Epic v Apple Day 8 - Daily Pool Report

Herrera, Sebastian <sebastian.herrera@...>

Below is a summary in chronological order of today's pool reports. Elizabeth Lopatto from the Verge will be your pool reporter tomorrow, alongside Dorothy Atkins from Law360. Apple will resume its direct of Lorin Hitt, professor of operations, information and decisions at the University of Pennsylvania.

Hello from Oakland for round 8 of the trial. This is Sebastian Herrera from The Wall Street Journal, and I’m your pool reporter today. I’m sitting next to Kellen Browning from the NYT.

Stanford economics of technology professor Dr. Susan Athey returns to the stand today for Epic. Subject to change, Dr. Athey will be followed by Richard Schmalensee, emeritus professor of economics at MIT, who will take the stand for Apple. A reminder that exhibits can be found here: http://tinyurl.com/epicvapple

Judge Yvonne Gonzalez Rogers (YGR) is on the bench wearing a black mask.

Today’s teams include: 


Yonatan Evans

Gary Bornstein  

Tim Sweeney 

Katherine Forrest

Lauren Moskovitz


Cynthia Richman

Richard Doren

Heather Grenier 

Karen Dunn

Housekeeping matters: 

Not too many updates to start. The parties are working through negotiations of evidence and other redactions to admit the written direction. The judge says she did not admit many exhibits yesterday.

Cross by Apple lawyer Karen Dunn of  Dr. Susan Athey began around 8:10 a.m. and ended around 8:45.


On cross:


Dunn started by asking Athey whether app stores can differentiate by falling under narrow categories of content, like gaming. She said yes. 


Steam app:


Dunn pressed Athey about her testimony that said Apple excludes multiplatform app stores like steam. Dunn shows a screenshot from Steam’s website about Steam mobile. In the screenshot, there’s a pic of an iPhone and Android. 


Dun: Are you aware that users can buy games and manage their accounts through this app?


A: yes


Dunn goes over a slide that shows Steam app is now available for all ios and Apple tv users. She goes through Steam messaging that says all users need is a tv. Dunn tells Athey that there is no place in her report that says users can use Steam through these devices. Athey doesn’t know how many times Steam is downloaded per day. Athey says she has used Steam but not the chat feature. 


Dunn: You must be aware that Playstation and Xbox have apps that allow playing games elsewhere? 


A: yes


Dunn shows an example of a the GameClub app, which says it is downloadable on both ios and android. Athey says that reflects her report.


On interoperability:


Dunn presses Athey that technological interoperability creates competition. Athey says she hasn’t said operating systems need to be the same but that there are certain types of aprobility that would be beneficial.


Dunn: Technological interoperability creates competition. Do you agree with that?


A: Yes


D: Can failure to provide interoperability be illegal?


Athey says forced interoperability could be interpreted in a lot of ways, so she wants to be specific about which types of interoperability would be beneficial to discuss.


On redirect by Epic’s Yonathan Even:

E: have you given any opinions in your report or your direct about any duty of Apple to make any of its own software available on Android?


A: No


E: Do you remember whether GameClub’s entry to iOS was smooth?


A: No, and in my report I mention that its application was rejected over 100 times


Athey says Gameclub needs an exclusive license to its games and that the restrictions preclude third-party games. Athey says in Steam, if you switch from a Mac to a PC, it facilitates your downloading the game on either platform and playing it on that platform. But you cannot download the ios games through the Steam app or android app and that the streamed games come from PC.


Even asks Athey if she is presently engaged with Microsoft on antitrust matters, a previous employer. She says no.


E: has MSFt been your primary consultant client in recent years?


A: no


E: when was the last time they were your primary consultant client?


A: somewhere in 2015 range


E: as far as you know, does your engagement with epic have anything to do with MSFT?


A: not as far as I know


Richard Schmalensee is now on the stand for Apple.

Direct by Apple on Richard schmalensee concluded at about 9:50:


Schmalensee starts by saying iOS biz is clearly a business linking consumers and devs, iOS is at the core of that platform … the third element besides is App Store - transaction platform which facilitates linkage between consumers and app developers


Apple: do you agree there is a fore market in which iOS competes …


S: no, there really is no market there. You think of a market where things are bought and sold … the iOS has never been marketed separately from devices, and the other system, Android, has always been free. What is an ordinary market is devices, in which bundles of operating systems and hardware are bought and sold, and which apple has about a 15% market share




On IAP, S says lot of functions are performed, but a key function and a function that’s critical to this case is it automatically and essentially frictionless collects the commission due apple on transactions involving in-app purchases. The commission is typically 30%, sometimes 15%. He said the average commission on a transaction handled by the App Store is a bit under $3 and the store handles well over a billion and half transactions every year


Asked if IAP should be treated differently in the app store, S says no. He says lots of two-sided platforms use IAP models, lists Google Play, steam.


