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Epic v Apple Day 15 - Daily Pool Report

Acton, Michael (LNG-SFR)
 

Ahoy! This is Mike Acton from MLex. I’ll be your pool reporter for Epic vs Apple trial day 15. Any questions for me – 415 734 7740/acton@.../@MActon93

 

Apple CEO Tim Cook appeared outside the courtroom at around 7:35AM, and said a few cheery hellos to the lawyers. He’s wearing a dark grey suit, plain white shirt with grey tie, black shoes. He’s opted for a clear face shield, no mask. As we wait for proceedings to start, he sits in the back row and looks at his phone briefly.

 

The courtroom feels busier than it has been previously, maybe ten people besides the usual legal teams.

 

Judge Yvonne Gonzalez Rogers appears at 8AM, holding a coffee. She notes the extra people. “I’m going to use my discretion and allow it.”

 

There’s a bit of housekeeping. Forrest notes that Epic has 2 hours 3 minutes left. Apple has 6 hours and 38 minutes. Doren agrees. Then Forrest wants to confirm expert direct testimony has been admitted, which had previously been provisionally admitted – Athey and Cragg. Doren says Apple is fine with that, subject to court rulings. Then Forrest asks for a bit of extra time for them to submit findings of fact – asks for Friday next week. Judge says she’s fine with that, sets a noon deadline. “That way you’re forced to get them done and then you can take a break.”

 

Then we get some very interesting thoughts from Judge Gonzalez Rogers on what she wants to talk about on Monday when we get the back-and-forth between lawyers on key issues in the case. The two sides have offered an agenda.

 

“It is an ambitious agenda, I don’t think we are going to get through it. I think remedies would be interesting to hear about, issues relating to obviously the nature of the market.”

“I don’t need to hear too much with respect to Epic’s approach in the sense that – well I guess as Professor Schmalensee said it’s a tautology – of course they have a monopoly if it’s their thing. The question is whether I accept that argument or not. It is under the law the exception, not the rule. It is the rare case.”

“Issues of substitutes I think are interesting, and will be something that I spend some time on. The lack of competition on the 30 percent is something that is troubling.”

“This is a dynamic market, things are changing rapidly, I have a snapshot. We are at a point in time in a moving stream. So understanding what your perspectives would be for the court’s role in that dynamic environment, that would be interesting to me.”

“Those are questions that I might ask you if I wasn’t forecasting right now.”

“It’s also, there are a lot of facts – I have to go back and check whether there is any substantiation for some of the positions that are being asserted, and I haven’t had the time to do that, obviously.”

 

Here’s my (not completely exhaustive) list of lawyers and execs in the courtroom.

 

Epic:


Katherine Forrest

Gary Bornstein
Tim Sweeney
Lauren Moskowitz

Yonatan Even

Apple:


Richard Doren
Heather Grenier

Kate Adams
Karen Dunn
Phil Schiller
Veronica Moyé 

Kyle Andeer

 

Veronica Moyé from Gibson Dunn questions Cook from 8:15 when he takes the stand. Court goes to break at 10:15.

 

A Brief History of Tim

Cook confirms he became CEO in 2011. Has worked at Apple since 1998. Got a call out of the blue that Steve (Jobs) had come back to Apple and wanted to talk to him about being the operations chief. Has been Senior VP of worldwide operations, executive VP of sale, and COO.

His App Store oversight is “limited in a review capacity.” But he has a role in the “strategic direction of the company, so to some degree, but more on a review basis.”

Apple’s mission “it’s to make the best products in the world that really enrich people’s lives.””We invest like crazy in R&D, have invested 100bn dollars since iPhone development, 50 billion in last three years. In addition to that we have a “maniacal focus on the user and doing the right thing by the customer. Integrate hardware software and services “and we think that we do that better than anyone else”

Commitments to “simplicity, safety, security, privacy are key. Reliability, quality. The things that make the best products in the world.” This focus on security  and privacy “from our point of view is one of the most important issues of the century. If you look at what’s happened today, technology has the ability to sort of vacuum up all kinds of data from people, and we like to provide people with tools to circumvent that.”

App Review and security

Why’s it important? “Because there can be malicious things that occur, things that vacuum up people’s personal data, there can be malware, the list is pretty long of things that can happen.”

Are computer tools able to replace human assessment? I don’t think so, Cook says. Important to have both, but today despite the advancements in machine learning, machine learning will not address all the issues on the app store.

Apple has invested to improve user privacy with ATT (2021), its privacy nutrition label, and intelligent tracking prevention (2017). How do developers respond to these initiatives?

Some applaud it and some are not happy with it. And what you do when a developer disagrees? “We listen, we don’t have a tin ear, but we are making decisions in the best interest of the user.”

Consumer response “overwhelmingly positive, the number of notes I get are truly, truly unbelievably positive.” Consumer surveys Apple carries out show “it’s a very key factor, one of the top factors of why people choose Apple.”

Privacy and security was an iPhone design choice. Apple thought “eventually the threat profile would be much greater on the iPhone because of the number of iPhones that would exist in the market.” App review was introduced in 2008 “because we care so deeply about the safety, security and privacy for our customers.”

It’s much safer than Android and Microsoft. “It’s literally an off the chart level of different,” Cook says. Judge Gonzalez Rogers steps in. “What do you think the third party data shows, you personally?”

It shows from a malware point of view that there’s about 1 to 2 percent of malware on iPhone vs 30 to 40 percent on Android and another 30 to 40 percent on Windows. Third parties just aren’t as motivated about privacy as Apple, Cook says.

Looking at numbers

We’re shown an email chain dated 8 June 2015 between Cook, Matt Fischer to Eddy Cue. They’re discussing a complaint about how Apple’s discovery features aren’t great (PX0089). In the doc, Cook says the note is “poorly written note but we do need to do much more to improve discovery.”

Was an effort made to improve things, Moyé asks? Yes, Cook says, work was already underway.

We’re shown another document – it’s a Form 10-K from Sept 26 2020 (fiscal year 2020) (DX4581). Apple’s R&D spending is going up, Cook testifies, with a 14 percent increase 2019 to 2020. In 2020 it was 18.8 billion.

Now Cook explains how prices on App Store have fallen. About 85 percent of the apps on the app store are free so there’s no commission charged for those. The rest of those are either 15 or 30 percent. The ones that are 15 are the second year and beyond on subscriptions after initial 30 percent. Then the Small Business Program that came in late last year.

“What was in my mind at the time was I was very worried about covid and the effect of covid on small businesses in particular.”

Did Apple consider regulatory issues?

They were “things in my mind, sure. That was in the back of my mind.”

Have competitors responded to that price cut? Yes, it slashed fees. “People were universally pleased with the 30 to 15 percent move.”

He’s on to the economic benefits of the App Store: “I think it’s been an economic miracle,” when I think about the way it started with just 500 apps. There’s almost 2m people in the US that are around the iOS economy, 38bn dollars in commerce in US, half a trillion worldwide. Prices have only gone down for software in general – used to walk into a store and the commission was 60-70 percent.

IAP and switching

Is IAP a payment processor?

“No we have a payment processor it’s called Apple Pay.”

Is there a fee for IAP?

No

“The 15 to 30 percent commission, is that a payment processing fee?”

No, no. Helps Apple efficiently collect the commission – for a number of different things, developer tools, APIs, customer services, payment process itself.

Now on to competition that Apple faces – for mobile devices. “It’s fiercely competitive,” Cook says. Samsung, Huawei, Google, there’s a whole list of different handset competitors.

Does Apple have a dominant share? No not at all, worldwide 15 percent, in the US in the high 30s or so, but clearly not a dominant share. Then in gaming, gets more complex -  Xbox, Playstation, Nintendo Switch. Consoles are competitors to the App Store.

DX3084 is shown – a Kantar ComTech USA Report CQ3/20 – this is a study that was carried out for Apple

Cook – “what is says is that in 2019 to 2020 third calendar quarters, of the percentage who bought an iPhone, between 12 percent to 26 percent of the people switched to Android depending on the quarter.”

Does Apple make it difficult for people to switch? No. They’re working with Google, Facebook and others on a data switching plan. First one being worked on is photos, and so now it’s quite simple to move your photos from Apple to Google. Judge says this needs to be entered into evidence if she is to consider it – it is, a bit later.

We’re shown a Steve Jobs email Oct 24 2010 (recipients blocked out) – he talks about how they need to “tie all of our products together so we further lock customers into our ecosystem.”

“It means making all the products work so well together people don’t want to leave” – Cook explains

There’s also reference in the email to stickiness – “make Apple ecosystem even more sticky”

Same thing, Cook says – “to make the ecosystem have such high grade customer satisfaction that people don’t want to leave.”

PX0416 –  March 2016 email chain with Cook, Eddy Cue – “The  #1 most difficult to leave the Apple universe app is iMessage”

Does Cook agree? No

“I think that means that the setup was done incorrectly because you can easily turn off your iMessage.” Do you believe it has prevented customers from switching? No.

Profits

Do you believe the App Store is profitable? Yes I do, Cook says. But as mentioned in earlier testimony, Apple doesn’t break that down.

Moyé turns to some sealed evidence (that internal email Epic got hold of on the last day of testimony). There’s some panic about allowing it on the screen – Apple lawyers wave frantically – Moyé says she is just talking about the cover sheet and nothing comes up. Phil Schiller places a hand on his chest and gives a (jokey) sigh of relief.

All this stuff is sealed so we rely on Cook describing it to us, sans figures. Epic expert Ned Barnes testified showed fully-burdened operating margins for App Store, is that correct? No. It shows op ex for the company that’s sort of a total, and then it shows only sort of unallocated op ex methodology under it. Does the number for the App Store in the op ex column include all of the associated expenses? No, not at all. Anything for overall op ex for the App Store? No.

Is the operating margin higher than it would be if there had been a fully-burdened analysis? Yes definitely.

Epic’s remedies

“You can imagine if you turned review off how long it would take for App Store to become a toxic kind of mess”

Also terrible for the developer, depends on the store being a safe and trusted place where customers want to come.

What about Apple’s IP rights? What impact? “It seems like it would be forcing us to license our IP and I can’t imagine that.”

Epic also wants an order that no longer require developers to use IAP. What are the consequences.

“It would wind up where customers would then have to add credit card for all of these different apps.” Fraud risk would go up dramatically. “Also we’d have to come up with an alternate way of collecting our commission, and I strongly believe that IAP is the most efficient way to collect it.”

EPIC CROSS-EXAMINATION

Epic’s Gary Bornstein is up to cross-examine Cook.

He starts by digging into those emails about improving the Apple discovery process.

Matt Fischer notes some exciting announcements he would like to be able to make re enhancement of discovery. But at “WWDC 2016, the big announcement was search ads, wasn’t it?”

“And so the big announcement everyone was working for here was another way for Apple to make money off of discovery?” No, says Cook. I believe we also announced the Today tab which also did editorial and really launched a lot of apps

Operating Systems

Probably the highlight of the morning so far. One of the things we’ve been debating is market definition.

