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Wednesday, April 10, 2024

Does Apple Put Greed Before Gamers? Tim Cook Takes the Stand

Early in his testimony for Epic Games v. Apple on Friday, Apple CEO Tim Cook described his company’s mission: “To make the best products in the world that really enrich people’s lives.” For the rest of the day, Epic’s lawyers sought to demonstrate that what Apple most wanted to enrich was itself, at the expense of consumers.

What does greed prove? For the past three weeks, Epic has doubled down on its allegations of Apple’s monopoly power over the iOS ecosystem. The Fortnite publisher is desperate to show that Apple’s core is rotten and that its business practices are too.

Apple is worth over $2 trillion today, and one reason is the structure of that ecosystem: It manufactures and owns Apple devices, the iOS operating system, the Apple App Store, and the payment system consumers use for those apps. In defending itself from Epic’s lawsuit, Apple insists that its iron grip on the iOS market isn’t a simple play for massive profits; rather, it’s all in the service of keeping its customers safe, its user experience simple, and its developers happy. As Apple’s highest ambassador, Cook had a big job ahead of him.

Cook spent today on the defensive, fielding pointed questions both from Epic’s lawyers and US District Judge Yvonne Gonzalez Rogers. A key issue in the case has been the commission Apple collects from the App Store, up to 30 percent on in-app digital purchases. In its lawsuit, Epic is framing that 30 percent commission as a “monopoly tax.” Just before Cook took the stand, Judge Rogers said, “The lack of competition on the 30 percent is something that is troubling.”

Digital marketplaces have taken 30 percent commissions for decades. Cable companies charged it for pay-per-view movies in the 1990s. In the mid-2000s, Apple convinced record labels that it deserved a 30 percent commission from song sales on the iTunes Store. The labels, desperate to cut down on rampant online music piracy, went along. Today, Apple makes a similar argument for its App Store commission—only instead of fighting off Napster, it’s iOS’s relatively low rate of malware infection.

The commission is standard in games too. Now that the lion’s share of video game sales have migrated online, digital game marketplaces like Steam, the Nintendo Online Store, the Microsoft Store on Xbox, and the PlayStation Store all charge 30 percent on game sales.

Epic has been crusading against the 30 percent commission for years, part of its long quest to paint itself as gaming’s good guy. In 2018, it launched the Epic Games Store, which took just a 12 percent cut from game sales, leaving developers with a bigger piece of the pie. Microsoft followed suit this year, but just with its PC app. “We want to make sure that we’re competitive in the market,” said Microsoft vice president Sarah Bond at the time.

Epic argues that game companies like Sony and Nintendo are different from Apple, even though they’re also reaping the benefits of total hardware, software, and marketplace synergy.

“There’s a rationale for this on console where there’s enormous investment in hardware, often sold below cost, and marketing campaigns in broad partnership with publishers,” Epic CEO Tim Sweeney said in an interview with GamesIndustry.biz. During the Epic Games v. Apple trial, Xbox business development vice president Lori Wright testified that Microsoft sells its Xbox consoles at a loss. And if it did not charge a commission on the Xbox store, it would lose money on Xbox systems. Sony sells its PlayStations at a loss too. Epic has also revealed that its Epic Games Store is not profitable, in part because it is new and in part because the company has paid massive sums to game developers for licenses to offer free games.

For companies like Apple, Google, and Valve, however, Sweeney added in the interview that a 30 percent commission was “disproportionate to the cost of the services these stores perform, such as payment processing, download bandwidth, and customer service.”

“Disproportionate” was the word of the day on Friday too. Toward the end of Cook’s testimony, Judge Rogers grilled Cook, implying that the games industry seemed to be "generating a disproportionate amount of money relative to the IP you have given them and everyone else. In effect it’s almost as if they’re subsidizing everyone else,” she said, referring to all other iOS apps.

Throughout the day, Epic’s lawyers took runs at Cook to determine the App Store’s profitability and the commission’s role in it. Cook testified that a large portion of App Store revenue comes from in-app purchases, and the majority of that comes from games. But he also repeatedly testified that Apple has never calculated the profitability of its App Store. “No, we have not done that. I have a feel, if you will,” he said, implying that the store was profitable—he just couldn’t say by how much. Epic’s lawyers referenced a report from one of their expert witnesses: In 2019, Apple’s margin on the App Store could have been 78 percent, according to Ned Barnes, managing director of financial consulting firm Berkeley Research Group. Cook did not directly dispute Barnes’ analysis, though he suggested he did not have access to all the relevant information.

To combat any implication of greed, Cook pointed to Apple decreasing the 30 percent commission to 15 percent for some smaller developers last year. “The primary reason was Covid,” said Cook. (Rogers grilled him on this too, implying that if the primary reason was Covid, Cook was not worried about competition. Apple has insisted that it faces competition across every axis of its business.) Apple also does not take a commission from downloads of free apps, which make up 85 percent of its App Store, although it does from in-app purchases.

Cook defended the App Store as “an economic miracle.” It started with just 500 apps and now offers 1.8 million. Apple and the App Store have created over 2 million jobs in the US job economy and does over a $500 million of commerce, he said. And Apple invests heavily in curating its store so users aren’t infected with malware.

If Apple cared so much about its consumers and its developers, though, why doesn’t it give them more choice? Right before a break, Judge Rogers directed this question at Cook, citing a recent report that 39 percent of Apple’s App Store developers were either very or somewhat dissatisfied by Apple’s distribution services. Cook said he wasn’t sure whether Apple runs its own developer satisfaction surveys.

“It doesn't seem to me you feel pressure or competition to change the manner in which you act to address the concerns of the developers,” she said.

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