic power, but a benevolent tech giant.
But that persona changed when Epic's hit Fortnite game was kicked from Apple's App Store in August after Epic CEO Tim Sweeney approved an update to his company's app purposely breaking Apple's rules against using alternative payment processing.
The outcome of the lawsuit could change everything we know about how Apple's App Store works, and Google's Play store too. And ultimately, it could change the way we see antitrust in the age of Big Tech.
Rogers could force Apple to disregard its concerns over app security, allowing alternative app stores and payment processing into its devices. Legal experts, lawmakers and regulators are closely watching, seeing the case as a first look at how antitrust laws could apply to tech giants.
Because the proceedings are a bench trial, the judge will decide the case, not a jury. As a result, the judge's tough questioning pushed the companies to answer details they may have glossed over with a jury.
With the trial portion of the case now over, Rogers said she plans to issue her ruling in writing sometime in the next couple of months. Earlier, she'd unsuccessfully tried to joke it would be by Aug. 13, the one-year anniversary of Fortnite being kicked from the App Store. Most people missed the reference.
While we wait for her decision, below are some of the revelations and notable moments that came from the trial:
Opening salvos and Sweeney's testimony. When Katherine Forrest began her opening statement for Epic Games in its battle against Apple in a California courtroom on May 3, she blasted the iPhone maker as a monopolist, holding app makers hostage to its onerous licensing terms and commission structure, taking up to 30% off subscriptions and other sales without explicitly telling users. But when she asked a seemingly benign question of Sweeney on May 4, she revealed potential hypocrisy on her side too.
In the summer of 2020, Sweeney sent emails to Apple executives, asking them to allow his company to offer its own app store for iPhones, effectively an alternative to the system Apple's used since 2008. Apple has only allowed app developers to offer programs to iPhone and iPad users by submitting apps to its store where they go under review before being offered for sale or for free. Apple also requires all app developers to use its payment processing service if they want to sell subscriptions or in-app items, like a new look for a character or a power-up for their next turn.
Sweeney at the time appeared to be seeking a separate and special deal with Apple, something that didn't fit with the company's blustery lawsuit in which Forrest had claimed, "Epic is suing for change, not just for itself, but for all developers."
"The market will not self-correct," she added. "That requires the intervention of force, more powerful than even the largest company in the world has ever seen: our justice system."
The next day, on May 4, she asked the soft-spoken Sweeney whether he'd have accepted a side deal with Apple, effectively getting special treatment while other app developers continue losing out. "Yes, I would have," he said.
Sweeney prefers an iPhone. When Apple's lawyer asked if part of the reason Sweeney prefers the device is Apple's treatment of customer data, privacy and security, he responded, "correct." He'd been handed Android devices but confirmed he gave them away.
Apple CEO Tim Cook's typical calm and friendly demeanor didn't stop Rogers from asking tough questions.
AppleThe other Tim didn't get away so easily. Tim Cook, Apple's CEO, didn't offer much new information in his testimony on the second-to-last day of the trial. He did share an anecdote about why Jobs restructured all of Apple under one profit and loss statement. As Cook tells it, when Jobs returned to Apple in the late 1990s, he found each of its divisions -- like education -- were producing a profit on the profit and loss statement, but the company itself was losing money.
But the last 15 minutes of his testimony changed the tenor of the day, when Rogers began asking questions after lawyers for Apple and Epic were done.
Rogers said that despite Apple saying competition is good, "You don't have competition for those in-app purchases." Cook responded that the competition is with other platforms like the Microsoft Xbox, Sony PlayStation or Nintendo Switch.
She then brought up Apple's small-business program, which lowered App Store commissions to 15% for developers making less than $1 million per year. "At least from what I've seen thus far, that really wasn't the result of competition," she said. "That's the result of pressure you're feeling from investigations and lawsuits, not competition."
Cook responded, "It was the result of feeling like we should do something from a COVID point of view, and then electing instead of doing something temporary to do something permanent."
Rogers pressed further. "It wasn't competition," she said.
"It was competition in that after we dropped to 15, Google dropped to 15," Cook said.
Rogers interrupted as he continued, "I understand perhaps that Google changed its price, but your action wasn't the result of competition."
Cook said it was the result of wanting to do something for small developers.
Games is one of Apple's biggest money-makers. Rogers noted that "a significant portion of in-app purchases come from gamers," and Cook agreed.
"So what is the problem with allowing users to have choice, especially in a gaming context, to have a cheaper option for content?" she asked.
Cook responded that they do have choice today, "They have choice between many different Android models of a smartphone, or an iPhone that has a certain set of principles behind it, including safety and security and privacy."
After Rogers pressed further, Cook added that in-app purchases are how Apple gets a return on its intellectual property, an argument his lawyers and executives raised earlier.
"But you could also monetize a different way, couldn't you?" Rogers asked. She added that the gaming industry is generating "a disproportionate amount of money" and effectively subsidizing everyone else.
