Epic Games argued that Apple purposely locks in its customers in the first day of a landmark trial with Apple over the rules of the App Store.
Epic is looking to force Apple to open up iPhone software distribution so it could use its own payment processor, bypassing Apple’s customary 30% fee on digital goods. A favorable ruling could even allow Epic to offer its own app store for iPhones.
Apple is arguing that it built the App Store and gets to set the rules, which are designed to ensure that apps are high quality and secure.
“Epic wants us to be Android, but we don’t want to be. And our consumers don’t want that either. They want the choice,” Apple lawyer Karen Dunn said.
Epic’s argument is that Apple’s App Store is anti-competitive, and that its arguments about quality and security are essentially an excuse to exclude competitors like Epic Games’ title Fortnite, which was booted from Apple’s store last year after it introduced a direct payment mechanism.
On Monday, Apple’s and Epic’s lawyers both made their opening statements, and Epic Games founder and CEO Tim Sweeney testified. The trial is expected to last three weeks.
Walled garden
A core part of the debate centers around the relevant market that Apple allegedly dominates.
Epic is arguing that the relevant market is iPhone app distribution. Apple says it is game distribution, and that users can easily switch to other phones and game consoles.
To bolster its definition, Epic is trying to show how Apple works to lock users into its products, making it more difficult to switch to Android or other platforms. On Monday, Epic lawyers cited several internal Apple documents, some over a decade old, while arguing that Apple executives built a “walled garden” brick by brick.
“Getting customers using our stores (iTunes, App, and iBookstore) is one of the best things we can do to get people hooked into the ecosystem,” Eddy Cue, current Apple online services senior vice president, wrote to Apple CEO Tim Cook in 2013, according to an email revealed by Epic Games.
“Who leaves Apple products once they’ve bought apps, music, movies, etc!” Cue concluded.
In another exchange, Apple executives discussed in 2013 whether releasing a version of iMessage for Android would make it easier to switch phone brands. iMessage is still exclusive to Apple products.
“I am concerned that the iMessage on Android would simply serve to remove and obstacle to iPhone families giving their kids Android phones,” Craig Federighi, Apple software senior vice president, wrote in 2013.
In 2016, a customer emailed Apple saying that iMessage amounts to “serious lock-in.” As part of an internal conversation about that email, Apple’s current head of marketing, Greg Joswiak, wrote to colleagues, “we hear this a lot.”
Most recently, Federighi wrote to Cook about Apple’s sign-in feature which enables users to log into apps with an Apple login, saying that the feature is likely to “make our platform more sticky” in 2019.
Epic also argued that Apple doesn’t need the App Store approval process to keep iPhone users safe. Epic contended that because Apple has sometimes approved low-quality apps for the store, its approval process is ineffective and doesn’t protect user security.
In an email produced as part of proceedings, former Apple marketing boss Phil Schiller wrote in 2012 “Is no one minding the store? This is insane!!!!!!!” in response to a report of an “obvious rip off” app becoming the top free app on Apple’s platform.
Apple doesn’t want to be Android
In Apple’s opening statement, it emphasized that its rules have helped created a vibrant ecosystem that benefits iPhone developers, with more than 1.8 million apps in the App Store.
Apple said that Epic made $750 million from the App Store, arguing that the trial is merely about money and that Epic planned this lawsuit and a related marketing campaign in order to use Apple’s technology without paying. Apple also said that Epic was looking at the wrong market and cannot show anti-competitive conduct in the gaming market — users can switch to Android, Microsoft Xbox or Sony Playstation.
Apple also defended its “walled garden” without using those terms, citing its App Review department that manually reviews and approves apps and filters out “obviously malicious apps.” It said that based on its research, iOS represents only 2% of malware infections among all computing platforms.
“Take away from the security particular to the iPhones and the bad actors have a field day. This is why Android security statistics are so much worse,” Dunn said.
“We thought about the fact that the iPhone is a phone that you’re carrying around, you need it to work for you as a phone, and we cared deeply about the security of that device so it would be more protected and more reliable than PCs were at the time,” Apple cited Schiller saying.
That’s why Apple doesn’t allow “sideloading,” or manual installation of apps, like Android does, Apple argued. If Epic wins, Apple contended, it would mean a less secure iPhone operating system.
What’s the App Store margin?
In its opening argument, Epic lawyers said that Apple’s App Store generates large profits, with operating margins of 78% in 2019 and 75% in 2018.
Epic cited Ned Barnes, one of its expert witnesses, who says he used internal Apple documents to come up with the calculation.
The profitability of Apple’s App Store will be part of Epic’s argument that Apple uses its market power to extract excess fees from software developers.
“We have documents, long detailed PowerPoints prepared for Apple’s senior executive team that lay out the profitability of the App Store in regular presentations given multiple years in a row,” Epic lawyer Katherine Forrest said.
Apple disputes the accuracy of the number and has said that the company doesn’t look at profit and loss for specific units, instead looking at Apple’s financials on a higher level.
“They’re going to pull documents out of context in this case. This is incredibly misleading,” said Apple lawyer Dunn. She said in court Monday that Apple doesn’t internally allocate to the App Store the costs of building the technology for the store, and that the company has an integrated business model.
“Apple is concerned that analysts, investors, reporters, and others in the marketplace could misinterpret the public disclosure of non-public, unaudited financial information,” Apple lawyers previously wrote in a court filing.
Apple’s App Store is part of Apple’s services business, which executives have highlighted to investors as a source of growth. Apple reported $53.77 billion in sales in its services line in its fiscal 2020 with a 66% gross margin (its fiscal year ended Sept. 26, 2020). Apple’s services sales also includes subscriptions like Apple Music, AppleCare warranties and licensing fees in addition to the App Store.