Apple: What do you conclude from this? 


S: “In an online business of this kind, the commission model is a way to monetize. The percentage model seems natural, seems common.” Collecting those fees automatically seems to be the obvious way to go, he says. He says American express uses similar IAP restrictions. 


The judge interjects to say when you go into a physical store, you can see a sign that says amex, visa, discover. So there were visual indications of options. Those visual indications of options don’t exist in the app store. 


S: Yes, but it wouldn't say the merchant would save money if you use this option or the other. 


S says Apple’s one click model enables privacy because it prevents automatic transition of payment card info to developers because all ios apps go through the app store and can automatically transfer apps across devices. He says two-party systems wouldn’t be able to replicate that.


Discussing profitability, S says operating margin is not a measure of profitability. He makes an example of two factories selling the same product at the same price but one of them invests a lot into machinery and hires one person while the other invests in workers and not machinery. The one that has the machinery has higher operating margin without knowing other financial factors. Apple stands out as selling devices and putting a lot of r and d into devices and opening system, which benefits transactions in app store, he says.


Epic lawyer Gary Bornstein began cross


On cross


Bornstein: your testimony was that a potential new operating system entrant would look at the possibility that apple was required to open its system and would decide that the right thing to do would be to not have 3rd party apps at all?


S: not necessarily, I would say that the thought of having 3rd party apps and then facing the potential of having to change the biz model…


B: I just asked if I understood the testimony correctly. Did you testify that a potential new entrant would conclude that the right thing to do was not to offer 3rd party apps?


S: I said it would take that possibly into consideration


B: one other issue you discussed … you testified that the market that was at issue in the in-app purchase payment solution field was relatively small?


S: I didn't endorse that market definition, what I intended to say was if anything’s been foreclosed by IAP, IAP’s relatively small relative to the university of in-app payment processing


B: so relative smallness


S: absolutely 


B: do you know what the absolute dollar figures are that have been foreclosed by this?


S: I could estimate but I don't know off the top of my head. They’re in the billions


B: tens of billions?


S: on that order, yes, but small relative to the world of online payment processing


B: you talked about iOS platform that has multiple elements to it?


S: yeah, I talked about the iOS biz as a platform that had multiple elements


B: in the real world, when Apple launched the iPhone without 3rd party apps, it quickly realized to have success, it needed to open it’s store over Mr Jobs initial rejection, right?


S: that is certainly what happened


B: in analyzing a 2 sided platform and the potential competitive consequences of conducts relating to that platform, it is important to consider the effect of indirect network … 


S: yes


Epic lawyer pressed S that when there are higher switching costs, that there is a situation in which there is monopoly power. The lawyer said when you have a single home scenario, there is a situation in which developers are stuck and that consumers don’t often switch between android and iphone. S has aid that they switch from time to time.


We went on break and back at 10:35.

Gary Bornstein continues cross of Richard Schmalensee at around 10:35:


Bornstein brings up an example that when Fortnite launched on the Switch, users shifted spending away from ios. Schmalensee said in percentage terms they shifted. B asks if absolute levels went up on the switch. Yes, Schmalensee said. Bornstein says there wasn’t a substitution but increase in play and spending went up. Schmalensee says that’s what exhibit shows. 


Schmalensee said the App Store is a two-sided platform and Apple treats it that way. 


In discussing distribution, Bornstein asked Schmalensee if there are different substitution possibilities for those games. Schmalensee said there are different substitutions but consumers may find one more sutitutable than another. 


Bornstein brings up Steam and how it lowered its commission rate when Epic introduced its store. B asked Schmalensee that that move happened within months of Epic introducing its store. “Yes,” S responded. 


B pressed S that as part of the licensing agreement with Google, OEMs get operating system for free but pay in restrictions they have to access android. In that case, Android isn’t free, right? S says yes. 


Bornstein called a slide that showed commission rates for Xbox, Sony, Nintendo iphone, android, windows and mac. Bornstein shows that on windows and mac there is no prohibition on third party distribution. Schmalensee agrees that developers have an option to go another route. B goes through the business model of all of the platforms. He populates the slide with a column showing that video game companies subsidize hardware while iphone profits from OS and hardware, android from advertisements, windows from OS and hardware and Mac from profit share/hardware. 


B: video game console makers have radically different models right?


S: yes


Bornstein said when Apple’s app store was launched and before it introduced IAP, it was possible for developers to to sell products through the app. Schmalensee said he wasn’t aware of that, but admitted that if the case, prices for developers would have then increased when Apple introduced its IAP for those using the service. However, he said Apple would likely argue that introducing IAP did not amount to a price increase. 


