Epic Games v Apple Day 1 -- Daily Pool Report


Leah Nylen
 

Good morning from Courtroom 1 in Oakland Federal Court! The courtroom deputy is testing the audio lines right now after a hurried 20 minutes of both sides setting up. (Apparently there’s a slight problem with the audio lines they are trying to fix.)

You might not know we had the internet from the way the courtroom is filled with rows of binders and exhibit boxes. Epic has set up black binders -- the exhibits for each witness -- along the entire back row of the public gallery. Apple are set up on rolling, metal carts along the back of the room. Judge Gonzales has her own set -- on black metal shelves set up to the left of the dias.

For Epic, Katherine Forrest, Gary Bornstein (both lawyers from Cravath), Epic CEO Tim Sweeney and two others are seated at counsel table.

Epic CEO Tim Sweeney is wearing a gray-blue suit, blue button-up shirt, tie with blue and white stripes, American flag pin on his lapel, black mask. (To be honest, I’m slightly disappointed. I was hoping for an interesting tie at least.)

For Apple, Karen Dunn (Paul Weiss) and Richard Doren (Gibson Dunn) along with Apple’s Phil Schiller are at the defense counsel table. 

Apple’s Phil Schiller is wearing a black suit, white shirt, red tie, disposable blue/white medical mask. 

The courtroom deputy is having trouble ensuring that the press line, public line and Zoom participants (lawyers for Apple/Epic) can hear. The court’s IT folks are here helping her, while everyone else sits slightly restlessly flipping through exhibits or fiddling with phones.

The courtroom looks like it might at a normal trial, except everyone is wearing face coverings and the dias is covered with more than a half a dozen plastic screens, big squares each about 3 to 4 feet high/wide. The courtroom deputy and court reporter have large plastic screens separating them from the rest of the courtroom (and one between them that keep falling over as the IT folks move from one desk to the other trying to help them set up).

Judge Gonzalez Rogers has her own plastic dividers, one directly in front of her dividing her from the deputy/court reporter and to her left, separating her from the witness stand. The witness stand has its own shorter, plastic separators.

The galleries are largely empty, except for Erin Griffith and I, a lawyer from the class cases and the courtroom sketch artist.

Oh and Erin and I clearly win the most interesting mask contest. All of the lawyers are wearing either the white/blue media masks, black or white face coverings, except for one female lawyer in the gallery who has paired her black suit with a light pink mask. Erin and I both opted for floral patterns.

Trial Start (finally!)

Judge YGR is now here at 8:45 am. Wearing a blue-green collared shirt under her judicial robe. 

There are 299 participants on the public conference line, 17 participants on the Zoom (that is for lawyers who aren’t in the room). (Not sure how many are on the press line).

After so long listening to these court hearings at home, I keep forgetting that people can actually see and hear me when I laugh at the technical difficulties the courtroom deputy keeps having (I swear I’m laughing WITH her, not at her).

Judge YGR complimented the lawyers on their professionalism and work to make sure the trial goes smoothly. She also had everyone in the courtroom (including Erin and I) introduce ourselves. Names all below. The schedule today will be slightly different because of the audio delay, but she plans to take a couple breaks during the day. They are now double-checking the audio before openings.

For Epic

Katherine Forrest

Gary Bornstein

Yonatan Even

Lauren Moskowitz

Tim Sweeney, Epic corporate rep

Jason Rudd - Epic’s computer guy

 

For Apple

Richard Doren

Rachel Brass

Karen Dunn

Phil Schiller, Apple corporate rep

Kate Adams, Apple general counsel

Matt Spaulding - Apple’s computer guy

Alberto Rodriguez, class counsel for the day

 

Erin + Me + the sketch artist Vicki.

 

Epic Opening Statement

 

Katherine Forrest gave the opening statement for Epic, lasted almost exactly 60 minutes.

 

Forrest is wearing a tan, knee-length dress with a matching jacket, paired with pearls.  She opted for the disposable medical mask, but took it off for her opening and instead wore a face shield.

 

Some key quotes:

Apple carefully designed a closed ecosystem

 

“When they pick up their iPhones, users enter a different world. Each and every time they make an in-app purchase, a 30 percent tax is imposed.”

 

“Epic is not suing for damages... Epic is suing for change. It is suing for change, not just for itself but for all developers.”