“Does Apple compete against Google in Operating Systems?” “We compete against their devices that they enable,” Cook replies. And so we also compete against Samsung, and LG etc.

“So your testimony is that you do not compete against Google on OS?” We benchmark them, Cook says. Now Bornstein brings up a video of a Berkshire Hathaway Shareholders Meeting interview with Cook from 2019.

“We compete on the OS side with Google and Microsoft, we compete in the hardware space with Samsung, Huawei, LG,” Cook says in the video.

There’s an awkward silence. “Was that you in the video?” Bornstein asks Cook.

“It sure looked like me,” Cook replies, with a wry smile. There’s some soft laughter in the room.

Profitability

We’re getting into that question of whether Apple looks at App Store profits separately.

A video is played of Apple’s Kyle Andeer’s testimony in front of Senator Klobuchar in the Senate Antitrust Subcommittee last month.

“When we look at the App Store it’s not a separate standalone business for us, we don’t have a separate profit and loss statement for the App Store,” he says.

Now, a document Epic got in discovery. It was prepared by a Ms. Casey for Cook and his CFO Luca Maestri. Again, it’s under seal so we see nothing on the screen and there are no figures. It’s from September 25 2019.

“And it has on the right side a chart titled ‘services operating margin percentage’ – with a number for the app store, tracked for a five-year period.” Yes. “And again your view is these are not fully burdened numbers.” Yes.

Then discuss R&D calculations. The people who made the document looked at not just direct costs but shared ones as well. There’s lots of accounting questions here in reference to the document we can’t see, so it’s hard to follow closely, but Bornstein is basically suggesting that this is no throwaway document. Cook and Maestri attended a meeting about it.

Another sealed document – same team “have come up again with an operating margin for the App Store which they are again presenting to you and others in the Apple management team.” This document was found in Cook’s files.

Did you know that your counsel produced after discovery was taken, on the very last day of fact discovery? “I don’t know that,” Cook replies.

Google Search deal

Bornstein brings up the deal Apple and Google struck to make Google the default search engine on iOS. That’s of course included in the DOJ and State AG lawsuits against Google for search engine monopoly abuse.

It’s a “very lucrative arrangement,” Bornstein suggests.

“We do so in the best interest of the user,” Cook replies.

It’s a very lucrative arrangement?

“They pay us money.”

They pay you – government claims that they pay you upwards of 10bn dollars

“I don’t remember the exact number.”

Don’t know if it’s upwards of 10bn?

“I don’t know.”

All that just to establish Google search engine as the default. A user can change default on iPhone, correct? Bornstein says: “I have an iPhone, I hope it still works after my examination today.” Cook and others give him a generous laugh.

But it’s sufficiently “frictionful” (a new word from this trial) to be worth Google paying a lot of money to make it the default. “That’s not the way I look at it,” Cook says.

Epic and ‘threats’

Last stretch of this marathon morning testimony. Apple offered Epic the ability to come back to the App Store with Fortnite. If it was such a bad actor, why would Apple invite it back.

You said it benefits users if you prevent malicious activity. But if Epic were the bad actor it wouldn’t be to the benefit of users?

“I think it would be to benefit, if they abided by the rules,” Cook replies. Because the users are caught in between two companies here. When inviting Fortnite back, “we weren’t thinking about the money at all, we were thinking about the user.” (Apple’s Michael Schmid testified this week that Apple made north of 100m dollars from Fortnite)

“It had nothing to do with money”

You testified before congress last year

Has Apple ever retaliated against or disadvantaged a developer who went public about frustrations?

And you maintain still, sir, that Apple did not retaliate against Epic by threatening to shut down Unreal Engine

Correct

And you testify Apple did not retaliate against Down Dog for coming and testifying

I’m not even familiar with that one

Are you familiar with your DPLA?

No, I have a vague knowledge of it. We’re shown the DPLA. Last sentence of 7.1 – which says if Apple determines or suspects a developer has engaged in, encouraged or participated with other developers re. any suspicious, misleading, fraudulent, improper, unlawful or dishonest act or omission, Apple may withhold payments.

Cook says he had no idea this language was added

And the consequences of Apple’s unilateral suspicion is that Apple can withhold payments both to that developer and all affiliates? Yes. And it is contrary to Apple’s culture to retaliate? Yes.s

Is Apple relay “curating a store” with 1.8 million apps? There’s some back and forth over this. Is Cook aware of rival stores that offer more specific sets of apps?

We make sure they adhere to guidelines, Cook says. But you haven’t gone through and selected which ones are valuable to users? “I think you are confusing curation and featuring,” Cook replies.

Are you familiar with Good Old Games for example? SlideMe? No, he’s not.

 

With much-needed help from Dorothy at Law360, here’s what happened when we came back from the break at 10:35AM, and in the afternoon.

Bornstein continues his cross-examination of Sweeney. He points out that users can choose between different browsers and search websites and find “all kinds of horrible” stuff on the internet. “You trust they can tell difference between browsers but not app stores?

Cook: "They’ve never had to do it before, they’ve bought into something that’s just an ecosystem that just works." ...I’m saying I. don’t know.” You’re saying Apple’s “vast marketing machine” couldn’t educate them on the difference, Bornstein asks. Cook says it seems like a complexity they shouldn’t have to worry with. “It’s an experiment I wouldn’t want to run.”

How do you know if you've never given others the opportunity? Cook says he’s giving his business judgment. Customers like safety, security and privacy, and some developers “do like the way that it is.” Some don’t.

Just one? Cook admits there are a few. Would it be surprising no developers testified on behalf of Apple in trial?” After a pause Cook says no, it wouldn’t. And Apple doesn’t have the unique ability to protect users? Cook says Apple rejects 40,000 apps per week, so there’s a lot of work and expertise that have to do with that.

Switching topics – in China, Apple’s iCloud service is part-owned by a Chinese government entity, GCBD. Cook confirms. An Apple doc says: “when iCloud is enabled, your content will be automatically sent to and stored by GCBD. So for these users, data is accessed and stored by a Chinese state owned entity. Cook says this is correct.

And Apple also complies with request to take down apps in the App Store?

Cook: Occasionally we have apps in the App Store that are illegal that we have to remove.

News apps get removed, Bornstein says. “I wouldn’t say it’s a regular occurrence…” Cook says. Apple has to comply with the laws of each jurisdiction it operates in.

Bornstein reads from document: “There are deep perils in Apple operating the only allowed software distribution facility onions, as it allows repressive regimes to demand developer participation in their surveillance and censorship programs, using Apple as a proxy for enforcement.”

A Tim Sweeney (Epic CEO) email from 2019 shows him talking about the decision not to get a Vietnam license for Fortnite because “obtaining the license would force Epic to take actions violation the basic human rights of our users, and would impose censorship” over creative expression.

Cook says he doesn’t take a position on others’ stances in regards to this.

Commission fees

Bornstein shows a video of Senator asking Cook what has stopped Apple from increasing commission fees to 50%. Cook replies in the video that Apple has never increased commission in the store.

It has increased scope of the commission that it applies though, hasn’t it, Bornstein says. Cook appears confused. For example, Bornstein says, developers could offer subscriptions before the commission fee was introduced. “Not to my knowledge,” Cook says.

A February 2009 says developers can pay in-app  without the commission fee, before Apple launched its in-app purchase feature. Cook: “I don’t know, but it’s not clear to me it’s on the store. It looks like it’s in review.” Another email is introduced regarding an ‘Unbound Medicine’ app. No it doesn’t refresh Cook’s memory.

We move to Skyscape, another medical app. Email correspondence indicates that there was a store within the app, Bornstein says. Cook says it’s not clear it’s on the App Store, looks like it’s going through review. And it would be in violation of rules.

Apple instructed this app to change so it instead launches safari for a purchase. So that’s like Apple hanging a sign saying “go purchase this at Best Buy.” I’m not familiar with this email, Cook says.

Bornstein then has Cook clarify about the rules in the App Store about directing users to alternative payment mechanisms, which he have been over enough, so I’ll spare you.

Apple redirect

Veronica Moyé is up again for Apple. She goes back to the discussion about the discovery terms. Was introduction of search ads intended to help with discovery in 2016? It was, Cook says.

Was introduction of search ads intended to help with discovery in 2016? It was, Cook says. And there was a process of removing some surplus apps in the store which would inherently improve discovery. A games tab was also added.

We go back to that deal with Google on making it the default search engine. Does Apple have similar agreements with other search engines with similar revenues? “I believe so,” Cook says. Why does it have this agreement? Google is a good search engine.

We return to the various sealed P&L documents, which are hard to keep track of. But Cook basically clarifies that he doesn’t recall seeing any similar documents since these ones in September 2019. He says he is in a better position to give “meaningful testimony on the meaning” of those documents than Epic’s expert Ned Barnes. Are these figures fully-burdened? No.

On Epic’s offer for Apple to come back – does Cook still consider Epic to be a “malicious” actor? He does. So why did you offer for them to come back? “We thought it would be the right thing for the user – that was a terrible thing to do to them really from the beginning.”

Government rules

There’s a mention of a policy change for the App Store in Japan. Do you know whether or not Japanese law required addition of language? Do you know what motivated these changes to the licensing agreement provision?

“My understanding is there was something in Japanese law that required it,” Cook replies, prompted by Moyé (the judge will pick up on this later).

Do you believe Apple has a unique ability to protect user privacy on iOS devices? “I believe that we do – we know a lot of things to look for, in terms of the OS itself, the results speak for self re. the malware that gets onto the system.”

Now that China question – does Apple gave an option as to whether it can or cannot follow Chinese law? It does not, Cook says. We ship the same iPhone in China as everywhere else, same encryption, other than the cloud piece it’s the same. Apple follows the law in every jurisdiction.

Has the same ATT policy, app nutrition label in China as everywhere else.

We then turn to this question of whether in app commerce was possible before IAP. Does that language in the document to you in app commerce was allowed. The examples given were of apps in violations of Apple’s terms and conditions, Cook says.

Moyé then tries to introduce a news article in relation to the point about Apple having no developers backing it. Epic objects – the article came out while Cook was on the witness stand today. Judge says it’s hearsay, and upholds. There’s other evidence on the record, she says.

RECROSS Bornstein

We have another delve into these P&L documents which we can’t see. One is a benchmarking exercise, Cook says, showing Apple compared with a bunch of companies.

We then talk about this language change in Japan. Bornstein notes that Apple didn’t know before why that change had happened. You remembered only when counsel prompted you? Correct.

Now back to that Google search engine deal. Cook testified you have search related deals with companies other than Google – Bernstein draws up some (undisclosed figures).

“There’s a line that says licensing – that’s your search deals? You can see that the Google number is quite a bit larger than other licensing” deals…

“Yes it is,” Cook says.

Then some back and forth again on the option to buy things in-app before Apple introduced IAP (the reason Epic is hammering this point is because it’s trying to show Apple raised prices by introducing IAP). We look at the Amazon Kindle. Apple allowed Kindle to have purchasing within the app before IAP, right? “Not to my knowledge,” Cook says.