Bornstein shows a slide in which Apple theoretically could “put up a tollbooth” for advertising and transactions on safari.


B: For a long time safari was the only browser on Apple computers, right?


S: It was the only one pre-installed


B: The only thing preventing Apple from putting up these tollbooths is competition and people's willingness to pay right?


S: I believe that is correct


Cross ended around 12:01 followed by brief re-direct and re-cross. 


The judge then said it seemed to her that Epic is saying there are only two platforms (ios and android) and therefore all of the competitors can’t succeed without accessing the platforms. Everybody has a communication device, and the only way to access billions of consumers is through android or iphone, she says. 


Schmalensee responds that there are other people in the app store business. And that developers have “made a lot of money” going through the app store. 


Schmalensee testimony ends around 12:15. Apple calls Francine Lafontaine from the University of Michigan to the stand. Apple’s Dunn begins direct.


On Market definition:


L: you don't want to ask for substitutes to be perfect. Substitutes might not be exactly what you have chosen but given change of circumstances - price, etc. - you might switch  If products are not substitutes for each other then one of the ways to put them in the same market is to create a cluster market (if they have the same market conditions fundamentally). 


L discusses case she was involved with when she was at the FTC - Staples and Office Depot proposed to merge for a second time. They’ve now proposed a third time. 


L says at the time the FTC looked at this particular merger and was concerned about biz customers in particular. They found that biz customers went to both in a major way to buy all sorts of different kinds of office supplies. Obviously these are not products that are substitutes for one another but they were offered by one set of options in the market. 


D: how would you apply this example to this case?


L: similar situation - for different kinds of apps there are different opportunities to transact. For gaming, there are consoles and stores that specialize in games in addition to general app stores. For general kinds of apps, there are a different set of options that may be available but they don't have the same competitive conditions between games and non games, as a result of that clustering is not something you can do here


Judge: in this example, what was the market definition suggested by Office Depot and Staples?


L: they wanted ink and toner included. That would have made them have a smaller share.


D: what happens to the market definition analysis for the wine if the liquor stores sell not only wine but some other items like crackers?


L: the crackers and these other things are not what bring people to the store - it’s mostly the wine and the liquor that brings customers. As a consumer, I would go thru these stores for wine and liquor and not for the cracker specifically. So it doesn’t affect market definition 


D: what does that have to do with substitution?


L: as a consumer, my option are to go to the liquor store, the other supermarket, these are substitutes. I would include all these options in the market. It doesn’t really change anything that there are crackers or other things in the liquor store


We broke for lunch until 1:15.

Dunn continued direct of Lafontaine at around 1:15


Dunn asks Lafontaine if the recent addition of non-game apps to the Epic Games Store over the past few weeks changed her analysis. No, she responded. 


Lofantaine says that Dr.. Evans ios distribution market is too narrow because it focuses on the one platform and consumers have options to transact on other platforms.


L says SSNIP test in a single market is puzzling because you're looking at a particular firm and that product. She said the tests by Dr. Evans doesn't give consumers or developers options to engage in most types of substitutions. For developers, the test is arguing about leaving the platform entirely. For the consumers, the test is focused on not having access.


D: Dr. Evans’s analysis on market and aftermarket -- should tha framework be applied in this case?


L: No because consumers don't really need to incur the costs of changing their device or even change their device. They can go buy (a game) on their safari or phone. There is not a foremarket product that locks them in. 


L says a foremarket/aftermarket scenario may apply without raising anti competitive concerns. “Consumers buy the device, and there is much more competition in that market.” You would look to see whether information is available in aftermarket terms and costs, she said. It’s important to consider if there have been changes in aftermarket terms.


Bornstein from Epic now doing cross.

Bornstein’s cross


Bornstein started by pressing Lafontaine that she has never published any articles on the subject of market definition on antitrust, or two sided platforms. She responds correct.


B: at beginning of Dunn examination, there was discussion about whether market definition begins with product or conduct, you said it doesn’t begin with conduct?


L: thats correct


B: you wrote, the general role of market definition in antitrust matters is to identify competitive restraints relevant to the conduct at issue


L: yes., I was responding to how does market definition work


B: how do you decide which transaction are the product


L: from the perspective of consumer welfare, we need to think about where the harm is, and that means which type of consumers are going to be involved in these types of transactions. The product at issue is the set of transactions that are relevant to the parties in this case


B: is your determination of a relevant product depends on the identity of the plaintiff, yes or no?


L: no. She said it’s the product that determines what the market definition is


B: here’s an example, assume someone buys iron, someone sells iron. Lots of people need the same iron, some are carmakers, some make skyscrapers, lets assume it’s all the same iron. There are markets like that correct?


