Epic v Apple Day 3 - Daily Pool Report


Leah Nylen
 

We are back for Day 3. Your poolers today are me and Joshua Sisco from The Information, the Dynamic Duo of Antitrust.

Today Judge Yvonne Gonzalez Rogers (YGR) has on a mustard yellow collared shirt under her judicial robe.

Epic’s Tim Sweeney is here (of course) wearing his standard gray suit and American flag lapel pin (very politician chic -- reminds me of being home in DC). He has a button-down, white with blue cross-hatching, a dark blue and red diagonal striped tie, black mask.

Apple’s Phil Schiller has a gray suit, white shirt, maroon tie. He has a dark blue mask with a logo I can’t make out on it (will investigate later). 

Today’s courtroom attendance:

Epic

Katherine Forrest, Cravath

Yonatan Even, Cravath

Wes Earnhardt, Cravath

Jin Niu, Cravath

Tim Sweeney, Epic

 

Apple

Karen Dunn, Paul Weiss

Richard Doren, Gibson Dunn

Lauren Dansy, Gibson Dunn

Betty Yang, Gibson Dunn

Ethan Dettmer, Gibson Dunn

Heather Grenier, Apple’s director of commercial litigation

Phil Schiller, Apple

 

Alberto Rodriguez, class counsel

Me + Josh Sisco + Vicki Behringer (sketch artist)*

Marc Peters, Turner Boyd (lawyer for Nvidia)

 

The morning kicked off with more than 30 minutes of bickering between Epic and Apple over the scope of the expert reports from the reports of 16 different expert witnesses (nine for Epic, seven for Apple). A visibly annoyed Judge Gonzalez Rogers mediated the dispute.

* Want to see the sketches from Day 1? Reuters picked them up and you can see one in this video

Nvidia’s Aashish Patel

Aashish Patel, director of product management at Nvidia, resumes his cross-examination at 8:48 am. Apple attorney Jay P. Srinivasan is questioning.

 Mr. Patel, who has black, wire rimmed glasses and closely cropped black hair, is today dressed in a black suit, white shirt, purple tie. He has one a black mask that has a clear, plastic square in the middle so you can see his mouth.

Patel cross resumed at 8:48 am by Apple attorney Jay P. Srinivasan. Mr. Srinivasan is wearing a gray suit, white shirt and a blue medical mask. Patel testified for about six minutes on cross, ending at 8:54 am. Epic’s Wes Earnhardt redirect lasted about six minutes, ending at 9:00 am. 

On cross, Patel again confirmed that October is “the potential date of release” for Fortnite on iOS.

On redirect, Earnhardt asked several questions as to web apps versus native apps. 

On a web app, “there are less controls over the streaming, so you could argue in some ways it’s worse” than a native app for latency, Patel said.

Was it your choice for Geforce Now to be on iOS as a web application as opposed to a native application? Earnhardt asked.

“No, we would have preferred a native application,” Patel said.

 

Microsoft’s Lori Wright

Lori Wright, Microsoft’s VP of business development for gaming media and entertainment, began testimony about 9:02 am with questioning by Epic’s Wes Earnhardt and spent about 1 hour 6 minutes on direct. Apple’s Jay P. Srinivasan cross examination begins at 10:09 am. The court took a break at 10:17 and then held a brief closed session. Public cross resumed at 10:42 a.m. and ended at 11:56 am. Her total cross examination took about 1 hour and 12 mins.

Epic’s Earnhardt conducted re-direct on Wright from 11:56 am to 12:09 pm -- about 13 minutes. Very brief re-cross at 12:09 pm for about 1 minute.

Her testimony took a total of 3 hours, with a 20 min break and a brief closed session.

Blond, with shoulder-length hair, Wright is wearing a black pin-stripe suit with a white blouse, glasses. She is testifying with a face shield, no mask. 

Direct (Earnhardt)

xBox vs other systems

Earnhardt had Wright walk through how an xBox works. It must be plugged into the wall and have an internet connection. Microsoft believes Sony’s Playstation as its primary competition, and to a lesser extent a Nintendo Switch, she said.

“We certainly don’t view the iPhone as a competing device,” she said. iPhones or iPads “are additives, not replacements.”

Games written for the xBox (called AAA or console games) are generally large (150-450 GB), they generally cannot be downloaded on mobile. “You can’t just move that over to an iPhone.” An example of this is Halo. A mobile game generally can’t be more than 3-4 GB. Halo is roughly 50x too large for iOS.