JUDGE’S QUESTIONS

Judge: Mr Cook it was odd to me that you did not remember anything about that termination provision before the break, and it was only by the prompting of your attorney’s question that somehow you remember it

Cook: I remember something happening in Japan where we needed to make a change in the termination clause. That’s the extent of my memory.

Judge: At the beginning of your testimony you indicated that you wanted to focus on users. I’ve seen evidence that a significant portion of revenue from IAP come from gamers. Have you seen evidence to that effect?

And it’s incredibly significant as compared to all other users, revenue is coming from gamers more than from anyone else. Am I right?

Cook: The majority of the revenue on the app store comes from gamers.

Judge: And IAP in particular.

Cook: Correct

Judge: You say you want to give users control

Cook: That’s right, of data.

Judge: So what is the problem with allowing users to have choice, especially in a gaming context, to have a cheaper option for content?

Cook: I think they have a choice today, they have a choice between many different Android models, or an iPhone. That iPhone has a certain set of principles behind it.

Judge: But if they wanted to go and get a cheaper battle pack, or cheaper V-Bucks, and they don’t know that they’ve got that option, what is the problem with Apple giving them that option?

You could also monetise it a different way couldn’t you – I mean that is the gaming industry seems to be generating a disproportionate amount of money relative to the IP that you are giving them and everybody else? In a sense it’s almost as if they are subsidising everybody else.

Cook: You’re right there is some sort of subsidy there. The way I look at that – by having such a large number of apps, it increases the traffic to the store dramatically. Get a much larger audience than they would sell to if there weren’t free apps.

Judge: So your logic is that they don’t get the customer base – it’s more of a customer base, not an IP then?

Cook: It’s both, we have APIs to maintain numerous developer tools.

Judge: Look at banking apps – I have multiple banking apps I haven’t paid for. You don’t charge Wells F or Bank of America – but you are charging the gamers to subsidise Wells Fargo.

Cook: We charge for digital transactions. It’s just a choice of a model. We’ve made a choice, there are clearly other ways to monetise, we chose this one because we think…

Judge: It’s quite lucrative, and it seems to be lucrative and focused on purchase that are being made on impulse basis. That [impulse purchasing] is a different question whether right or not, not really right for antitrust law. But it does appear to be disproportionate.

I understand this notion that Apple is bringing the customer to the game – but after that first interaction, the gamers, the developers of games, are keeping those customers. Apple’s just profiting off that, it seems to me.

Cook: I view it differently than you do, I believe we are creating entire amount of commerce on the store. We do that with a lot of free apps, they bring a lot to the table, we don’t collect commission. And then we have the vast majority of other people on 15 percent.

Judge: Yeah but the 15 percent – you would agree with the basic proposition that competition is good.

Cook: I think it’s great.

Judge: You don’t have competition in IAP though.

Cook: Sure somebody can go and buy on the Sony PlayStation or Nintendo Switch

Judge: Well only if they know, right?

Cook: That’s up to the developer to communicate

Judge: And only if they decide to switch? The issue with the 1m dollar small business program, at least what I’ve seen so far, that really wasn’t the result of competition – the pressure you were feeling.

Cook: Of course we had lawsuits and all the rest of the stuff in our head.

Judge: Ok but it wasn’t competition.

Cook: It was competition after we did ours to 15, made Google drop theirs to 15

Judge: I understand perhaps that Google changed its policy but your action wasn’t the result of competition

Cook: It was the result of feeling like we should do something for small business – small developer

Judge: So when other stores reduced price, Steam, you felt no pressure to reduce your price

Cook: I’m not familiar with Steam and their financial model. One of the thing that’s missed here is there’s a huge competition for developers, in addition to the user. You can imagine if we had an above market kind of commission, people just wouldn’t develop for us.

Judge: I’ve seen evidence in the record, survey of developers, I’m going to share with you the results of this bar graph presented to me – don’t know how accurate, looked for source doc and couldn’t find. Indicated that 39 percent of developers were either very dissatisfied or somewhat dissatisfied with Apple distribution services. 36 percent somewhat or very satisfied. And 19 percent didn’t go either way, in the middle.

So with 39 percent of all your developers dissatisfied, how is that acceptable and how is it assuming those numbers correct that you are again feeling any motivation or incentive to address their needs?

Cook: I’m not familiar with the document you are referencing – friction is what creates a curated experience for users that they are assured safe and trusted. So sometimes the developer and the user are not necessarily intersecting interests.

Judge: It doesn’t seem to me that you feel again real pressure or competition to actually change the manner in which you act to address the concerns of the developers – if these numbers are right.

Cook: I would look at that v differently, we turn the place upside down for devs

Judge: Do you have and again you see the hundred binders behind me – I don’t recall seeing any other surveys or business records showing that you routinely conduct surveys re. developer satisfaction and that you in fact move or make changes.

I take with a grain of salt each side’s anecdotal evidence, what I am looking for is aggregates – do you have

Cook: That’s something Phil [Schiller] better placed to answer.

Judge: You as CEO don’t regularly receive reports

Cook: Correct

After a brief redirect from Moyé re. those P&L statements, we go to lunch break and that’s a wrap on Cook.

Cook leaves the courtroom at 12:30. A squad of cameras are waiting outside for him at the court entrance – he hangs around a bit. Says hello to the courtroom artist who is scribbling away outside.

AFTERNOON

We’re back at 13:15 with Brent Byars from Cravath questioning Apple expert Aviel Rubin, from technical director at the Johns Hopkins University Information Security Institute, which broke off yesterday afternoon.

There are various other ways people can make purchases of digital goods other than IAP, he says. And Rubin had not looked at transaction volume of those payment processors - somebody like PayPal, he suggests.

You haven’t assessed the security of any other payment processing system. And you’re not going to offer an opinion about that in this case? He hasn’t and won’t. It would be possible to analyse whether these are complaint with PCI standard – consumer info. Yes. And he says IAP benefits customers with frictionless experience, minimises amount of effort a consumer has to put in.

Rubin provided the opinion that Epic explored the possibility of using Apple’s enterprise program, as a way to distribute apps essentially via sideloading. Would be important to give testimony based on the complete record.

You see an email from Andrew Grant at Epic, Sweeney – extensive communications among Epic employees describing the fact Epic has an enterprise certificate. Relates to potential use of Apple’s enterprise program. Rubin says he doesn’t remember context but does look like that.

The email says it’s not a goal to syphon money away from iOS but to test whether iOS is an open platform. You believe this statement that the point is not to siphon away money? Rubin says his understanding was that Epic wanted to avoid the commission. Your role as a computer security expert, Bryars says, is not to ascribe motivation. Rubin says he thinks it is part of looking at a security analysis.

Apple then up for a very brief redirect from Jason Lo on the substance of that email, then from Byars.

And that’s a wrap. “The evidentiary portion of this trial is now concluded,” Judge Gonzalez Rogers says. On Monday we’ll get the back-and-forth from counsel “to assist the court in my evaluation of the arguments that are being made.”

“I have a considerable amount of evidence to review in more detail, than just hearing it during trial, and then doing the legal analysis in that framework of the evidence. And what evidence is persuasive” versus what is not.

My decision will be in writing, when all said and done – I am picking a jury on June 7 so I’m in trial and obviously won’t be working on this case. But I am not going to let things sit around, I think it’s important to try to get these things resolved while everything is refreshed.

Will work hard to try and get you a decision as reasonably soon as possible – hopefully before August 13 but you never know.

 

 

 


FW: Epic v Apple Day 14 Pool Report

Leah Nylen
 

Hello friends, it’s Liz from The Verge again. Questions/concerns: 510-612-2139 / liz@... / @mslopatto (my DMs are open).
Judge Yvonne Gonzalez Rogers (YGR) entered the courtroom with no mask. Later, she put on a gray mask.
For Epic:Katherine ForrestTim SweeneyLauren MoskowitzColleen KozikowskiBrent ByarsJin Niu
Apple:Richard DorenHeather GrenierKaren DunnPhil SchillerLauren DanseyVeronica Smith Moyé 