 

“Apple’s plan was to lock users in and prevent users from switching away from the Apple ecosystem”

 

“The most prevalent flower in the walled garden is the venus fly trap”

 

“It’s not about security, it’s about business”

 

“The app review process is arbitrary and inconsistent.” 

 

The App Store launched in 2008. “At first when App Store launched, Apple did not require a particular payment processing solution” The company launched its in-app purchase system in 2009. No study of cost was ever done in setting the commission. In 2011, it began charging for subscriptions.

 

“Epic’s wants to reach consumers locked inside Apple’s walled garden” to provide better innovation, lower prices and better customer service

 

How much does Apple make?

 

KF: Apple has said it doesn’t know what the App Store’s rate of return is. “This is not true. We have documents, long detailed powerpoints that lay out the profitability of the App Store”

 

“We know from these docs, the app store has been making a lot of money for many years.” Epic’s expert used those documents to estimate the App store profit margins: it was about 75 percent in 2018, and 77.8 percent in 2019. 

 

Market definition

Epic must prove the market definition and geography. Dr. David Evans will testify that there exists a foremarket of the iOS operating system and the aftermarket for payment solutions.

 

“Without an OS, the iPhone is glass and metal and nothing else.”

 

Apple does not tell consumers are not told how much the apps they buy might cost over the life of their phone. “Consumers are locked into an ecosystem without knowing that cost”

 

Apple’s contention that there is a “digital game transaction market” ignores that practice is the same no matter what type of app it is. “All apps suffer from the same anticompetitive practices”

 

KF compared Apple to a car dealership. A car dealer sells you the car, but it doesn’t take any a cut every time a consumer buys gas. Apple sells consumers an iPhone and then takes a cut every time they buy something with an app.

 

Consoles are not substitutes for the iPhone

KF: They don’t fit in your pocket, they need a wifi connection, some require an electrical outlet. “None of these devices are substitutable for smartphones”

 

The slides that KF used in her opening presentation are available on the Box site

 

Apple opening statement

 

Karen Dunn, a partner at Paul Weiss, gave the opening statement for Apple.

 

She is wearing black pants and high-neck shirt, black kitten heels, long white jacket (I’m pretty sure I have that same suit jacket. NOTE: I confirmed with her during the break. I DO have that jacket). She has a white, disposable medical mask, but like KF took it off and used a face shield during her opening

 

Started 9:57. Paused at 10:35 for 20 minutes because Line 3 was having an issue.  Resumed at 10:57 am and ended at 11:24 am. Her full opening statement was about an hour in length. 

 

Some key quotes: 

 

“Epic is here, demanding that this court force Apple to let into its App Store, untested and untrusted apps and app stores, which is something Apple has never done. Apple’s unwavering commitment to safety, security, reliability and quality does not allow that – and the antitrust laws do not require it.” 

“Epic is demanding that this court undo Apple’s fundamental design decisions. Epic demands that this court force Apple to allow in any and all third-party app stores so that they can distribute unreviewed and untested apps on all iOS devices.”

“Every app in the app store has been developed using Apple’s IP.”

“When it comes to privacy and security, Apple dramatically outpaces its competitors.”

“Epic is asking for government intervention to take away a choice that consumers currently have. Epic asks this court to get rid of IAP functionality, which was a feature Apple added to the App Store in 2009, in response to requests from developers.” 

“Apple’s app store has created tremendous output, increased choice, benefits for consumers and developers – all of which the antitrust laws would consider a wild success”

“Rather than investing in innovation, Epic invested in lawyers, PR and policy consultants all in an effort to get all of the benefits Apple provides for free.” 

“Apple did not establish the 30%. It was Steam, another game platform, that set the 30% in 2003 and by the time Apple entered the market in 2008 the 30% was, as Epic’s internal documents will show, industry standard.”

“The law is clear that businesses do not have a duty to deal with competitors”

“The relief that Epic seeks absolutely requires forced interoperability and a compelled license ...We would need to make our products technically interoperable and we would be forced to enter into contracts to license our IP. The law just does not require that and does not permit that.”

“Apple has reduced commissions for subscriptions, for premium video entertainment, and earlier this year, for small businesses making less than $1 million a year. In an antitrust case, no price increase ever is a big deal” 

The Epic discussion on profit margins “pulls internal documents out of context. This is misleading.”