Cook said the free apps, which make up most of the apps in the store, do get a kind of subsidy, but he said they also attract people into the store, which benefits the companies by giving them more of an audience to sell to. "We need a return on our IP," he said, adding that there are 150,000 APIs that Apple maintains, along with customer service, transactions and other things.
Rogers then noted that her Wells Fargo banking app is free, which means a massive company is getting a free ride on Apple's App Store after paying the $99 developer fee.
"But you're charging gamers to subsidize Wells Fargo," she said. "It's just a choice of a model."
Cook agreed that Apple "made a choice. There are clearly other ways to monetize and we chose this one because we think this is the best way," he said.
"Well, it's quite lucrative," Rogers said.
Should the App Store be the only app store? That's a question Rogers may have to answer.
Angela Lang/CNETEpic argues app scams undermine App Store. One way Epic's lawyers and executives attacked Apple's App Store was to highlight scam apps, stories from upset developers who complained that Apple played favorites and who gave instances where Apple generally didn't deliver on its promises.
While Epic saw that as a symptom of Apple's problems, the iPhone maker tried to frame it as a strength.
"The mistakes that I've been shown originated from customer and developer complaints," Trystan Kosmynka, a senior director of marketing at Apple, said in court May 7. Rather than seeing these messages as signs the App Store team is struggling to do its job, he said, the activity shows people trust the store and want to help keep it safe. "I'm glad they're passionate and email our executives reporting the concerns and that we investigate them quickly and improve on it," he said.
There were some notable concerns Epic raised, though, including a copycat app of its Fortnite game.
Rogers asked tough questions of Apple too. When Kosmynka described Apple's review process, he added that the App Store team told developers it would approve 50% of apps in 24 hours and 90% within 48 hours, depending on the app. So Rogers asked if Apple delivered on those promises. "Absolutely," Kosmynka said, revealing that Apple currently approves 96% of apps within 24 hours.
She also challenged Apple's argument that restricting the app distribution to just the App Store is a worthwhile tradeoff. "One of the problems with limiting competition is that you don't get innovation, or at least that's one of the concerns," Rogers said. She also asked if Apple had an outside party independently review what's on the App Store and pay bounties, similar to how tech companies do for security researchers who find vulnerabilities in their products.
Epic says Apple isn't as invested in its partner's success. During his testimony, Epic marketing director Matthew Weissinger said Apple doesn't help market Fortnite as much as Microsoft, Sony and Nintendo do for their Xbox, PlayStation and Switch. "We create all sorts of engagement, hours of engagement inside of Fortnite," Weissinger testified May 10. "And then, at the last minute, Apple kind of injects themselves and says, 'We require 30% on this as well.'"
Epic executives said they didn't mind similar commissions they pay to Microsoft, Sony and Nintendo on their stores because their devices are typically sold at a loss, making up the difference with video game royalties. (This is often called the "razor-and-razor-blades" business model, in which the razor is sold for next to nothing, while the sales of blades provide companies with their profit.) Apple, meanwhile, makes a profit off every iPhone sold.
Epic argued that profit models in the video game industry incentivize hardware makers to partner with developers because royalties from those game sales help make up the cost on the console. As a result, Epic said, the video game console makers have sponsored in-person and in-game events as part of their marketing. That's something Apple doesn't really do.
But Rogers didn't appear convinced. The console makers, the judge said, "were promoting their product whenever you did a collaboration with them." So how was it different from Apple?
Weissinger said it came down to the types of people Apple funneled to Fortnite too. Console gamers are there to play a video game. The App Store has a lot more people who might be looking for more than a Fortnite fix. "It's not necessarily people making the purchase, it also is, like, all sorts of random folks who are going through that experience. It might be somebody looking for a fitness app or something like that," he said. The App Store, he argued, "just provides a less qualified audience or less qualified consumer."
Not just Project xCloud. Microsoft has been vocally complaining about Apple's app review process and its rules against game streaming services, like its formerly named Project xCloud Xbox service. In cross-examination with Nvidia's Aashish Patel, a director of product management who helped oversee its GeForce Now streaming service, Apple's lawyer said a streaming app from Nvidia had also been denied. In a steady stream, Apple's lawyer asked, "You're not a neutral observer in this dispute, correct? You want Epic to win this case, correct? Just maybe you're upset that Apple has rejected your app as a native app and you're not happy about that?" Patel said he was disappointed.
Xbox loses money -- kinda. One of Epic's arguments is that Apple's business model is to profit from the iPhone at sale. Microsoft's Xbox and Sony's PlayStation follow the razor-and-razor-blades model, where they sell the console at a loss (the razor) and then sell the video games and accessories at a profit (razor blades). Though this has been commonly known, a Microsoft representative confirmed during trial that its Xbox itself has never turned a profit.
Apple spends a lot on events. We all know Apple events are slick and tightly choreographed. But now we're learning they cost a bundle too. Schiller told the court on May 17 that Apple spends about $50 million each year on its Worldwide Developers Conference, also known as WWDC. Depending on how you see the return on investment there, Schiller said about 25 million people viewed the event before it was made widely public and free last year amid the coronavirus pandemic. Now it's about 50 million people. And, he added, aside from ticket sales when it's an in-person event and the $99 annual developer fee, Apple doesn't charge for WWDC. (Apple is holding its annual WWDC entirely online again this year starting June 7.)