Witnesses today:Dominique Hanssens, distinguished research professor of marketing at the UCLA Anderson Graduate School of ManagementJames Malackowski, CEO of Ocean TomoAviel Rubin, technical director at the Johns Hopkins University Information Security Institute.
We begin by discussing potential rebuttal witnesses. Epic may call them; Apple feels the deadline has passed for this and there should not be any surprise witnesses. “There should not be any surprise rebuttal witnesses” at this point, Doren says. Forrest says that there was a finding of fact that wasn’t previously in the documents — ”it is an unanticipated event, it would be 10-15 minutes.” 
YGR: “There is nothing for me to rule on right this second.”
Dominique Hanssens, distinguished research professor of marketing at the UCLA Anderson Graduate School of Management, takes the stand at 8:10AM PT. He’s an expert in marketing and surveys, Veronica Smith Moyé establishes.
Hanssens was asked to design and conduct surveys of iOS device users age 13+ . He was also asked to evaluate Epic’s expert Peter Rossi’s survey and the validity of his results. Hanssen conducted two surveys: one of people who’d visited the App Store and downloaded apps in the last 12 months, and one of people who’d played Fortnite on their iOS devices in the last 12 months.
The main goal of the iOS survey was to determine how much they used other electronic devices (ie, non-iOS devices) and whether they used them on a regular basis. The other goal was to find out about electronic devices they could have used and didn’t. The language was chosen deliberately because a certain device might be used by someone on a daily basis and someone else might use it on a weekly or monthly basis. So the focus is not on the frequency, Hanssens says. The 12 month thing is significant — Hanssens says this corrects for seasonal variation. (You may recall that Apple previously argued that Epic’s antitrust analysis, which relied on a month-long study right after the holidays, was skewed by the survey period.)
So 92 percent of people in the iOS App Survey used other electronic devices in that 12 months, and 99 percent regularly had other devices available for use. For the Fortnite group, 97 percent regularly used other devices, and 99 percent had other devices available. The Fortnite survey also found that 94 percent of people played on other devices.
For robustness checks, to make sure the results hold for reasonable subsamples, Hanssens compared results by iOS device (iPhone v iPad or both) and found there was no material change in the two surveys. In another check, Hanssens’ group also excluded those who answered too quickly or two slowly. Still no change. They also excluded respondents who regularly used (or could have used) a Microsoft Windows OS smartphone (a “surprising” finding, Hanssens says, with no change. 
Now looking at Rossi’s results. They are similar but not quite the same. “There were several areas of concern to me,” particularly because Rossi is establishing a hypothetical. “The overall conclusion is that like me, he did a pretest on the first draft,” Hanssens says. But he made fairly substantial changes, and as a result had a different V1 and subsequently V2 and V3 — so three rounds of changes, none of which were pre-tested, Hanssens says. He did what Hanssens calls a “pilot test” instead of “pre-test.”  Rossi’s final pilot was 1/19/21 and then the real thing started 1/20/21. V3 is the same as the final survey. Hanssens says the failure to pretest V3 may have had an effect on how reliable the results are.
A specific question we are now looking at was modified between V2 and V3. It’s a forward looking question, asking if you’d make fewer purchases in response to a 5 percent increase. The no answer is “No, the price increase would not cause me to make fewer purchases.” The final survey question was “Thinking about the same 30-day period, would you have made the same purchases of IAP/subscriptions with higher prices?” so it’s a backward looking question. (Would you have made the same purchases at higher prices, in other words.) The no answer is now “No, I would have changed my purchases and spent less than $4.24.” The backward-looking scenario creates concerns, Hanssens says. “When a consumer decides to react to a price change and still go with the purchase, they take the risk, because it’s a price increase, of not being satisfied and paying more for it. If you move the clock back 30 days, then you already know what your experience has been, because you’ve actually purchased that subscription or app.” That conflates the price reaction and satisfaction with the existing product. “That conflation causes me some concern.”
We are now looking at two assessments. V1 and V2 with “don’t know” on the hypothetical vs. V3 “not sure.” On the forward-looking hypothetical, we get 4 percent of people as “don’t know” — “backward looking,” the number rises to 10 percent. “That causes me some concern,” Hanssens says.
Hanssens also thinks the no-to-yes change on the survey questions matter. On V1 and V2, we see “no” as 51 percent, that is, 51 percent would not make fewer purchases. On V3, we see 73 percent have said “yes, I would have made the same purchases.” Does the change from a no answer to a yes answer matter in the outcome? Yes, Hanssens says, it’s an example of “acquiescence bias,” or going along with the question. If the number of people he determined were “stickers” had actually been inflated, that means by definition you now have a smaller elasticity in absolute value than otherwise, Hanssens says.
Rossi’s 81 percent (from prior testimony)  is among the deciders; Hanssens is just among all those who answered the question. Setting aside sample differences and so on, Hanssens just asked about actual usage. Rossi was asking about a hypothetical. That’s the major difference.
Hanssens pre-tested his survey he says.
Now we have Lauren Moskowitz for Epic doing cross. Hanssens is not an expert in general survey design, he says. He doesn’t recall having done surveys on smartphones before, either.
He doesn’t know how his surveys were used by Apple’s other experts in this case. He’s heard of a SSNP test now — but hadn’t before his deposition. He did not conduct a SSNIP test here. We are now looking at Lafontaine’s market definition exercise. “Market definition is fundamentally about demand substitution” the snippet begins. Hanssens had an availability survey but not a substitutability survey, Hannsen agrees. 
An individual can’t substitute something if it’s not currently available, Moskowitz points out. “Willing” is also a key phrase in Lafontante’s definition. “Willingness” was not part of Hanssens’s survey. Hanssens’s survey gave examples for “availability” such as household devices or work devices, or a friend’s device. The friend is one of the people he asked people to think about, Moskowitz says. He asked in the Fortnite survey if he used other devices for game-playing, but didn’t ask the specific uses for which a device could be available. (So for instance, you might have a work computer that you answer emails on but wouldn’t play games on.) 
“You just didn’t care what respondents were using their devices for,” says Moskowitz, just whether the devices were “available.” He was hired to do availability, he says.
We now refer to Hanssens’ written direct, para 16 and 17. 81 percent of iOS users and 94 percent of iOS Fortnite users had regularly used  a non-Apple device. Lafontane had characterized Hanssens’ survey differently, implying current rather than past use.
Now looking at Apple’s opening statement slide: “95 percent regularly used or could have regularly used devices other than their iOS device.” It does not include the last 12 months, and does not speak to individuals who do not currently use other devices. 
Some of his figures include devices that are still manufactured by Apple, Hanssens says. So looking at his Fortnite results, when he gave this survey, he didn’t ask whether they actually used those devices to play games. He just assumed that those who used a console used that device to play games, Moskowitz says. “You don’t know one way or the other if they just used it to watch Netflix,” Moskowitz says. Hanssens agrees. 
H: I did not test it because these consoles are designed specifically for game-playing
M: You assumed it.
H: Yes.
“Let’s talk about ‘regularly.’” This is an imprecise word — and if a term is vague or ambiguous, it can create confusion, Moskowitz says. That means there might be clarity problems, she says. Hanssens agrees. Vague wording can introduce error, Moskowtiz says. Hanssens agrees. One pretest respondent thought ‘regular use’ was vague, and Hanssens didn’t probe into the interpretation of that word among those in the pre-tests, Moskowitz says. 
iOS App Survey Pretest: We are now seeing responses to “regularly” from the pretest — and they vary from once an hour, once a week, all the time, a couple times a week. We are getting some tetchy back and forth between Hanssens and Moskowitz about what “regular use” means. YGR instructs Hanssens to answer Moskowitz’s questions.
In the pretest, Hanssens did not ask whether the term “available to regularly use” was clear, specifically. He also did not ask if he thought the example provided for “available to regularly use” was clear. And in response to the general question, one respondent did say they thought “available to regularly use” was vague. Included in this group are also devices the respondents didn’t use. 
Hanssens did not revise his survey at all in response to his pretest questions.
He did not use focus groups. Rossi did. Hanssens skipped the step because he thought people understood the difference between a phone and laptop. But his Microsoft Surface — is that a tablet or a laptop? He says both.
Now looking at Microsoft Windows smartphone results. 13 percent of respondents for the app survey (and 19 percent of the iOS Fortnite survey) said they had these phones, which are no longer being sold or serviced. As of 2015, market share for those phones was less than 1 percent. Hanssens didn’t acknowledge this was surprising in his original report, Moskowitz says. Nor did he look at Apple’s data to see if the results had a basis in reality.
In his robustness check, he eliminated 30 percent of respondents (“was available” App survey) and 43 percent (“was available,” Fortnite survey) to control for the Windows phone responses. You can’t rule out that some or all of these remaining respondents were confused or unsure in response to the survey questions, can you? Moskowitz wants to know. Hanssens is confused by this question. 
We are moving to Rossi, and the hypotheticals. They’re appropriate when they’re an inherent part of the survey, Hanssens indicates. Rossi’s questions — Rossi collected his data in screener data, not using “regular” or “last 12 months.” Rossi didn’t report point estimates on this. 
Now redirect. Veronica Smith Moyé is back. 
Hypothetical questions — Hanssens feels that Rossi did not take the appropriate approach to hypotheticals. Hanssens says it’s important to do pre-tests; Rossi, for his backward-looking hypothetical survey question, did not do that, Hanssens says.
Now we discuss Microsoft. Did Hanssens do an assessment about the possibility of confusion about the Microsoft WIndows phone affected his results? He did. He took out those respondents for an assessment. 
We are now discussing AMBIGUITY.  “Regularly used” is not ambiguous in the context of his survey, Hanssens says. It’s a common English-language term, and he precisely wanted people to use interpreting for what’s relevant to them, and that is why he did not define it clearly. “I did not want to impose a certain frequency cycle on them,” Hanssens says. After all, he drinks coffee every day and goes to the dentists four times a year (seems like a lot, but ok) — and would say he both does regularly.
Once the Microsoft phone respondents were removed, the sample size was still good enough to draw conclusions, Hanssens says.
Onto consoles — Hanssens didn’t ask if people played games on consoles because that’s what they’re designed for. He didn’t want to ask something obvious. He also says he didn’t listen to LaFontaine’s testimony (or read it) so he can’t determine how she used his data. 
Substitutability analysis — are his results relevant to his question? Yes, Hanssens says. His survey determined that consumers had other devices they regularly used. Moyé is trying to get him to say that regular use of other devices speaks to substitutability but Epic’s Moskowitz successfully objects, cutting off the line of questioning.
RECROSS 
Hanssens doesn’t use “substitute” in the survey or the written direct. Hanssens says he doesn’t need to understand how his survey may be used to conduct one successfully. The only assessment he did re Microsoft confusion was to remove those respondents. He didn’t assess the understanding of the remaining respondents.
Hanssens is excused at 9:41AM.
James Malackowski, CEO of Ocean Tomo, takes the stand at 9:45AM. Richard Doren is handling his direct examination.
He’s a patent/intellectual property expert — Ocean Tomo is an IP-focused valuation, strategy and investment banking firm. He’s an accountant (CPA) and a certified licensing processional (CLP). He’s previously testified as an expert witness in district court, state court, bankruptcy court, etc more than 50 times. He’s appeared before YGR previously as well, in Netlist v Diablo. “I remember the case, I do not remember you,” YGR says. “That was a pretty memorable case.”
IP is a tool for economic development, Malackowski says. Business planning and investment decisions require predicting IP rights.  There’s an interplay between IP and antitrust. As an expert, he’s testified on matters related to that intersection (patent misuse, brand compliance for license agreements etc). Exclusivity is what gives the incentive to invest in innovation, Malackowski says.
“Free riding is when the relationship between the inventor and user breaks down. There’s no longer an agreed-upon contract or set of terms,” Malackowski says. He’s taken FTC guidelines on IP into account in this case. He “searched high and low” through Epic’s case documents, and found nothing about IP concern. So his assignment was to assess the “innovation footprint” for the iOS ecosystem: the R&D investment, the IP that resulted, and the use of that IP by Apple or others by license, including specifically Epic Games.
Overview of opinions: 1. Apple’s substantial and sustained investment in R&D results in valuable IP 2. App developers and consumers benefit from Apple’s innovation 3. Epic made substantial use of APple’s IP 4. Epic’s requested remedies would result in a compulsory license without compensation to Apple for its existing IP and ongoing innovation
A chart showing that Apple spent more than $101 billion from 2005 to 2020. The trend has been significant and upward, with more money spent on R&D every year. R&D is the raw material for creating IP, Malackowski says. That’s why it matters.
So we see 23,012 utility patents, 2,979 design patents, and 3,907 utility patent applications — looking at what exists and what is in process. In some companies, R&D grows significantly but patent application falls off, suggesting R&D has changed or become less efficient. Knowing how the input and output relate is important, he says. Apple’s data suggests it has a significant and sustained commitment to innovation, Malackowski says. Ocean Tomo manually reviewed 3,500-4,000 of Apple's patents to make sure they were relevant. They wanted to make sure Apple wasn’t just collecting patents.
Apple’s IP was relevant to the iOS ecosystem, Malackowski says. We now look at a slide of his findings. iOS: 1,227 patents, with 559 applications; App Store: 165 patents, 91 applications; 2,515 dev tool patents, 696 dev tool patent applications.