Justifications

“Apple has a host of procompetitive justifications for the design choices Epic challenges in this lawsuit. These are Apple’s procompetitive justifications: consumer trust, security and privacy, reliability, quality, user experience, consumer choice and protecting our intellectual property.”

“Epic’s argument here is, basically, why can’t you just protect the iPhone like you protect the Mac? ...The iPhone is not a Mac. It is a rare moment when someone leaves a Mac on a bus or in a movie theater. Your Mac doesn’t always know where you are, or where your children are.” 

“Epic wants us to be Android, but we don’t want to be. Our consumers don’t want that either. They want the choice.” 

“IAP is not a product. ...IAP is a complex functionality that performs a number of steps. Epic’s tying claim is really just an attack on Apple’s 30% commission that Epic doesn’t want to pay.”

“If Epic prevails, other ecosystems will fall too. ...Sony, Nintendo and Microsoft all operate similar platform models to Apple. ...Mr. Sweeney’s personal preference that all platforms be open is directly contrary to what the antitrust laws say is procompetitive. The law protects Apple’s choice to have an integrated system, just like it protects Sony and Nintendo.”

The slides for Apple’s opening are here on the Box site.

Epic’s first witness: CEO Tim Sweeney

 

Direct

Epic CEO Tim Sweeney took the stand at roughly 11:25 am for direct testimony. Epic lawyer Katherine Forrest is questioning him. We broke for lunch at 12:34 pm. Resumed at 1:15 pm. Direct ended at 1:57 pm.

Sweeney, dressed in a blue suit, removed his black face mask and put on a face shield for his testimony.

Epic has been working in the Apple iOS ecosystem since 2010 and “loved it in the early days.” But over the past decade, Apple has become more restrictive in its policies, leading to increased prices and fewer options for developers. “I had initially been a fan of the iPhone model. The policies became more and more restrictive.”

Over time, too, the economic model for apps has changed. For some apps, like Fortnite, the company might have more than 100 developers working on it. With its 30 percent commission, “Apple was making more profit from selling developer apps in the app store than developers.”

Epic doesn’t want money from Apple. “Epic is solely seeking changes to Apple’s future behavior”

Epic has three prongs in its business: the consumer side that offers games like Fortnite; the developer side where it makes products like the Unreal Engine; and the Epic Games Store, which distributes apps on PC and Mac. “Apple’s policies harm every facet of our business.”

Fortnite has about 400 million users. “iOs is a vital platform for our business.”

 

The Epic Games Store isn’t profitable right now but Epic expects it to become profitable in the next 3-4 years. It has processed billions of dollars in transactions on other platforms without any security problems.

Differences in play

Sweeney explaining that web apps – those that run through the Safari or other browser on a smartphone – don’t have the same functionality as a “native app” on a smartphone. “Web apps are not nearly powerful enough to run a modern 3D experience such as Fortnite”

Game streaming is also slightly different. The application/game is running on a server in the cloud while the user is watching. Since the application is running somewhere else, there is “higher latency” or a bigger lag between when a user tries to take an action and it goes through, he said. It can also be very variable depending on a user’s internet connection.

Epic is working with Nvidia and GForce Now service to experiment and test a version of Fortnite which runs on Nvidia’s servers but users could use the Safari web browser to play the game.

Sweeney said that Microsoft’s xBox and Sony’s Playstation have better graphics than smartphones and the Nintendo Switch. Playing on a smartphone or Switch is similar, except Sweeney said, a Switch requires a Wifi connection and a smartphone doesn’t.

KF asks him to explain a “console fee” which software developers pay to the console makers to help subsidize development of more advanced hardware since consoles are generally sold below cost.

 

Judge YGR interrupts to ask her first questions.

 

YGR: In 2007 or 2008, was the technology to play Fortnite available on the iPhone?

No, Sweeney says, iPhone not graphically sophisticated enough.

YGR: “So Apple did have to do something to the iPhone itself in order for it to be sophisticated enough to play your software? How is that any different than consoles?” She says, emphasis on the words “did have”

Sweeney says the development between console and smartphone hardware is similar. But he was seeking to make a point about the different business models between consoles and smartphones.

