Tim Sweeney, Chief Executive Officer of Epic Games Inc., arrives at the U.S. District Court in Oakland, California, USA on Monday, May 3, 2021.
David Paul Morris | Bloomberg | Getty Images
Epic Games argued that Apple was deliberately locking its customers in on the first day of a landmark test with Apple about the rules of the App Store.
Epic wants to force Apple to open iPhone software distribution so it can use its own payment processor, bypassing Apple’s usual 30% fee for digital goods. A positive decision could even enable Epic to offer its own app store for iPhones.
Apple argues that it created the App Store and can set the rules designed to ensure apps are high quality and safe.
“Epic wants us to be Android, but we don’t want it. And our consumers don’t want that either. They want the choice,” said Apple lawyer Karen Dunn.
Epic’s argument is that Apple’s App Store is anticompetitive and that its arguments about quality and safety are essentially an excuse to shut out rivals like Epic Games’ Fortnite title, which booted from the Apple Store last year after introducing a direct payment mechanism .
On Monday, Apple and Epic lawyers gave their opening speech, and Epic Games founder and CEO Tim Sweeney testified. The process is expected to take three weeks.
A central part of the debate revolves around the relevant market that Apple supposedly dominates.
Epic argues that the relevant market is the proliferation of iPhone apps. According to Apple, it’s a game distribution and users can easily switch to other phones and game consoles.
To improve on the definition, Epic tries to show how Apple binds users to its products, making it difficult to switch to Android or other platforms. On Monday, epic lawyers cited several internal Apple documents, some of which were over a decade old, arguing that Apple executives were building a “walled garden” brick by brick.
“Getting customers to use our stores (iTunes, App, and iBookstore) is one of the best things we can do to bring people into the ecosystem,” wrote Eddy Cue, senior vice president, Apple Online Services, in 2013 to Tim Cook, Apple’s CEO. According to an email from Epic Games.
“Who Leaves Apple Products After Buying Apps, Music, Movies, etc.?” Cue closed.
In another exchange in 2013, Apple executives discussed 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 iMessage for Android would only serve to eradicate and impede iPhone families giving Android phones to their children,” wrote Craig Federighi, senior vice president of Apple Software in 2013.
In 2016, a customer emailed Apple that iMessage was a “serious lock”. As part of an internal conversation about this email, Greg Jozwiak, Apple’s current marketing director, wrote to colleagues: “We hear that a lot.”
Most recently, Federighi wrote to Cook about Apple’s sign-in feature, which allows users to log into apps with an Apple login, and said the feature is expected to “make our platform stickier” in 2019.
Epic also argued that Apple doesn’t need the App Store approval process to keep iPhone users safe. Epic argued that Apple’s approval process is ineffective and does not protect user security as Apple has sometimes approved low quality apps for the store.
In an email created as part of the process, former Apple marketing director Phil Schiller wrote in 2012: “Nobody cares about the store? This is crazy !!!!!!!” in response to a report on an “obvious rip-off” app that is becoming the best free app on Apple’s platform.
Apple doesn’t want to be Android
Apple Fellow Phil Schiller arrives at Federal Court on May 03, 2021 in Oakland, California.
Justin Sullivan | Getty Images
Apple’s opening speech emphasized that the rules have helped create a vibrant ecosystem that will benefit iPhone developers with over 1.8 million apps on the App Store.
Apple said Epic made $ 750 million from the App Store, arguing that the study was all about money and that Epic planned this lawsuit and a related marketing campaign to use Apple’s technology without doing it to pay. Apple also said that Epic was looking at the wrong market and cannot display anti-competitive behavior in the game 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, which manually reviews approved apps and filters out “obviously malicious apps”. Based on its research, iOS accounts for only 2% of malware infections on all computing platforms.
“Take away the security specifically for the iPhones and the bad actors have a great day. That’s why the security stats for Android are so much worse,” Dunn said.
“We thought about the iPhone being a phone that you carry around with you. It has to work as a phone for you, and we’ve put a lot of thought into the security of this device so that it is better protected and more reliable than.” PCs were at the time, “Apple quoted Schiller as saying.
Because of this, Apple doesn’t allow “sideloading” or manual installation of apps like Android does, Apple argued. If Epic wins, Apple argued, it would mean a less secure iPhone operating system.
What is the App Store margin?
The controversial filing by Epic Games over the edges of the Apple App Store.
Epic games / court records
In its opening argument, Epic’s lawyers said Apple’s App Store is making big profits with operating margins of 78% in 2019 and 75% in 2018.
Epic quoted Ned Barnes, one of its experts, who said he used internal Apple documents to make the calculation.
The profitability of Apple’s App Store will be part of Epic’s argument that Apple is using its market power to extract excess fees from software developers.
“We have documents, long detailed PowerPoints prepared for Apple’s senior executive team that show the profitability of the App Store in regular presentations for several years in a row,” said epic lawyer Katherine Forrest.
Apple denies the accuracy of the numbers, stating that the company doesn’t look at profits and losses for specific units, but rather looks at Apple’s financials at a higher level.
“In this case, they’ll take documents out of context. It’s incredibly misleading,” said Apple attorney Karen Dunn. She said in court on Monday that Apple does not internally allocate the cost of building the technology for the store to the App Store and that the company has an integrated business model.
“Apple fears that analysts, investors, reporters and others in the market could misinterpret the disclosure of non-public, unaudited financial information,” Apple’s lawyers previously wrote in a lawsuit.
Apple’s App Store is part of Apple’s service business, which executives have highlighted investors as a source of growth. Apple had fiscal 2020 revenue of $ 53.77 billion in its services business with a gross margin of 66% (fiscal year ended September 26, 2020). In addition to the App Store, Apple’s services also include subscriptions such as Apple Music, AppleCare guarantees and license fees.