James Malackowski, CEO of Ocean Tomo, takes the stand at 9:45AM. Richard Doren is handling his direct examination.
He’s a patent/intellectual property expert — Ocean Tomo is an IP-focused valuation, strategy and investment banking firm. He’s an accountant (CPA) and a certified licensing processional (CLP). He’s previously testified as an expert witness in district court, state court, bankruptcy court, etc more than 50 times. He’s appeared before YGR previously as well, in Netlist v Diablo. “I remember the case, I do not remember you,” YGR says. “That was a pretty memorable case.”
IP is a tool for economic development, Malackowski says. Business planning and investment decisions require predicting IP rights.  There’s an interplay between IP and antitrust. As an expert, he’s testified on matters related to that intersection (patent misuse, brand compliance for license agreements etc). Exclusivity is what gives the incentive to invest in innovation, Malackowski says.
“Free riding is when the relationship between the inventor and user breaks down. There’s no longer an agreed-upon contract or set of terms,” Malackowski says. He’s taken FTC guidelines on IP into account in this case. He “searched high and low” through Epic’s case documents, and found nothing about IP concern. So his assignment was to assess the “innovation footprint” for the iOS ecosystem: the R&D investment, the IP that resulted, and the use of that IP by Apple or others by license, including specifically Epic Games.
Overview of opinions: 1. Apple’s substantial and sustained investment in R&D results in valuable IP 2. App developers and consumers benefit from Apple’s innovation 3. Epic made substantial use of APple’s IP 4. Epic’s requested remedies would result in a compulsory license without compensation to Apple for its existing IP and ongoing innovation
A chart showing that Apple spent more than $101 billion from 2005 to 2020. The trend has been significant and upward, with more money spent on R&D every year. R&D is the raw material for creating IP, Malackowski says. That’s why it matters.
So we see 23,012 utility patents, 2,979 design patents, and 3,907 utility patent applications — looking at what exists and what is in process. In some companies, R&D grows significantly but patent application falls off, suggesting R&D has changed or become less efficient. Knowing how the input and output relate is important, he says. Apple’s data suggests it has a significant and sustained commitment to innovation, Malackowski says. Ocean Tomo manually reviewed 3,500-4,000 of Apple's patents to make sure they were relevant. They wanted to make sure Apple wasn’t just collecting patents.
Apple’s IP was relevant to the iOS ecosystem, Malackowski says. We now look at a slide of his findings. iOS: 1,227 patents, with 559 applications; App Store: 165 patents, 91 applications; 2,515 dev tool patents, 696 dev tool patent applications.Some dispute about evidence occurs at 10:15AM. We now break. 
We return at 10:35. The evidence issue is apparently about CVs. They are in evidence now.
DX 3134: a patent, #10,726,604 B2 — it’s a patent relating to the Metal graphics API. You may remember Metal from earlier this week, when we were played a 20-second clip of Tim Sweeney enthusing about it at WWDC.
DX3052: a patent, #8,620,272 B2 — a patent relating to the UI Kit and Audio Toolbox. It is for mobile devices, and existed during the relevant time period (filed in 2020). We have heard testimony in this trial: the UI kit was used by Epic Games, we heard in other testimony.
Patents, copyrights, and trademarks are all part of the asset plan and portfolio. They may work distinctly or they may interact, all working together on a specific innovation. In some innovations, such as Metal, a mix will come into play.
We are now looking at Metal. It has 11 patents, and 4 applications. This is a good example because it does make clear that metal, like on the back of the smartphone, was excluded. This is just API, SKD, etc, Malackowski says.
We now discuss Malackowski’s second opinion, that app developers and consumers benefit from Apple’s innovation. We are looking at slide 10, a hilarious graph with lots of app graphics under the line. There were 500 apps in 2008; there are now 1.8 million, an increase of 500 percent. Malackowski says that Apple made it easier to develop apps, and that what they were creating was of higher quality in terms of features (eg augmented reality and machine learning APIs). And as to if consumers benefited: he checked out the number of downloads. The first benefit is diversity of choice. We also see a slide showing “dramatic growth in consumer adoption.” 180 billion downloads in 2020. The consumer quality benefit is largely about security and privacy. 
So in conclusion, the trend lines bear obvious similarity: consistent, sustained, and significant growth over the time period, Malackowski says. These four graphs are put together to look for discontinuities. What you find is that there is a relationship between that starting investment (eg the protection of IP) and the consumer and developer use. 
Now onto point 3: Epic made substantial use of Apple’s licensed IP. Epic witnesses have testified to this. Epic experts have also mentioned this. We now see that Epic has used a number of Apple APIs, SDKs and Xcode to make Fortnite playable on Apple devices. “You can't not use them if you want to be on the platform," Malackowski says. Testflight was also used — so Apple IP was used at each step of the process, Malackowski says. 
Epic has used IP from Apple: 235 US patents and 52 patent applications, per a slide called “Epic has made substantial use of IP licensed from Apple.” As the owner of this IP, Apple can exclude others from using it, Malackowski says.
We are now looking at the Apple Developer Agreement. It offers a limited license to use Apple’s IP. Next: the Apple Developer Program License Agreement, which offers an additional limited license. There’s a $99/year program fee for it. The benefit of ADPLA is access to the IP, and it requires apps go through app review and be solely distributed through the App Store, Malackowski says. “This is very consistent with what a licensing professional would expect to see” in such circumstances, he says.
Opinion 4: From a licensing perspective, Epic is asking for a de facto compulsory license without compensation to Apple. The requested relief would take away Apple’s control and provisions of its license agreement and force Apple to house, for instance, a store within a store, Malackowski says.. The store within a store could impair Apple’s property rights in that it would not receive the compensation Apple negotiated for. They would also be compelled to continue to support Epic in its store not just today but in the future. “It’s quite extreme,” Malackowski says. From a business standpoint, that means it’s no longer possible to predict what return you’ll get on your innovation, and it may no longer be justified to invest in it.
Freeriding has a relevance to this point. Requested relief would result in free-riding. The requested relief isn’t consistent with the licensing agreement. It’s inconsistent with guidelines a licensing professional would use. There is no discussion of IP and compensation for IP in Epic’s expert reports, Malackowski says. This would increase Apple’s cost and remove their interest in innovation, Malackowski says..
CROSS:
Epic's Lauren Moskowitz is now discussing Malackowski’s previous expert opinions. He has been rejected from six other court cases (one is Oracle v Google) — but he’s testified in about 50 cases. I can’t keep up with how quickly Moskowitz is going, so let’s just stipulate he’s been excluded from several cases. Courts have found his testimony was "unreliable," "methodologically flawed" and "improper.” Other quotes include:  “flaw in the nature of your analysis.” “Allowing your testimony to allow such inflated numbers to the jury would be prejudicial to the jury even if you were cross-examined.” 
Malackowski is getting testy that he doesn’t have these documents in front of him. “If you could show it to me, I would be happy to confirm." Moskowitz is now showing one to him. The court prevented his opinion from being offered. We are now looking at another document saying that Malackowski “purports to opine on the comparability of license terms, products, patents and negotiation positions, much of that evidence is superficial or insufficient to show comparability.”
Another case: “The opinions are also inadmissible because they are unreliable.”
Malackowski testified that Apple has valuable IP. His work in the case was to provide an understanding of the value of the IP, but he did not conduct a financial valuation (or appraisal) on this. That’s true for IAP, no financial valuation or appraisal, he confirms.
Malackowski did not chart Apple’s R&D relative to revenue, profits, any version capitalization, its total assets or comparable companies. He didn’t try to disaggregate the lines of business. He did not quantify the amount Apple’s investments in IP assessments specifically associated with the App Store, either. Nor innovation that specifically relates to API or SDK. 
The specific cost of development of the App Store was not the basis for the 30 percent commission, Malackowski says. The $99 developer fee (and the $299 fee for enterprise) is a return on Apple’s investments, Malackowski says.. It also makes profits from its devices, he agrees. He was not asked to quantitatively determine what would be a fair return on Apple’s investment. No one at Apple gave him a file showing the specific IP relevant to DPLA and no one told him that list existed. Other than searching terms in the PTO, there’s no list at Apple of what IP is being licensed in the DPLA. Licensing agreements should actually show which patents are being licensed, he says. But the DLPA doesn’t talk about specific IP.  Malackowski admits that the entirety of the IP he mentioned isn’t necessarily licensed under the DPLA.
The source for all his patent data are publicly-available patents, and that’s how he generated the list from which he did his own work. He got help from a commercial program allowing him to identify patents, he says. His face is getting redder. He seems frustrated.
Malackowski said there were 165 patents that reference the App Store. Most of the review was done by the team; he personally reviewed about a dozen. One way this can be overinclusive is if “App Store” is referenced in the patent but the patent isn’t about the App Store. We now look at DX 1182. This is a design patent, which is included in his overall set, but app developers don’t generally use this. DX 5447 is a spreadsheet produced of the Apple App store patents. So if we find this patent here, it would be in the 165 list. We find it.
Should we delete it from the list, Moskowitz asks. No, Malackowski says. Is it relevant to the DLPA? I don’t believe they would be utilizing this patent, Malackowski says. 
We now look at the patent itself, D617,334 S: The App Store trademark is reference to its trademark (and that it is property of Apple Inc). It appears nowhere else. Malackowski says this relates specifically to the app store.
Now looking at PX 1183. It’s a patent also on the 165 list spreadsheet (DX 5447), Malackowski confirms. The invention is for determining quality of sleep. We search for “App Store.” Just one instance. “This App is publicly available on the iOS App Store,” the line reads.  Malackowski agrees the patent may be over-inclusive.
Moskowitz is now casting doubt on whether Apple is licensing *trademarks* to developers — Malackowski says sometimes yes. There are about 1,500 trademarks, but he doesn't believe those are licensed to developers in the DPLA. Under the DLPA, the developer gets access to a comprehensive suite of IP, and that Epic gets access to API. 
Open source shouldn’t be any part of your work here, right, Moskowitz says. So in terms of Webkit, it’s listed in your report. You’re aware it’s open source? Includes open source, sure. Many APIs include open source. He did nothing to disaggregate what the value is for proprietary stuff  versus open source.
Not all IP is protectable. THe most obvious example is an expired patent, Malackowski says. He’s also familiar with instances in which enforcing a copyright would introduce harm. Google v Oracle is one right? Yes. The Supreme Court found that some API were subject to fair use. Malackowski has not done analysis to determine whether the API Apple has is subject to fair use.
Malackowski has not cited or offered any evidence that shows that Apple was prohibiting store-within-a-store to protect its IP. Malackowski says Schiller testified about security. Moskowitz says set that aside. Does he know that’s to protect against free-riding on Apple’s IP? He believes that’s true. His only evidence is just live testimony? There are no documents? Malackowski doesn’t remember testimony or documents. Has he seen any evidence that the reason that prohibition came into being was to protect Apple’s IP rights? No. Has he seen any evidence that the prohibition on side-loading was to protect IP? I believe yes, Malackowksi says. He can’t recall a document specific to that, though.
Can Apple charge whatever it wants, even up to 90 percent? Yes, theoretically. 90 percent is an extreme rate, though, Malackowski says. The trade secrets can be licensed by the DLPA — and there’s no time limit for how long Apple gets commission. Restrictions on licensing agreements can harm competition? Yes. He’s not offering an opinion on whether these licensing agreements do harm competition.
REDIRECT. Doren is back. We have 3 hours, 10 minutes  left in Apple-Epic, YGR says.
We are looking DX3900, the DPLA. Malackowski says it is a portfolio license, instead of one that enumerates specific patents. This license remains in place over time, so every time Apple has a new patent it doesn’t have to be noted. The majority of ongoing licensing agreements are portfolio-based for that reason. App review is required as part of the license.
We are now discussing design patents. He says they are relevant because they specifically address the design of the display of the App Store on the iPhone. We also discuss the sleep patent. Would improvement in iPhone being able to determine quality of sleep help app developers? Yes, it would provide a toolkit that would help app developers come up with newer/better apps, Malackowski says. “It describes an invention they may use — the gyroscope feature, essentially — of the phone.”
Now onto prior cases, the long and boring segment that began his cross. Motions are filed in every case against every expert, he says. Trial testimony more than 50 times, more than 200 depositions. Oh no, we are going to look at specific cases again. Malackowski testified in some of the cases Moskowitz cited — just not specific pieces of testimony. I get the sense this is more for the judge (ie, what’s precedent and allowed) than it is for us.
Malackowski has testified 8 times in the Northern DIstrict of California, not counting this case.
Fair use: fact-specific inquiry. He did not analyze whether Apple’s IP is subject to fair use. Malackowski’s been retained by Epic’s counsel (Cravath) on other cases over the years, and has spoken to Cravath partners and associates about IP. "I may not be invited back again since you're asking about it.”
RECROSS.
Rembrandt case: the federal court rejected him.
REREDIRECT:
It was subsequently resolved by the federal circuit, making his motion moot.
Malackowski steps down.
Aviel Rubin, technical director at the Johns Hopkins University Information Security Institute, is sworn in at 12:27PM.
Jason Lo for Apple is conducting the direct exam. We begin by going through his degrees. In this case, Rubin was asked to look at the App Review process and App Store distribution, and determine whether it has an impact on security (privacy, reliability, trustworthiness); he was also asked to look for real-world data to inform his opinions.
Apple’s App Store review and centralized model has significant security benefits for iOS, resulting in lower infection rates on phones, and a lower volume of malicious and untrustworthy apps, Rubin says, summarizing his conclusion.
“I look at security as dealing with an adversary,” ie a bad person looking to cause harm. Safety has to do with making sure that malicious code isn’t running on a device. Privacy means protecting your data. Reliability means knowing your device will work when you need it. (ie, you can’t call 911 because of malware) Trustworthiness has to do with your confidence that all the security properties will be there — ie, that your device will protect you.
We now stand in recess until 1:15PM.
Court is back in session at 1:15PM. Doren is at the podium to discuss the rebuttal issue, which has “ripened.” Apparently Doren received a notice for an Apple employee to testify, and Apple feels misled. According to Doren, the deadline for rebuttal witnesses had passed before the notice; the notice was "intentionally and provocatively" late.
Forrest responds: Two potential third-party witnesses (Wenke Lee and Nancy Mathiowetz) were what Forrest was thinking of this morning. The issue has to do with IAP — what’s new was the back-and-forth with Schiller about in-app commerce before IAP. If there was an opportunity before IAP, then it would have effectively increased the cost to the developers of those in-commerce opportunities. They need not call her if the documents are admitted. 
“This is sandbagging, pure and simple.”
It may be late, YGR says. Give her the documents, and she’ll look. Doren is punchy!!!!! Forrest says she’s insisting because it’s critical.
