The Epic v. Apple case could hinge on the definition of the “marketplace”

Enlarge / A Fortnite loading screen displayed on an iPhone in 2018, when Apple and Epic weren’t at each other’s legal throats.

After three weeks of wide-ranging (and often meandering) witness testimony and questioning, today’s closing arguments in the Epic Games Inc. v. Apple Inc. trial focused on two crucial and highly technical legal questions: what is the relevant competitive market and what should the court do if Apple is found to be unfairly monopolizing that market?

For Epic, the market in question in this case is simply the market for apps on iOS. In this market, Epic argues, Apple clearly has monopoly control, since iOS users can’t legitimately download apps or make in-app purchases without using Apple’s App Store.

But Apple said that’s the wrong way to look at the world iOS operates in and that the company already faces “massive competition on a worldwide scale.” That includes mobile competition from Android (which has a much larger worldwide market share) and gaming competition from consoles, PC storefronts like Steam, and more.

“This isn’t the ’90s,” Apple’s counsel argued, a time when most relevant consumers had a single computing device and were effectively locked into whatever computing platform they chose. Most iPhone owners instead have “concurrent ownership of a boatload of devices” like desktop PCs or Macs, laptops, consoles, or non-iOS tablets. Apple also pointed to the 2017 debut of Fortnite on the Switch, which ended up reducing the market share on other platforms, including iOS.

“This is not a case where there’s one device out there and if there’s a part missing you’re out of luck, you can’t use that device,” Apple’s counsel argued, a strong allusion to the legally relevant 1992 Eastman Kodak anti-monopoly case for after-market copier parts.

“If you buy the Xbox or buy into a variety of these particular walled-off gardens, you know that that’s what you’re buying into, and you choose to make that decision.”

Yvonne Gonzalez Rogers

Epic argued back that App Stores on other devices aren’t appropriate market substitutes. That’s because, even if those competitors lowered their App Store commissions, “you would not see switching in sufficient numbers in terms of app distribution to constrain Apple’s conduct.” Conversely, Epic said, “if Apple were to raise the price [of its commission], you would not see sufficient people switching to an Android device or a console.”

But Judge Yvonne Gonzalez Rogers suggested by way of argument that Apple is trying to build “a particular kind of ecosystem that is incredibly attractive to its consumers.” Allowing other App Stores on iOS would “destroy the ecosystem into which they have made the choice to enter. If you buy the Xbox or buy into a variety of these particular walled off gardens, you know that that’s what you’re buying into, and you choose to make that decision.”

Epic’s counsel answered back that, even if consumers are aware of the downstream effects of that “walled garden” market when they purchase a device, the costs associated with that choice are not large enough to impose market discipline on Apple when it comes to the App Store. “If you’re thinking about a $1,000 purchase [for a phone] then you are not be as interested in a 30 percent commission which you might pay on a bunch of 99 cent purchases at some point in the future,” Epic’s counsel argued.

Where’s the harm?

Apple pointed out that it has never raised the commissions it charges on developers above the 30 percent set when the App Store first opened in 2008, a rate that matched what competing digital marketplaces like Steam charged at the time, Apple said.

“Apple’s 30 percent commission has always been competitive,” counsel argued. “That 30 percent commission was competitive when it was introduced and remains competitive with the rate in all the platforms seen [in the case].” Those other platforms constrain Apple’s ability to raise its commission rates, the company argued, because of the indirect market effects of developers and consumers switching to a platform with lower rates.

“Apple’s 30 percent commission has always been competitive. That 30 percent commission was competitive when it was introduced and remains competitive with the rate in all the platforms seen [in the case].”

Apple’s closing arguments

Instead, Apple argues that it has effectively lowered its App Store commission rates in many cases through policies such as the Reader rule (which allows content purchased outside of iOS to be freely loaded onto an iOS device), the video partner program for streaming services, and last year’s Small Business Development program.

