Epic vs Apple: what we learnt from the trial that could change the iPhone

When Epic Games, the maker of Fortnite, opened its case against Apple at the start of this month, accusing the iPhone maker of operating an illegal monopoly, the legal analyst Nick Rodelli gave the software developer a one-in-three chance of prevailing. Others put the odds even lower.

By the time the judge retired on Monday to consider her verdict, which could have big consequences for a billion iPhone users and thousands of app developers — not to mention Apple’s profits — the case looked harder to call.

Rodelli, who works for the investment research firm CFRA, put the chances at 55 per cent in Epic’s favour. Apple, he said, had lost credibility by pleading ignorance on key questions, while Judge Yvonne Gonzalez Rogers appeared to be more interested in present-day business facts than older legal precedents — a plus for Epic, which has conceded its case lies on the “frontiers” of antitrust theory.

Here are five takeaways from the trial:

App Store margins

Apple threw Fortnite out of the App Store last year when Epic tried to get round the 30 per cent commission that the iPhone maker charges on app sales and purchases made inside the smartphone’s games.

Epic claimed that the App Store operates with a 78 per cent profit margin and that this reflects a monopolistic stranglehold on developers, who are forced to go through the App Store to reach iPhone users. Emails among Apple executives going back to 2010 indicated the App Store was already more profitable than anticipated early on.

Apple disagreed but did not rebut it with a figure of its own. It argued it could not calculate a margin figure for the App Store because it does not break out the costs and revenues that way.

That allowed Epic to argue that Apple’s reluctance to discuss the details was itself evidence that the iPhone maker is aware of the anti-competitive optics at play.

Tim Cook’s testimony

Observers of the trial saw a turning point during the testimony of Tim Cook on Friday last week. He also tried to sidestep questions about the issue of profit margins, and much else, too.

If Epic can convince the court that Apple devices are a singular market unto themselves, it would likely carry the day. We think this is relatively unlikely

Epic’s lawyer Gary Bornstein pressed the Apple chief executive on the terms and conditions for app developers and Cook responded frequently that he did not know specific details. Cook also could not say why Google pays Apple an estimated $10bn a year to be the default search engine on the iPhone.

“Bornstein conducted the best adverse witness examination since Daniel Kaffee grilled Colonel Jessup in A Few Good Men,” Rodelli said. “Is it really believable that they don’t have a good sense of what the profits are? That may have impacted Apple’s credibility with the court.”

Cook also got a grilling from Gonzalez Rogers, notably over why Apple cut its 30 per cent commission to 15 per cent last year for some types of purchases for some types of apps, after Epic launched its suit.

When she tried to ask Cook for evidence that Apple has ever reduced the fees it charges developers as a result of competition — rather than because it was facing litigation — he pointed to how Google cut its rate to 15 per cent after Apple did.

“I understand perhaps that when Google changed its price, but your action wasn’t the result of competition,” she said.

Defining the market

“Market definitions will likely be the deciding factor in this case,” said Amit Daryanani, analyst at Evercore ISI, who thought Apple was still likely to prevail.

“If Epic can convince the court that Apple devices are a singular market unto themselves, it would likely carry the day. We think this is relatively unlikely.”

Cook pointed out that while Apple controlled access to the iPhone through its App Store, consumers had the choice of switching to an alternative ecosystem by picking another smartphone and app developers had access to those customers.

Apple was also able to argue that, in the case of Fortnite, the market was even wider — unlike, say, if the case had been brought by a dating app or another company catering only to smartphone users. When
Fortnite was booted from the App Store, players could still find the game on Xbox, PlayStation and PCs.

When court documents revealed that the App Store accounted for just 7 per cent of Fortnite’s revenues, Apple’s lawyer said: “It makes you wonder why we’re even here.”

The MacBook precedent

Apple said last year that Epic’s vision for how the iPhone should operate would “threaten the entire App Store ecosystem” and Cook said giving up its control over apps would turn the iPhone into a “toxic mess”.

Epic said its request was not all that revolutionary, it just wanted the iPhone to act more like MacBooks and iMacs. Macs allow users to download a world of apps beyond what is available in the Mac Store, it said, so why can’t the iPhone be the same way?

Can you find me a single antitrust case where the type of relief you are requesting has been granted by a court?

Apple’s defence was unexpected: the Mac isn’t safe.

Craig Federighi, Apple’s head of software, said: “We have a level of malware on the Mac that we don’t find acceptable and is much worse” than on the iPhone.

“The Mac is a car that you can take off road if you want, you can drive wherever you want,” he said. But with the iPhone, “we were able to create something where, you know, children — heck, even infants — can operate a . . . device and be safe in doing so”.

Parsing the judge

Gonzalez Rogers probed both parties on Monday in an attempt to find a middle ground — but neither side wants that.

The judge looked reticent of making what she said would be sweeping changes to Apple’s business model.

“Can you find me a single antitrust case where the type of relief you are requesting has been granted by a court?” she asked Epic’s counsel at one point. “It is a pretty significant step that courts haven’t done.”

Yet last Friday and again on Monday, Gonzalez Rogers has indicated she was troubled by the 30 per cent commission charged as standard by Apple. “The 30 per cent number has been there since the inception,” she said. “And if there was real competition, that number would move. And it hasn’t.”

Her ruling is not expected for several weeks.