YGR: If it’s critical, you should be prepared for it. At most, I’ll allow the documents in. No rebuttal witnesses.
We are now going back to Rubin.
There are several models of app distribution. So there’s direct distribution, where the dev gives the app directly to the user. There’s multiple app store distribution, where devs build apps and there are multiple app stores (numbered 1-5 on the slide), and both devs and users have choices about app stores. Occasionally there may be an app that’s only available on App Store 4, and so the user would need to get there to get that app. The two models aren’t mutually exclusive. The Android system uses the combination of the app stores and direct distro.
There’s the central model, where devs send their apps to the single app store, and users have to go to that app store as well. The iOS app store uses this model.
Phones have to be set up for the type of app distribution they’re participating in.
Security implications of direct distribution: Let’s say a developer is Bad, sending a malicious app to users. When users receive it, they’ll install it and be infected with this malicious app. Developers aren’t the only potential source. Say a user installs an app on the phone, because they are enabled for direct distribution, they can infect other phones and other users.
Multiple stores: let’s say we have one bad dev, creating a malicious app. The dev sends the bad app to 4 different app stores. Now app store 2 sends it out; app store receives the app but refuses to distribute it (because, say, there’s a stricter security policy); App 5 distrubtes, but App 6 does not.
Attacker tools: 1. Multiple listings - Bad App Dev will submit an app to more than 1 app store, not all of which have the same security criteria 2. Multiple listings with different variations - the idea here is that the dev makes 2 versions; one is benign, one is malicious. The good app is posted on a high-profile Good App Store, they wait for it become common, then distribute a bad version of the app that looks exactly the same as the good one. Now if people get the app from the wrong store, they get a malicious app. 3. Listing in one then updating in another - posting an app in multiple app stores. In less-secure app stores, there will be updates for the app that make it malicious 4. Imposter apps - borrows from a well-known apps. Take Evernote, well-known for being useful and safe. An imposter app calls itself Evernote and makes it look like Evernote, but behind the scenes something bad is happening. 5. Imposter store - next level of imposter app. Let’s say there’s a store that’s popular for productivity apps. There will be a whole store with a similar look and feel and name, with good apps there. Then, once people start using it, the apps will be replaced with malicious apps. 6. User infection - related to sideloading. Once a user is infected, they can then infect others with the app.
When we look at the data, we see that the weakest link is the problem, Rubin says. With multiple stores, there are different levels of security. They may not compete on security — and those stores may be much less secure places.
Centralized distribution has advantages from a security perspective. If it does a good job, it’ll prevent malware. The single app store may miss things form time to time — nothing is perfect when it comes to software security. The goal is to do as good a job as possible, Rubin says. The centralized app store lets you do that.
So if a malicious app gets through the centralized app store, the app store managers may find out that this happened. They can then change their review process so that kind of app will be blocked if it’s seen again. Further, the app store could ID the developer and ban them. “So the centralized distribution allows for a process that’s dynamic,” Rubin says.
“My view is that the central model is the best for security,” Rubin says. This is pretty similar to Craig Federighi’s testimony yesterday.
Rubin says he looked at third party data — three reports, one from Nokia, one from Risk IQ and one from PurpleSEC. Rubin often looks to industry studies, he says. Others in the industry also rely on reports like these.
Here’s the Nokia report (Threat Intelligence Report 2020) we also heard about with Federighi’s testimony. Their product, a security product that protects their network (and has anti-malware capabilities),  has visibility into 200 million devices. They also have a sandbox to see how malware works. They also use honeypots, or a popular security tool, devices on hidden parts of the internet. Not all IP addresses that are possible have been assigned. So Nokia puts their honeypot server into an unused area by giving it a random unassigned IP address. Any traffic that arrives there is by definition malicious, because no legitimate computer is trying to communicate with it — because the IP address is unassigned. Hackers, though, are generating random IP addresses. So the honeypot may be malware that’s never been seen before.
Infections by device: 26.46 Android, 38.92 Windows/PC, 32.72 other; 1.72 iOS.YGR: isn’t that just there are more Androids?
Rubin: well, globally, there are 3x Android compared to iOS, so we’d expect 5 percent Android not 26.6
What is iOT? YGR asks.
Rubin explains that he means smart thermostats etc. It’s not very well-controlled for updates.
The Nokia report says that “The fact that Android applications can be downloaded from just about anywhere still represents a huge problem… iPhone applications, on the other hand, are for the most part limited to one source, the Apple Store.”
DX4934: So this is a RiskIQ report: “2020 Mobile App Threat Landscape Report.” They looked at about 2 billion apps. In this study, they looked at over 120 different Android stores to find “blacklisted” apps. (Rubin doesn’t like the term) A “blacklisted app” is known to be suspicious or malicious or have some concern. Total Virus publishes a list of blacklisted apps, and there are other sources as well. 
P6 of the document: The most prolific stores of blacklisted apps in 2020 were 1. Google Play Store (10,292) 2. Xiaomi (3,020) 3. APK20 (1,708) 4. PConline (1,656) 5. Tencent (1,493)
The report considered Apple — looking at the store — and refers to Apple as “Fort Knox.” It rarely hosts dangerous apps, Rubin reads from the document.
Some app stores are more dangerous than others (ie, have a higher concentration of bad apps) 1. Xiaomi 2. Baidu 3. PConline 4. AppLenovo 5. APK20
So the stores with a higher concentration are more dangerous. These stores distribute android apps.
YGR: Can you tell me anything about this company, RiskIQ? How can I be sure it’s not biased?
It’s pretty well-known, Rubin says. Says it’s a pretty widely cited source.
YGR: Do you know if it has any funding by Apple?
Rubin: I think they're an independent security company but I don’t know for sure
DX4956 PurpleSEC report. They say that 98 percent of malicious attacks on the internet are related to social engineering, ie, when the attacker somehow fools the user into getting the user to participate. Here’s an example: There was a malware on Android that disguised itself as a systems update. The user would look at their phone, a pop-up would tell the user to update the system. The user would be asked to enable various things like GPS. Then the phone would connect to a botnet, a network of compromised devices. So the commands would come to the compromised phone, and it would then turn on the camera and take a photo. It could also say, launch an attack — and that would mean listening to the next phone convo, listen to both ends of the convo, and send the audio to the attackers. The device is completely owned at that point.
You can’t stop these attacks on a device level because the user has helped out and given access. That’s why human review is important, Rubin says.
From looking at the studies, his conclusions were reinforced that App Review and central distribution results in lower infection rates and a lower volume of malicious and untrustworthy apps. Rubin chose these reports because he liked the methodology. Other reports were consistent, he says. “I didn’t see a single report that showed the opposite.”
Some stores are ad-based, making money by getting eyeballs on the ads, Rubin says. Those stores are not as strongly incentivized for security. One study he reviewed showed that malware is more common when there’s adult content, Rubin says.
Rubin spoke to Kosmynka and looked at Apple documents, as well as Google's process in the Play Store. At a high level, Google internal info included statistics about the human app review process and internal evaluations. He found that Apple’s process looked at far more apps in human review, and their process was more effective, Rubin says. 
CROSS
Brent Byars is conducting the exam. 
Rubin has testified in court cases before, mostly patent cases, and he has worked on cases for Apple. He also heard Mickens’ testimony, and agrees Mickens is qualified.
Android has less secure runtime protections, and cited studies about sandboxing, Rubin says. Sandboxing is weaker on Android. In fact, he discussed one specific vulnerability due to external storage, which was not sandboxed on Android at that time. iOS, to his knowledge, does not have external storage. He hasn’t done an analysis to see if the “man in the disk” vulnerability would happen on iOS.
The uniformity of the iOS operating system contributes to security. All Android device makers use variations of Android, which means updates are irregular and don’t always occur. This is fragmentation of the OS. That makes Android devices more attractive targets for malware. Epic is not asking Apple to license iOS to other device makers, right? Byars asks “I have been very confused about what Epic is asking for,” Rubin says. He eventually agrees Epic is not asking for licensing iOS. 1. Less secure runtime protections 2. More fragmented os 3. Centralized app store with less comprehensive review processes
Each could contribute to malware on android.
Epic is not asking for the App Store to be banned. In China, though, there are multiple stores competing with the Android, but Rubin didn’t compare it. 
CVE is a broad term that may include more than apps — he didn’t look directly at the ones that are assigned to apps. Android’s code being open to the public could make it easier for the public to identify CVEs, right? Byars asks. “That answer is nuanced,” Rubin says. We turn to a binder. He had previously answered this question, “it might” per the binder testimony. This may be why more CVEs are reported for Android than iOS, Byars asks. Rubin says he can’t say yes or no to that. We now go back to the binder for Rubin’s deposition. He was previously asked a similar question, and answered. “It wouldn’t be possible if there weren’t vulnerabilities there, but given there are vulnerabilities, I think that is right.”
Now onto Nokia. DX 4975.8, which Rubin used to compare Android and iOS — but it’s not possible to compare iOS to Mac using this slide, Byars says. Mac is not represented on this slide. Rubin says he assumed it was built into the Windows/PC section, but it doesn’t say specifically.
Now looking at malware in mobile networks - fig. 2 monthly mobile infarction rate since Jan 2019. There’s a 2017 number, but we don’t know if it’s a typo. Rubin hadn’t noticed it until just now. He didn’t discuss the inconsistency with Nokia. His understanding of the 0.2 percent figure on the slide is that it would include all the infections and malware on Android he’d described previously, as well as any other mobile device. Rubin wonders if they meant 23 percent, if there was a typo. This just appears to be brief confusion, the 0.2 percent figure is accurate, we determine.
There’s malware that doesn’t activate or perform any malicious actions. That wouldn’t have shown in the study, though, Rubin says. “Based on their methodology, that’s how I understand it.” 
Byars says to look at slide 12. There’s only one infection expressly associated with a Mac. This infection achieved some notoriety because it was the first malware that was the first notarized by apple, Byars says. Rubin says he’s unaware of it.
There’s now a confidential email. At the bottom of the first page is a mention of Shlayer, the first Mac malware notarized by Apple. It includes part of a Wired article. The company was notified on Aug. 28, revoking the notarization and neutering the malware anywhere it was installed. Rubin’s report didn’t address notarization.
Rubin spoke with several people at Apple to develop his opinion, but didn’t discuss whether Apple had performed a formal security analysis before the iPhone was brought to market. Nor did he discuss whether Apple developed a threat model before the iPhone was brought to market.
Another step in the security analysis is the construction of policy invariance. He didn’t ask anyone at Apple for that, or see it. He assumed based on his conversations that Apple had created policy invariance. 
iOS has an extraordinary threat model, causing Apple to employ extraordinary features, Rubin agrees. One reason is the number of apps. Another is the number of app downloads. If Apple hadn’t anticipated the number of apps or downloads, those numbers could not have affected their development of a threat model, right? Byars says. If they never contemplated it, they wouldn’t have put it in the threat model, Rubin says.
Built-in microphones, cameras are features of both the iPhones and Macs. Both can expose a user in private moments. Rubin says there are fewer private moments with Macs. Byars says Macs are with users in their most private moments. Rubin blushes and giggles. Some people might use a mac in the office when they’re working on confidential documents, or in their living rooms or bedrooms. These are private moments, right, Byars asks.
Users sync information between their iPhone and Mac or store passwords and credit card information in iCloud, Rubin agrees. People have sensitive information in their email and photos, Rubin agrees. In Rubin’s view, the most sensitive info — payment, biometric info — on a phone is kept in an enclave. This is also true on a Mac.
App review enforces the App Store guidelines, some of which have a primary focus on something other than security, Rubin agrees. Part of his assignment was to get real-life data and evaluate app review. Rubin hasn’t done an empirical analysis of apps distributed through the App Store or the privacy of apps distributed through the App Store. Nor has he done empirical analysis of the reliability of apps in the App Store. He hasn’t addressed the quote we heard from the head of Apple's FEAR team that App Review was like bringing a plastic knife to a gun fight, or little better than the TSA. 
App Review’s key performance indicator is how many apps you can get through the pipeline, and Rubin didn’t address it. Rubin didn’t speak to Friedman to about these things. 
Manual and automated app review is the one that’s most directly related to the need for exclusive distribution, Rubin agrees. Other app stores could implement a manual review. If they had all of Apple’s resources and money, they could put in their own process, right? Byars asks. Maybe, if they “cloned Apple,” Rubin says. Byars asks a similar question. “They might need more,” Rubin says. We are now going back to the deposition. In the deposition, Rubin says that would be enough. He says he’d revise that answer now.
He hasn’t conducted an empirical analysis of the resources Apple puts into app review, or compared it with any other app store, Byars says. Rubin does compare Apple’s resources and Google’s, he says. We are now going back to the deposition again. In the deposition, Rubin says he has not compared them to Google. Rubin says he’d revise the answer from the deposition. “This is another answer you’d revise?” Byars says.
Rubin doesn’t know how much money Apple puts into app review, nor has he looked at what another hypothetical app store could do or would have done if it were allowed on iOs, he agrees. Bad apps can be blamed not just on an app store but on a device maker. His example, an iOS app that went through app review, was called Baby Shaker. If you shook the image of the baby hard enough, there’d be red xes on the eyes. This was an example of blaming the device maker and not the app distributor. This is the only example he gave.
In the Android ecosystem, it’s possible to get a bad app that’s not affiliated with the device maker, app store, or OS maker. Rubin says that some people will blame the device maker for a bad app. 
Byars says he has another 20-25 minutes. We are stopping for the day at 3:17PM. The first witness tomorrow will be Tim Cook. Rubin can’t talk to his lawyers before his next testimony.
Doren and Forrest are back up. Some matter about Schiller depositions. In these three segments, he says, first that he couldn’t recall whether there were IAPs, then says clearly that there were no IAPs, and then again that there were no IAPs, YGR says. That’s what he says, explicitly. The issue is that there’s a difference in functionality — IAPs and whether merchants were offering IAPs. So he was saying there was no formal IAP from Apple, but the record is clear factually that app developers had figured out their own methods for IAPs and Apple knew about it, Forrest says.
The record is the record, there will be no addition, YGR says. I can see it may be confusing, but I am going to take the record as it is. The fairest thing is to leave the playing field as the playing field. 
Doren is complaining that Epic hasn’t turned over some documents. YGR says it’s a cross examination and Doren can do his own search. “The playing field is the playing field,” YGR says. At 3:22 we stand in recess.
Elizabeth Lopatto
Deputy editor, The Verge
510-612-2139
@mslopatto