Judge pops in with a question as the lawyers are getting the exhibits ready.

YGR: “How many games are developed in-house by Microsoft versus third-parties?”

LW: There are roughly 3500 you can play on xBox. There are probably less than 100 developed by Microsoft.

YGR: “So it’s principally third parties?”

LW: Yes.

Wright says there are some games that are available on xBox and also on mobile, such as Minecraft or Roblox, but Microsoft is “agnostic” about whether xBox users buy the same game for iOS. 

“People play games on mobile, but they are also playing on a complimentary device. It’s additive,” she said.

They do care, though, if a user buys from Sony.

“If you’ve made a choice to buy a Playstation you are buying games from Sony that is taking away from you buying an xBox and buying games from the xBox store. Sony is our direct competitor,” she said.

Microsoft sells its xBox consoles at a loss, and charges a 30 percent commission for game sales to help cover that loss. 

PCs vs other systems

Microsoft also operates the Microsoft Window Store. Right now, the Windows Store charges a 30 percent commission but the company plans to reduce that to 12 percent in August.

“For our Windows Store, in order for it to be competitive and relevant, we need to reduce the commission,” she said.

Wright goes through some numbers that Microsoft put together for 2019 (Exhibit DX5523). On PCs, 83 percent of consumers buy games directly from the game publisher, while platforms only account for about 15 percent of sales.  

On another slide, Microsoft breaks down the profit margin for developers versus the platform. On PCs, developers retain 95 percent of the profit. On mobile, developers retain about 61 percent.

“An open ecosystem is much more profitable for developers and publishers,” Wright said, summarizing the difference between PCs and mobile.

xBox Cloud

Microsoft’s cloud gaming service xBox Cloud is available for Android but not Apple’s iOS (though as of a few weeks ago, can be accessed through the iPhone/iPad Safari browser). “We tried very hard to get it onto iOS but were not able,” she said.

Wright said Microsoft representatives spent 3-4 months talking with Apple and even traveled to Cupertino to meet with Apple and discuss a way to offer xBox Cloud as a native iOS app. At first, Apple was amenable to letting them use the Netflix/Audible model where the app serves as a catalog for media/entertainment. But Apple later changed its mind and said Microsoft would need to offer each game as an individual download.

“We were seeking to understand why that was the case, why there was a special carve-out for all other types of media and entertainment other than gaming, but we didn’t get an answer.”

The individual download method Apple required is a “really inelegant solution” for users, she said, and would make it difficult for Microsoft to remove games from its catalog since that would leave a “dead app” on the user’s phone.

“People don’t play games through the browser on iPhone,” she said, but “it was our only outcome in order to reach mobile users on iOS.”

Cross (Srinavasan)

In response to questions, Wright acknowledged that xBox users can use Spotify and stream Netflix, Hulu and YouTube. 

Once cross resumed, Microsoft’s lawyer David Chiappetta of the law firm Perkins Coie objected to some of the questions for getting into privileged communications.

Wright said Microsoft earns $300-400 million from Epic. Srinavasan asked to read from her earlier deposition. Chiapetta objected to the disclosure of the revenue numbers, but YGR overruled.

At her deposition, Wright was asked “Do you know how much revenue Microsoft earns each year from Epic?” She testified that Microsoft had “net revenue in the $600-700 million range.”

Wright was asked if she was called to testify on behalf of Epic, and she said she wasn’t aware of that.  

xCloud negotiations

Apple’s App Store rule that requires a gaming catalog to individually separate games was the main issue that could not be overcome between Microsoft and Apple over xCloud, she said. That rule “fundamentally breaks down the service we were trying to deliver.”

Once it became clear Microsoft wouldn’t be able to make a native app, the company began working to make xCloud available through the iPhone/iPad Safari browser. 

“When we realized that after the attempts we had made and proposing many different ways to comply with the spirit of what [Apple] were asking us to do, that we could not, we saw no alternative to reach the iOS mobile base of customers” other than browsers, she said.

Srinavasan asked whether Microsoft objected to Apple’s commission. She said they did not.

“It was a tertiary issue,” she said. “Being able to pay that to Apple over the long run would be challenging.” 

xBox doesn’t follow the same rules as Windows

Srinavasan showed Wright exhibit DX5518 titled “Principles for the Microsoft Store on Windows.” Wright acknowledged that these principles apply to Windows but not necessarily to xBox. 