Project Liberty

The idea developed throughout 2019. We began making significant planning and preparations in early 2020. By end of first quarter 2020, made a plan of record to pursue Project Liberty and challenge Apple and Google.

“We spent many months on extensive preparation. We were challenging the two most powerful companies in the world. It would have been foolish to do anything less.”

KF asked why Epic used the Hotfix to introduce Epic’s payment system.

“I wanted to show the world through action exactly what the ramifications of Apple’s policies were. I felt it was very easy to mistake Apple’s bm for just software distribution. I wanted the world to see apple exercises total control over all software on iOS and it can use that control to deny users access to apps.”

“I wanted to demonstrate to the world that Epic was using direct payment in order to pass on savings to consumers on iOS and Android so the correlation between these platform fees and consumer prices was made abundantly clear”

Judge YGR asked another series of questions.

YGR: Before you did this, did you contact the lawyers who were representing a class of developers?

Sweeney: I don’t know if counsel contacted them or not. I didn’t contact them.

YGR: You knew there was a lawsuit available. You ignored that and went forward on your own.

Sweeney: Yes.

Cross examination

Epic CEO Tim Sweeney started on cross examination by Apple’s lawyer, Richard Doren, at 1:57 pm. Since it’s cross, a lot of the questions are yes or no, so I’m sticking in the most interesting quotes here at the top and then summarizing the rest below.

Why Apple lowered the price on Vbucks - Doren pressed him on whether that was “a PR move”: 

Sweeney: “Our goal was to demonstrate to smartphone owners that removing the platform fees would result in savings for them.” 

 

Doren: “In August 2020, you as the shot caller at Epic chose to intentionally breach your contract with Apple?”

Sweeney: “Yes.”

Doren: When Epic added the hotfix to allow direct payments in Fortnite, “you knew at the time you did that that it would lead to the removal of Epic from the App Store?”

Sweeney: “I wasn’t certain of that. I was aware of the possibility of it.”

Doren: “You hoped maybe they’d … cave to the pressure given the popularity of Fortnite right?” 

 

Sweeney: “I hoped Apple would seriously reconsider its policy then and there.”

On the Freemium model:

“I attribute a lot of our success to the decision to make Fortnite Battle Royal available for free.” 

Other key info:

Tencent largest is the second largest shareholder in Epic (after Sweeney) with a 37% stake. Sony also recently made some investments that gives them a 1-2 percent stake in the company.

 

Fortnite launched in 2017.

 

Epic had $5.1 billion in gross revenue in 2020. It has about made about $13.1 billion in total revenue from Fortnite over the lifetime of the game.

 

Sony’s Playstation is the largest console by revenue for Fortnite, bringing in $6 billion in lifetime revenue for Epic through the end of 2020. Epic has earned $3.5 billion in lifetime revenue through xBox and about $1.1 billion through Nintendo Switch.

All three of those platforms charge 30 percent, don’t allow sideloading and require use of their in-app payment system for purchases. 

Some key terms:

Cross-progression. When a player plays on one device (such as iOS0 and then later fires up Fortnite on another device (PC), they will find that their game progression and identities and purchases all waiting for them.

Cross-play or cross-platform play. Players on different platforms (like xBox, Playstation, mobile etc.) can play with players using a different platform.

Cross-wallet. V-Bucks purchased on one platform can be used on another. Most of the platforms allow cross-wallet with the exception of Sony Playstation.

Doren asked Sweeney how often players switch platforms. He said he didn’t know, so Doren offered DX5535.

Feb 4, 2020 e-mail from Aakash Gupta on analytics within Fortnite. It offered a weekly analytics report on play within Fortnite that included this as a key bullet point:

“Fortnite players who play on mobile are the most likely to play on other platforms (~38%)”

At roughly 2:57 pm, the court saone of id the public lines had gotten gotten cut off so she was going to close the courtroom to let Doren do some cross on confidential stuff related to Epic’s contract with Samsung.

Court ended for the day about 3:15 pm.

Day Two

Tomorrow court will resume at 8 am with Epic CEO Tim Sweeney still on cross examination.

Epic expects to call Andrew Grant, Engineering Fellow at Epic Games, next.

 

 

Leah Nylen

Politico, Antitrust and Investigations Reporter

(202) 660-2971

@leah_nylen

 

Join Apple-Epic-trial@groups.io to automatically receive all group messages.