Epic v Apple Daily Pool Report Day #13

Leah Nylen
 


Subject: Epic v Apple Daily Pool Report Day #13
 
EXTERNAL SENDER: Use caution with links and attachments.

Here's the sum of the reports. Tim Cook testifying first thing Friday. Tomorrow's reporters will be Liz Lopatto from The Verge and Amy Miller with MLex.


Good morning! Josh Sisco here with The Information. I'm sitting on a very uncomfortable courtroom bench (Kouchtown anyone?) next to Bobby Allyn from NPR.

 

Questions/comments/concerns: jo...@...

 

Exhibits: http://tinyurl.com/epicvapple

 

Judge Yvonne Gonzalez Rogers (YGR) is wearing a black mask. I can't compete with Leah's fashion sense. Everyone else is dressed like lawyers.

 

These are the names I know, will add later if/when I get them.

For Epic:

Tim Sweeney

Katherine Forrest

Lauren Moskowitz

Yonatan Even

 

Apple: 

Phil Schiller

Richard Doren 

Stephanie Fine

Heather Grenier 

Katie Adams (general counsel)

Jay Srinivasan


First up on the stand today: Apple's Michael’s Schmid, head of game business development for the App Store.

Next up per an Epic spox: Craig Federighi, Apple's Sr VP of software engineering, followed by Dominique Hanssens, a marketing professor at UCLA.


Housekeeping:

KF wants to know when Epic can respond to Apple's motion from yesterday that the court should rule in its favor that Epic has not met its burden to prove the the App Store is an essential facility. Epic will respond Sunday. Motion here: https://storage.courtlistener.com/recap/gov.uscourts.cand.364265/gov.uscourts.cand.364265.708.0.pdf


YGR: I will go through on monday how much evidence I will have to consider in this case. You will not get a ruling on Monday, or on Tuesday. I believe Judge Koh's ruling in the FTC's Qualcomm case was 250 pages long (It was 233 pages). "I have a very tiny team"


Apple's Richard Doren says Tim Cook will be it's final witness first thing on Friday. Epic says they may call rebuttal witnesses that will follow Cook.


Schmid testimony starts at 8:08


Michael Schmid, Apple’s head of game business development for the App Store

Resumes direct examination at 8:08 by Apple attorney Jay Srinivasan with Gibson Dunn


He was on the stand yesterday only for about 15 minutes and left off discussing games and other apps available on multiple platforms, as well as “cross wallet” games


Since these are all “friendly” questions from Apple counsel, I’m not including the questions. If YGR asks a question I’ll note it.


Schmid says he works with hundreds of developers around the world.


Schmid discusses differences between game developers and other app developers, game developers are at the “bleeding edge” of graphics processing and other tech.

Game developers are also different in how they monetize apps, such as through IAP, there's also a premium market for games with a purchase up front.

Other app developers are increasingly focused on subscriptions, but less so for games.


Public line is down, trial paused to fix it, YGR talks about the Golden State Warriors with the lawyers, your pool reporter is not familiar enough to follow.


YGR: will be interesting to see what happens when we return to normal, there has been much more public access to the courts in general bc of the pandemic

Epic attorney Katherine Forrest agrees

YGR says she never wanted lawyers to appear remotely prior to covid, “cant get the same kind of information when I have people on a telephone line” once a relationship is established its easier, “I don't mind zoom as much”


Line fixed


Schmid says developers can allow game players to avoid IAP by making in-game currency purchases in mobile and desktop browsers; Hearthstone, Roblox and Candy Crush are all examples. It’s at the discretion of the developer, then users decide where to purchase in-game currency.


Schmid narrates a visual presentation of making Hearthstone purchases in a mobile browser instead of inside the app. That allows the developer to avoid paying a commission to Apple. “Then I get to experience the joy of what’s inside.” says something about a game card related to the plague?


Goes through a similar exercise with Candy Crush, this time purchasing gold bars with paypal. “As you can see it’s very sad, I’m only level two.” Schmid is making these demos in his own game accounts on his phone.


Schmid says there are other games w/ the same functionality and it's at the discretion of the developer. Apple does nothing to prevent or discourage this. “Absolutely not”


Says some game developers like Fortnite, Roblox and Minecraft also sell physical gift cards in stores.


“Invest a tremendous amount of time and money and energy” to support game developers. Engineering, marketing and business, and developer tools and products.

“Silly to suggest that a dev looking to grow a biz wouldnt be thinking about mobile.”


"We want to be the best platform to develop a game or app in the world," but we also compete with Google Play, and other android stores, consoles, PC stores, and cloud gaming.


Developer tools include APIs and AppStore Connect to help build the business on the App Store. Former includes tools to test apps prior to launch.


Schmid says Epic took advantage of these tools including Test Flight, App Analytics, to manage sales and revenue, ARkit to experiment with augmented reality in their games


Schmid says From day one since epic was in the app store there was a tremendous amount of support for Epic within Apple.