Cross-platform games

Srinavasan asked her about cross-platform games. Wright said you can just port a game from one platform to another, you have to rebuild certain portions for the platform. 

“It’s like asking Steven Spielberg to reshoot Jurassic Park,” she said of moving a game from a console to iOS. “It’s no small effort.”

Mobile games are a different game with what she called “the same franchise brand.” It is a different version of the game written specifically for a mobile platform, she said.

Mobile is a “vast part” of the gaming business overall and has to be considered in industry analysis, but Wright maintained that Microsoft does not compare it to its console business.

Redirect (Earnhardt)

Earnhardt returns to the discussion about xCloud. What Apple wanted Microsoft to do -- make each game available for individual download -- is “untenable and would fundamentally break the service.”

YGR breaks in with some of her own questions.

YGR: I can use Netflix with a native app and see lots of different stuff. You didn’t want a subscription model?

Wright: No, we wanted to use the Netflix model. The issue is that we could not do what Netflix does.

YGR: You wanted to charge a subscription fee and that’s what was not allowed?

Wright: Correct.

 

Fashion Update 

 

I am reliably informed that the pattern on Sweeney’s button-down would properly be described as “graph check” (And TIL the difference between gingham, tattersall, plaid, graph check and many other men’s shirt patterns)

Schiller is wearing a U-Mask, the official mask of Formula One. (The Italian health ministry has banned the use of these masks because it says the company has not provided evidence to backup it’s claims that the mask can be worn for up to 200 hours. U-Mask is appealing. Irony alert: Italy’s Competition Authority has also opened an investigation.)

 

Epic’s Andrew Grant

Direct

Andrew Grant, engineering fellow at Epic Games, began direct testimony under questioning by Epic’s Katherine Forrest (KF) at 12:11 pm for 24 minutes. After a 40 minute lunch break, he resumed at 1:15 pm and testified until 2:28 pm. His direct testimony was about 90 minutes.

Grant appears to be in his 40s, dark brown close-cropped hair with some short spikes on top. He has a delightfully mellifluous Scottish accent. He is wearing black suit, white button down shirt, tie with a pattern of diagonal stripes of gray, green and yellow (This is the best tie I’ve seen so far. Take note: lawyers. You don’t always have to wear boring ties). He is wearing a face shield, no mask. 

KF is wearing a face shield, no mask today. She has on a dark blue, brocade sheath dress with matching jacket and pearls, velvet black heels.

Grant has been in game development since 1998, having working at Lucas Films and Activision before joining Epic.

Forrest started off the testimony by asking Grant basic questions about Epic’s business including the products it offers. He also was asked to define a lot of technical terms about software and app development.

Differences between platforms

Apps/software have to be developed for each platform. Developers will have to recreate some portion of their app for each platform. This can be quite significant.“It’s a big part of the upfront cost” to get the app on multiple platforms, he said, and it’s a big consideration as apps are updated.

YGR breaks in with a question.

YGR: What percentage of the app has to be rewritten?

AG: It depends, some code -- like something that simulates gravity for example would work across platforms -- but some parts need to be redone depending on the platform. For an app like Slack it might be entirely different for each platform; Games are often more similar across platforms.

KF asks about the differences in code for Fortnite on a PC versus a mobile platform like iOS.

“They share business logic but have very distinct code to handle input. We spend a lot of time engineering a specific user interface on touch,” Grant said. He said they also spent time focused on performance and battery life to make sure it didn’t drain users’ phone batteries too much.

Forrest asks a series of questions about the difference between how developers approach consoles, PC, smartphones and tablets. She also asks him to describe the differences between how Fortnite performs on a desktop computer compared to a mobile device and a console.

AG says the performance is overall better on a desktop or console, the gameplay is “a little more precise and a little more accurate,” and the audio quality is better. The latency is lower on desktops and consoles than mobile and has better graphic fidelity.

Native Apps v Web Apps

AG: Native iPhone apps have access to a far wider range of APIs than web apps, allowing for more functionality. That includes access to push notifications, Apple’s voice assistant Siri, certain health data, certain audio features, augmented reality features.

Web apps must also be far smaller than native apps, and are capped at about 50MB in size, Grant said. Native apps are “orders of magnitude” larger, as large as 27GB.

KF: How does the performance of Fortnite differ between a console and a web app?

AG: “it would be significantly better” on a console.

KF: does Epic make a web app version of Fortnite?