Apple spends a lot on research and development. As part of his testimony on May 17, Schiller revealed that Apple's building a facility on its Apple Park "spaceship" campus specifically for developers. He didn't say much else about it, but the detail was part of a larger point he was making in testimony about how much Apple spends on research and development for its software, hardware and developer ecosystem, effectively justifying the 30% commission it charges from in-app purchases. He also noted that Apple's spent $100 billion specifically on R&D in the last 15 years, including for retina displays, its in-house A-series and M-series chips and the software that helps power them.
Apple feels like it bent over backward for Epic. Apple's head of business development for games in the App Store, Mike Schmid, described his company's moves as reasonable and supportive of Epic before lawsuits began flying in August. As the person at Apple who most interacted with Epic, he described a friendly relationship with his counterparts and described how Apple supported Fortnite.
Apple had apparently rushed its review process so often for Fortnite that Apple's own app review team had begun to push back. "I truly understand the plight of game developers especially that are operating at this speed," Schmid said during testimony, in which he praised Epic's speed of delivering updates to users.
"Epic is also suing Google on the exact model you're arguing should be the result in this case," Rogers says. "On Google's platform, there are many stores, and yet Epic sued them anyway."
"Apple is bigger, more powerful, more entrenched and more pernicious than monopolies of yesteryear," Epic said in a filing kicking off a lawsuit in August last year. "Apple's size and reach far exceeds that of any technology monopolist in history."
Apple's got gamers in its top ranks. There are two types of executives in the entertainment industry: Businessmen who are comfortable running organizations, and people who actually watch, play and regularly experience what their company has to offer. Schiller and Schmid both say they're in the latter camp. Schiller said he owns a Microsoft Xbox, Sony PlayStation and Nintendo Switch. Schmid meanwhile said he and his family play many games, including Fortnite. "Fortnite was the hottest game at the time. I personally played Fortnite. My family played Fortnite, we connected over it. My son played it on the iPad, my wife played it on PlayStation, I played it on my iPad with the controller," Schmid said.
Phil Schiller may oversee the App Store but doesn't run it like a typical store. Amid all the questions Schiller answered, one that Epic's lawyers focused on was whether and when he knew the App Store was profitable. Schiller described in the beginning of his testimony that when he was brought back to Apple to help co-founder Steve Jobs remake the company, one quick big change was to reorganize all of Apple's divisions under one P&L.
That set him up for when Epic's lawyers pushed this idea, criticizing Schiller's testimony. "Apple can do accelerometers, and machine learning, and have some of the most sophisticated technology around, and it can't figure out if the App Store is profitable," Epic's lawyer asked at one point. "Is that what you're saying?" Indeed, Schiller said, the focus at Apple is to support the larger company, not count individual division profits.
Apple CEO Tim Cook offered similar testimony, and was met with similar skepticism.
Schiller on why games are different. Apple's pushed back hard on Epic's efforts to offer its own payment processing or even to run its own app store on the iPhone, but it doesn't treat all companies that way. Notably, companies like Amazon, eBay and other real-world goods stores don't have to use Apple's payment processing like others do, and thus don't hand up to 30% of their revenue to Apple.
He also defended Apple's approach to streaming game services from Xbox, Google and Sony, as opposed to video-streaming apps like Netflix, saying privacy policies and logins typically differ between games, regardless of whether they're in a catalog. "It isn't about movies. It's an Apps and Games Store," he said. "I do think there's a difference there."
Apple says it's always been worried about security. Schiller said that even before the iPhone's launch in 2007, Apple executives were concerned about the sensitive data like the phone's contacts database somehow leaking onto the internet. And when Apple saw people "jailbreaking" their original iPhones to install apps from outside developers, the company decided to announce its first software development kit for the iPhone before it was ready, and to create the App Store as a way to manage what apps were going to the phone.
"We were very concerned that this would create unreliable and unstable devices," Schiller said. "This was our way to quickly say, 'Hold on just wait, we're going to address this and we want to do something safe and reliable for you.'"
Apple's lawyers also cited a 2007 public letter from company co-founder Jobs, in which he outlined Apple's focus on privacy. "As our phones become more powerful, these malicious programs will become more dangerous," he wrote at the time. "And since the iPhone is the most advanced phone ever, it will be a highly visible target."
Schiller said it's even more so the case now.
Marketing isn't just marketing. Apple's known for its advertising and marketing, and has won several industry awards for it. Schiller said part of what sets Apple's product marketing teams apart is that they're part of the development process almost from the start, giving input to engineers and helping to shape the project. He even noted that he helped come up with the idea for the wheel on the iPod music players. "Apple product marketing is entirely involved in the creation of our products from the very first concept, up to and through when we bring it to market," Schiller said.
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