But Epic argued that there’s no evidence that Apple made these changes because of competition from the market, which is the key issue in the case. “There was no instance where Apple felt pressure to lower price or change its terms because of something that happened on consoles or PCs,” Epic’s counsel argued.

Both sides tried to make use of developer surveys to make their case. Apple pointed out that 64 percent of iOS developers reported being satisfied with iOS in 2017, compared to 22 percent that expressed some level of dissatisfaction. But Epic argued that aggregate number hides lower satisfaction rates with iOS in specific surveyed categories like profitability, search and discovery, and marketing opportunities.

“They have done a good job overall, but it masks the different vectors of competition if they were out there,” Epic argued. In a more competitive App Store marketplace, “someone else could say ‘Hey, I see Apple is not doing a good job on search and discovery’ so I’m going to make something better.”

“It’s like the ‘benevolent overlord theory’ of antitrust law,” Epic continued later. “[Apple says] ‘We’re doing a good job, so let us keep doing it.’ But antitrust laws expect competition to make you do better.”

What to do about it?

While both parties in the case obviously disagree on whether Apple is acting like an unfair monopolist, they also disagreed strongly on what the court should be able to do to fix the problem if it exists. Epic wants a variety of injunctions that would prevent Apple from limiting what developers could do with iOS hardware. But Apple argues that would ruin the entire ecosystem it has built around the iPhone.

Right now, Apple argues, the walled garden of iOS and the more open model of Android are both serving different segments of the mobile market. “People who want what Epic is advocating… it’s freely available,” Apple’s counsel argued. People who want features like sideloading or alternative app stores “are free to go out and buy an Android device.” If Epic were to prevail in the case, though, Apple argued that iOS would become similar or identical to Android on this score and the effect would be to “take a competitively differentiated product off the marketplace.”

Furthermore, Apple argues that Epic is effectively asking for a “compulsory license” to use Apple’s intellectual property without having to pay for it. Epic is “not seeking to compete on commission,” Apple argued. “They’re seeking to get around the commission… It is an attempt to profit from Apple’s IP without any compensation.”

Epic agreed that Apple doesn’t have any responsibility to license its iPhone technology at all. But since Apple has chosen to let third parties have access to iOS programming APIs and other IP, it can’t offer licenses in a way that has anticompetitive effects.

“The problem is they’re the only store in town, the only store that there is to get apps onto the iPhone. It’s that restriction that’s at issue.”

Epic’s closing arguments

Epic’s counsel allowed that getting rid of current “anti-competitive” App Store restrictions might mean Epic ends up paying nothing to Apple on iOS. “That might be where it goes,” said counsel, “if the market goes there.” But it was also possible that Apple would change its policies and improve the App Store in a way that convinces Epic to use it, counsel argued.

Epic’s counsel brought up testimony from Apple CEO Tim Cook, who said on the stand Friday that, if Apple were forced to allow other App Stores to operate on iOS, “We’d have to differentiate in some way.” That “gave away the game” according to Epic’s counsel. “They’d have to work to differentiate themselves, and that would be a good thing.”

Apple also cited expert witness testimony to suggest that giving in to Epic’s demands would turn iOS from a relatively locked-down platform to “this absolute mayhem where anything goes.” Epic argued back that Apple was simply trying to scare the court and the result of opening up iOS would be less like the “Wild West” and more like another relatively secure and usable platform Apple maintains: MacOS.

Under Epic’s proposed remedy, Epic’s counsel said, Apple would still be able to curate its own iOS App Store, protect that store’s customers, and impose any guidelines it wanted, just like a grocery store chooses what products to stock. “The problem is they’re the only store in town,” Epic argued, “the only store that there is to get apps onto the iPhone. It’s that restriction that’s at issue.”

Judge Rogers noted that she has thousands of pages of evidence and over 4,500 pages of testimony to review and thus we should not expect a verdict immediately. That said, she is eager to evaluate the case “while memory and arguments are fresh.”

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