Epic Games Inc. Chief Executive Tim Sweeney said he reluctantly decided to sue Apple Inc. despite his regard for the company and its products, as he set in motion Monday one of high tech’s most important court cases.
“It took me a very long time to conclude about Apple’s negative impact” and its economic harm to Epic and other developers, Sweeney said in the opening day in Epic’s lawsuit against Apple AAPL, +0.82% in federal court in Oakland, Calif. Epic claims Apple extracts money from developers by abusing its market power through its App Store; Apple’s counterclaims that Epic breached its contract.
“Apple’s policies have kept us from implementing the future we wanted on Fortnite,” said Sweeney, the first witness in what should be a three-week trial. “I support the right for Apple to offer a purchasing system. It’s about the ability to offer a competing purchasing system so developers can choose.”
Sweeney denied the lawsuit was prompted by flagging interest in the popular videogame “Fortnite,” when pressed by an Apple lawyer under cross-examination. When further pressed if Epic had a quarrel with paying a 30% commission on other platforms, Sweeney said he wished Apple influenced others to reduce their fees.
Apple’s suffocating policies with its App Store underscore the difficulties developers face on the proprietary digital platform, according to Sweeney.
Sweeney’s halting, mumbling testimony highlighted a rough first day in court for Epic, in which hoped to make a strong first impression. But a problem with Sweeney’s microphone, and some difficulty on his part in explaining the impetus for the lawsuit, didn’t help. Sweeney, who could bounce back in testimony tomorrow, also was burdened with thankless questions such as “What is a console?” that didn’t advance Epic’s case.
It wasn’t entirely Sweeney’s fault. The trial got off to an inauspicious start when two public phone lines and an audio press line experienced technical difficulties, delaying its start more than 20 minutes. The mute function on the public lines did not work, turning both into glorified party lines of gamers screaming “Epic Games!” and “Free Fortnite!”
What’s at stake is nothing less than billions of dollars for thousands of mobile developers, many of whom depend greatly on the App Store to sell their products but consider Apple’s 15% to 30% commission fee onerous. Their dispute has spilled overseas, where the European Commission last week charged Apple’s restrictions on developers unfairly influenced the music-streaming market following a complaint from Spotify Technology SPOT, -1.76% in 2019 that parallels those of Epic.
Two clashing narratives emerged in the trial’s first few hours: While Epic insists it was forced to take legal action against Apple for what it claims are crippling business conditions, Apple argues Epic is seeking an unfair advantage over thousands of other developers on the App Store to maximize revenue. Apple repeatedly mentioned plenty of other gaming platforms that charge a similar commission, some of them used by Epic to promote its products.
Apple’s monopolistic behavior was aided in large part by a digital “walled garden” that locked in developers and consumers, Epic attorney Katherine Forrest said in the company’s opening statement to start the trial Monday. The anticompetitive attitude started with late Apple co-founder Steve Jobs, she argued, and flourished through the company’s current executive team of CEO Tim Cook; Eddy Cue, senior vice president of internet software and services; Craig Federighi, Apple’s senior vice president of software engineering; and others.
“Epic finally said enough” in “taking on the world’s largest company,” Forrest said.
Epic argued Apple’s iOS does not need to be a “walled garden” because it is based on the more open MacOS, which lets consumers download apps from other publishers. Therefore, Epic wants iOS users to be able to download directly from the Epic Games Store.
“The facts will support an iOS app distribution market and a totally separate iOS in-app payment solutions market,” she said.
“Apple’s repeated statements that we have never increased pricing is false,” Forrest said. “Prior to 2009, developers did not have to pay Apple anything for purchases, and after 2009 [when the App Store was already profitable, with a 77.8% profit margin] they did. Prior to 2011, they did not have to pay 30% for subscriptions, after 2011, they did.”
(Apple disputes the 77.8% figure. Last month, Kyle Andeer, Apple’s chief compliance offer, told Congress the company does not report profit-loss for the App Store.)
“There’s a name for businesses that set prices without regard to cost: monopoly,” Forrest said.
She concluded that evidence will “show that iOS is far bigger and far more entrenched in every fractional way that matters than the Kodak copier at issue in the leading single-brand market case [in 1992] ever was.” She further compared the iPhone maker to a car dealer taking a 30% commission on the transaction every time a car owner buys gas.
Apple attorney Karen Dunn countered that Epic’s suit is a “fundamental assault on Apple’s secure and integrated ecosystem, which is what has made all of that growth possible. Epic, a $28 billion company, has decided it doesn’t want to pay for Apple’s innovations anymore. So Epic is here, demanding that this court force Apple to let into its App Store, untested and untrusted apps and app stores, which is something Apple has never done.” (Sweeney later confirmed under cross-examination that he is the controlling shareholder of Epic Games.)
Apple did not create a secure and integrated ecosystem to keep people out but to “invite developers in,” Dunn said in Apple’s opening statement.
“Epic is demanding that this court undo Apple’s fundamental design decisions” to protect the security, privacy, reliability and quality that customers have come to expect from Apple, Dunn said.
“You will even hear Tim Sweeney acknowledge that privacy and security are competitive differentiators for Apple — it gives consumers a choice between the iPhone and its competitors,” Dunn said. “And that choice is made possible by the very same App Store rules that Epic is demanding this court to get rid of.”
A major thrust of her presentation centered on “Project Liberty,” an internal scheme against mobile platform fees by Epic to break from the App Store and broker a side deal with Apple to avoid commission fees.
“But Apple did not agree,” Dunn said. “Apple refused to compromise the equal application of its guidelines so Epic went a step further, willingly and flagrantly breaching its agreements with Apple. Epic has stipulated to its breach of contract, and its conduct in the summer of 2020 will defeat all of its affirmative defenses.”
As Epic was negotiating with Apple, it had come up with its own payment system, or “hot fix,” to bypass the App Store and hinted as much to Microsoft Corp. MSFT, -0.13%, Dunn said.
Another Epic misnomer is the unfairness of Apple’s 30% commission, an industry standard already charged by Google parent Alphabet Inc. GOOGL, -0.44% GOOG, -0.62%, Samsung Electronics Co. Ltd. 005930, +0.49%, Microsoft, Amazon.com Inc. AMZN, -2.33%, and others, according to Dunn. The Steam platform, she continued, from Valve Corp., helped establish the 30% standard for digital revenue sharing in 2003. The App Store was launched in 2008.
According to Apple, Fortnite has made $6 billion on PlayStation, $3.5 billion on Xbox, and much less via Apple — yet it does not object to their similar commission fees.
“Epic’s proposed market is too narrow because there are many, many platforms where consumers and developers engage in game transactions,” she said. “PCs, Mac, iPhone, Android, consoles including the Xbox, PlayStation and switch. Even within devices, there are sometimes multiple options.”
“Epic’s proposed single-brand market is also too narrow because consumers multi-home,” Dunn said. “They use more than one device to play games. This is one result of a survey done by our survey expert — it found that 95% of iOS users regularly use devices other than their iOS device, like PC, Mac or a game console.”
What is more, she said that as more developers and users partake in the App Store, Apple’s commissions for game apps were 8.1% in 2019 and 4.7% for all apps. Some 84% of developers are offering apps for free, she added.
“Epic speculates about a world where Apple was a different company and asks this court to place a big bet that that world is better than the one we live in. But it isn’t,” Dunn concluded. “The result for consumers and developers will be: Less security. Less privacy. Less reliability. Lower quality. Less choice. All of the things the antitrust laws seek to protect.”
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