L: in your iron case, I’m also not good in metallurgy, there would usually be different versions of this same product that might be used by different types of customers - 


L says that transactions are the product that is being provided in the app store. 


Bornstein brought up the Staples case and said that it was feasible to separate the market because there were separate products such as printers, tape, etc. Lafontaine agrees.


B: Are game transactions a cluster market? 


L: I would argue probably not.


Bornstein asked Lafontaine if the transaction services provided to game apps are different than other apps. She said yes. 


Lafontaine said when she formed her opinion, she was not aware of the different kinds of apps Epic provided nor that Epic was the developer of Houseparty. Asked if she would have known that houseparty is a social network, would she have incorporated it into her definition of market, she said she would have considered. Lafontaine acknowledges that there are some ios games not available on consoles. 


B: While developers can price differently on the app store, Apple does not allow developers to tell users that they have done so?


L: correct 


B: apple does not allow targeted communications like email as well right?


L: right


Lafontaine acknowledges that if you want to watch Netflix on your iphone, you can’t substitute. You have to download from the iphone. She said those are transactions. 


Substitution definition:


Asked if for a product to be in the same market, does it have to have substitutes, Lafontaine says yes. She said she was aware that when Apple announced the app store in 2008, it said it would run it on break even but that it has become a profitable business and that the money comes from developers and developers pass on costs to users. 


B:Those consumers don't have ios and android at the same time,right?


L: yes. She said the only way a large percentage of users would switch from iphone to android is if “technology deteriorated rapidly” on the iphone. 


Her cross finished at 2:35. 


On the stand for Apple now is Lorin Hitt, professor of operations, information and decisions at the University of Pennsylvania.

We’re wrapped up for the day. Apple’s Cynthia Richman will continue direct of Lorin Hitt tomorrow morning. Here’s how it started (with help from Kellen):


R: what do economists typically look at to determine pro or anti competitive effects


H: evaluate output (growing or shrinking), prices, and innovation/quality. With competitive conduct, you expect output to grow, prices to stay the same or fall, and quality to improve.


There’s no evidence based on those metrics to suggest that apple engaged in anti-competitive conduct.


R: do your conclusions on competitive effects turn on the relevant market that the court adopts in this case?


H: no, those indexes of market outcomes are generally consistent


Hitt says he relied on the following data to conduct his analysis: The primary datasource for a lot of calculations on output was a dataset on apple transactions. Every transaction from the time apple store opened to the end of 2019. About 60 billion transactions. Also looked at market research etc.  … looked at monthly data of fortnite transactions by users for several years. About 2.8 billion monthly observations. He said while Dr. Evans has the same access to the data, he didn't really do anything on competitive effects with the apple transaction data. He did not use the full fortnite data. He used a less than 1% sample.


Asked why output is an important measure of competitive effects, Hitt said it's a key measure of the amount of activity occurring in a market. Hypothesis is monopoly will raise prices and restrict output. Expanding output would suggest there is not anti-competitive behavior. He measures output by the number of transactions…the second metric would be revenue. 


R: how did you identify game transactions?


H: developers self-identify 


R: did you look at changes in the number of games in the App Store over time?


H: yes, the extension of product variety.


R: did dr evans offer any analysis about output restriction?


H: I dont believe so


Hitt said you can look at the stated commission rates that apple has and comparable commission rates for competitors, you can look at what epic paid to its folks that do game transactions, and you can do a calculation of apple’s effective commission rate


R: has apple reduced its commission over time?


H: generally, yes


When the App Store started, the commission rate for downloads was 30%. When they added in-app payments, the commission for that has been 30%. But there has been an… in 2016, apple reduced commission rate for subscription renewals after 1 year to 15%.


Video partner program in 2016 - pay a 15% (like Hulu) on transactions performed thru the App Store for that comment.


More recently, small biz developers program - 15%


judge: did you see any document that indicated the 2021 change was contemplated prior to the planning of this lawsuit?


H: I haven’t seen any documents to either extent 


Hitt said that the market price is set by supply and demand. A high cost producer does not necessarily have any ability to charge a higher price - ultimately the market price depends on the entire market. Second, there’s evidence that uniformly all consoles do not necessarily lose money. Finally, it’s inconsistent with observational data. There are platforms that subsidize hardware and charge 30%, some that don't and charge 30%, and some that don't have hardware that charge 30%. He brought up Steam as an example of a platform that doesn’t sell devices and charges 30%. He said Apple’s fees only apply specifically to downloads and in-app digital transactions. He said apps can advertise in-app, sell digital content outside the app for use in the app, like subscriptions.

Sebastian Herrera
The Wall Street Journal

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