No, Grant says. It would take an incredible amount of work to create it, and would be a subpar product. “It would do more harm than good to the brand.App”

App updates

Apps for iOS have to go through App Review. That process “was very variable. It could be under an hour, it could be multiple business days” before an app was approved, he said.

Delays related to the app review were problematic because they might cause Epic to have to delay the release date of new versions of the app. There’s also a process called propagation -- the period of time after it’s been approved but before and app update is available in the store. That could take hours and because Fortnite requires all users to have the same version of the app, that meant iOS users would have a delay compared to those on Android, Sony or elsewhere.

YGR breaks in.

YGR: “Why do you want to use Apple if it’s so terrible? If it’s so bad, why use it?” I’ve read testimony that epic has issues with developers, and suspect apple isn’t perfect, so how imperfect is it

Grant says it’s akin to other platforms

YGR: “You have these issues with Android? Is it comparable?”

Grant: Very comparable.

Hotfixes were “a weekly occasion.” Apple never informed us these server-side changes violated Apple rules, he said. 

In early August 2020, Epic submitted an update to iOS. On 13th of August, Epic made a hotfix to servers that allowed iOS users to have access to two payment options: Apple’s in-app payment and Epic Direct Pay. Apple then removed Fortnite from the App Store.

Cross

Apple’s Richard Doren started cross examination of Andrew Grant at about 2:30 pm, which lasted through 3:05 pm.

Mr. Doren is wearing a dark gray suit, white shirt, maroon tie, face shield, no mask.

In response to questions, Grant says he has been writing software for mobile platforms since 2003 and iOS since 2008 when the App Store was introduced.

In 2008, Doren asked, could the iPhone have run a game as sophisticated as Fornite?

No, the iPhone lacked the memory and graphics necessary for Fortnite. Grants says iOS wouldn’t have been able to play a game like Fortnite until about 2014.

Unreal Engine

Doren asks him to look at an exhibit (DX4042) Unreal Engine End License User Agreement. The agreement requires users to pay royalties of 5 percent after the first $3,000 in gross revenue per quarter. That applies to gross revenue, so in the case of the App Store, that would be 5 percent of the price of the app. So if an app costs $10, even though the developer only gets $7 after Apple’s cut, Epic charges $0.50. Grant agrees that’s what the agreement says but he wasn’t involved in its creation.

Hotfixes

Doren asks a series of questions about how Epic ensures that Fortnite players don’t cheat before moving on to the Aug 13, 2020 hotfix. Grant said he doesn’t know whether the hotfix breaches Epic’s contract with Apple.

“You knew you were doing something dishonest,” Doren said.

“I knew we were doing something Apple would be unhappy about,” Grant said. “I don’t think it was dishonest.”

Forrest had just two brief questions for re-direct.

Updates on the schedule

Since we were so close to the end of the day, the judge asked them to give her an update on the rest of the schedule in lieu of calling a next witness.

In the morning, Epic plans to call Thomas Ko, who works at Epic and will testify about Epic Direct Pay. After that they will call Matt Fischer, head of the App Store for Apple, and Trystan Kosmynka, Apple employee who will talk about the App review process. Epic expects to get through all three tomorrow.

Either Thursday afternoon or Friday, Epic will call Steve Allison, head of Epic Game Store, and then Matthew Weissinger, Epic’s vice president of marketing for Epic. 

After that, they will move to experts. (This may be Friday afternoon; could be Monday) Epic intends to start with Dr. David Evans, their main economic expert, who is expected to take “a fair amount of time,” according to Forrest. After him, Susan Athey will testify on the economics of app stores.

Once she’s done, Apple will call three of its experts: Richard Schmalensee, their main economic expert; Loren Hitt and Francine LaFontaine. Both those experts will also testify on how to analyze the market and Apple’s market power.

Following LaFontaine, they will go to Michael Cragg and Evans again, both of whom will offer rebuttal testimony to the three Apple experts. After that, Epic will call Ned Barnes, accounting expert; James Mickens, will testify about security in the App Store; and Peter Rossi, survey expert.

Forrest said Epic expects to finish its case next week. Then Apple will then get to begin its defense. Both sides said as of right now, they expect to use all their time (meaning we will be going strong through Tuesday, May 25).

 

Tomorrow’s pool will be brought to you by Dorothy Atkins of Law360 and me (my last day in court for this trial, tear). Ta ta for now.

 

Leah Nylen

Politico, Antitrust and Investigations Reporter

(202) 660-2971

@leah_nylen

 

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