Calls, emails, in person support with engineers from Apple going to work onsite Epic. Says Apple was able to solve significant Epic-specific problems.

Apple also offered a great deal of marketing support for Fortnite.


Apple aggregated all of its marketing communications about Fortnite and it involved 500 million communications, mostly emails, but also tweets

Epic questions Schmid’s direct knowledge of that number, and YGR presses him on it, but he seems to satisfy her that he knows directly. Schmid says they track this info in the ordinary course of business.


Schmid: “I was certainly the most familiar with the [Epic] account and I dealt with them more than anyone else at Apple.”

In the 11 months prior to Fortnite getting kicked out of the app store Apple spent just over $1 million on marketing on behalf of Epic.

“Neverending crescendo of support”

Not a 9-5 engagement. "It was quite intense, there were 3 am phone calls, 5am phone calls, christmas phone calls it was a pretty demanding relationship."

Eventually brought in people in Australia to provide 24-hr support.

Relationship was “fairly tumultuous, a lot of really good times, a lot of stressful times”

It was a “net positive” to have Fortnite in the App Store

It was an amazing game, generating lots of revenue

Fortnite was reviewed over 200 times in the App Store, not part of the App Review time, but would push on behalf of Epic to expedite the app review process

There were more than 80 plus requests for expedited review in 2020.


Displayed Mar 27 2019 email from a colleague describing how Epic is “abusing” the expedited review process, doesnt agree with the abuse, but says there were “systemic” issues that Epic wasnt addressing that caused the repeated need for quick reviews: “It almost feels like they’re abusing expedite requests due to a systemic issue on their end in the development/QA/submission process,” the Apple official wrote.


Never felt like he could push back against Epic’s requests because Apple feared missing out on being able to offer its users the most updated versions of Fortnite.


Mark Hutchinson was first primary contact at Epic Games, then Brad Cummings, then Haseeb Malek, then Alex Shobin. All but Alec have left Epic.


Displays several email threads about Epic’s emergency problems and effusive praise from Epic for Apple, including for their help setting up a collaboration between Fortnite and Houseparty, Epic’s social media app.


Direct ends at 9:06, Now up cross by Epic lawyer Lauren Moskowitz.


Cross of Schmid by Lauren Moskowitz started at 9:06, morning break until 10:37, will continue cross after the break.


With a lot of heavy lifting from Bobby.


Epic lawyer Lauren Moskowitz doing cross-examination of Mike Schmid, Apple’s head of game business development. 


Q: You said Apple competes with consoles and PCs. Has Apple ever offered a better commission rate?

A: I can only speak to the game development side, and they have not. 


Q: Apple mandates all apps that require any other third-party option must require sign-in with Apple. Not required when a party doesn’t offer third-party log-ins, right?

A: Correct.


Q: Users don’t know about any commission that’s going to Apple, right?

A: I can’t tell you what users are broadly aware of


Q: Are you aware that Facebook publicly stated that Apple was not to tell the public that they were being charged a 30% commission? 

A: I’m actually not aware of that 


Moskowitz grilled Schmid about the videos played for the court, arguing that the videos skipped log-in steps in a way that made the process of circumventing the App Store seem more seamless than it actually is. 


To demonstrate, Moskowitz walks court through trying to make Candy Crush purchases by projecting an iPhone on screen to the court, showing the log-ins required (with an Apple log-in option) and pointing out that Candy Crush can’t tell users to go to a website to make purchases, since that violates Apple’s anti-steering provisions. Additionally, a user has to request a desktop version of the Candy Crush website, which she suggests may not be so intuitive to every user. 

YGR asks: remind me, was the price the same for the consumer? (Wondering if the price was the same for making a Candy Crush purchase as an Apple in-app purchase versus on the developer’s website. 


Schmid said, yes, both $2.99.


However, Mosokowitz points out that the purchase on the website did not include a 30% commission to Apple and Apple prohibits Candy Crush from telling consumers to go to the developer’s website to make purchases. Schmid agrees.


Q: Are you aware that the tech and gaming press is covering this trial?

A: Yes

Q: Are you aware of the testimony involving Roblox?

A: No

Q: Do you know that since then Roblox made changes to its website no longer describing itself as a game?

A: No 


There’s a discussion about whether Roblox has changed its self-label from a game to an experience. Schmid says Apple doesn’t review user generated content within Roblox, and says Apple has no pending inquiries into rule App Store rule violations.


LM going over an Apple termination clause that says “if at any time Apple determines or suspects that you or any developer with which you are affiliated have engaged in or encouraged or participated with other developers to engage in any suspicious misleading, fraudulent, improper, unlawful, or dishonest act or omission, Apple may without payment due to you or such other developers.” 


Schmid resisted  specific questions about this clause, saying he is not a lawyer nor on the Apple App Review team. 


YGR is concerned about Schmid testifying about material without direct knowledge.


Epic lawyers appear to be on high alert, passing notes around their table. 


LM asking questions about Apple’s App Store revenue, but Schmid has no knowledge about how Apple records profits.


Brief digression about playing candy crush, Schmid asks Moskowitz about her level in Candy Crush. LM says “Embarassingly high”


LM asks about Apple’s help with fixing tech issues for Epic

Schmid can’t say whether Apple has offered similar support for other developers.


Schmid said Apple made over $100 million on App Store commissions on Fortnite. 


LM asks if it’s actually closer to $200 million, and Schmid pauses to think before saying: “It would be inappropriate to say.” 

 

LM: so they paid $1m [in marketing costs] and made over $100 million?

Schmid says the $1m was only for the last 11 months and doesn’t know much more than that.


Schmid says his team tracks app revenue after a game is featured in the App Store, but is then confronted with his deposition where he said his team doesn’t track that. 


LM: asks about developers bidding on keywords to advertise in the App Store. 

Schmid says that’s a different team, and doesn’t know how the process works. He generally understands that Apple offers paid search results in the App Store.


LM: would it surprise you if pandora came up as a paid search result when users search for Spotify?

Schmid: yes, but again doesnt have a clear understanding of the process


LM: Apple benefited substantially from having Fortnite on the App Store?

Schmid: yes

LM: Apple music also benefited from the DJ Marshmallow concert? And other concerts? There were ads for Apple music in Fortnite at those concerts?

Scmid: yes

LM asked Schmid if he ever talked to Epic about creating a Steve Jobs outfit on Fortnite called The Innovator. He said he indeed did follow up about it, but that it was not his idea. Adds that Phil Schiller would have “hated” it.  Phil Schiller, in the courtroom, nods his head.

There was a discussion about the “rogue agent” skin being removed and then put back in Fortnite. 

Schmid confirms that Apple asked Rogue Agent to be exclusive to Fortnite on iOS.


Back from break at 10:38, cross of Schmid by Lauren Moskowitz continues 

When Apple update its iOS to version 12, there were some memory related issues. Moskowitz pulls up an email in which it says one Apple engineer was working with Epic and 8 Epic engineers to resolve the issues.

LM: every build for every app has to go through app review?
Scmid: if its a change to the binary it has to go through app review

LM: After app approval there’s something called propagation, which can take 24 hours
Schmid: correct, that process, including app review, typically takes about 72 hours, [before the app is available to consumers]

Schmid says he doesn’t remember a time that he has ever denied expedited app review for any developer

LM: pulls up an email from April 2019 with a colleague complaining about the technical aspects of Apple’s app propagation process, the process of pushing out the app to users.

LM: the propagation often took 24 hours
Schmid: often 30 minutes
LM: You’re aware that Epic often had difficulty with the process?
Schmid: yes

LM: consoles propagated games faster than Apple?
Schmid: yes (tries to explain the difference, but Moskowitz cuts him off)

Cross ends at 10:50

RE-DIRECT of Mike Schmid by Apple lawyer Jay Srinivasan. 

Q: Did you edit those videos in any way? [refers to the videos by buying in game currency outside of the app]

A: I Did not 

They had a back-and-forth about Epic’s Candy Crush iPhone example that showed how a user needs to enter a third-party login-system in order to make a digital purchase.

User can choose to save their log-in and password in apps and websites, which Schmid says is typical. 

JS: asks about propagation process between iphone and consoles
Schmid: the process is much more complex on iPhones, so it takes much longer

JS passes the witness

LM: has nothing for recross

YGR jumps in with a series of questions.

YGR: there has been lots of discussion about gamers in this trial. Has Apple done any studies or profiles about gamers as “a separate and distinct customer base”?
Schmid: yes
YGR: what about studies about gamer-specific revenue?
Schmid: we look at revenue derived from games, there are “billions of dollars that are generated that is mutually beneficial to apple and our game developers.”
"At apple we don't look at gamers as the stereotypical teen in their basement playing games” ... "It doesn't define them as a person, I’m a dad but I also play games”

YGR: of all app users how many would you put in a gamer category?
Schmid: Says its relative if a gamer plays once per week, "it's a very large percentage of users"

YGR: so in the context of revenue, what are you finding?

A: We analyze the revenue from games but don't look at the revenue gamers on our platform generate.

YGR: any analysis of IAP revenue v initial downloads
A: vast majority of games are free to play
YGR: subscriptions?
A: very few games are able to crack that subscription model, but still a much smaller section of games than IAP.
YGR: Any analysis of impulse purchasing?
A: not that I’m aware of. 

Moskowitz comes back for a couple questions.

LM: you were asked by the court about where revenues were generated from, can you say how much revenue generated by categories of apps?
A: no, says he would have to look it up

Schmid testimony ends at 11:03


Apple calls to the witness stand Craig Federighi, Apple's senior VP of software engineering. Takes the stand at 11:05, break for lunch at 12:35.

Again thanks to Bobby for the help.

He is being questioned by Apple lawyer Jason Lo. 

Federighi mainly works on engineering of the operating systems, including iOS, iPadOS and MacOS.

Federighi says MacOS and iOS have some small similarities, but "there are tremendous differences”.

CF said when Apple created the iPhone, it saw it as a “once-in-a-generation opportunity” in terms of building “security architecture.” 

At first, he said, iPhones did not allow third-party apps, but eventually opened iPhones up to native third-party apps. Did that present security threats? 

“Oh, tremendously,” he said. “We also wanted to radically rethink peoples’ relationship to apps” 

For iOS, he envisioned users would download lots of apps to solve all types of problems. “We wanted to make that something users can do very easily without having to be very thoughtful about the security consequences of those downloads,” so they built an end-to-end security review system. 

Apple displays a “Threat Model Considerations” exhibit with these three categories: Number of devices. Number of opportunities. Value of access -- all things, CF said, are major attacker considerations. 

CF on why attackers are interested in targeting iPhones: 

“iPhones are very attractive targets. They are very personal devices that are with you all the time. They have some of your most personal information,” he said. “They have cameras and microphones. They are capable of knowing your location. Because they’re always with you, they can be used as a key to get into your palace of business, or a token to unlock your bank account,” he said. “All of these things make an iPhone incredibly valuable to an attacker.” 

Another exhibit displayed to the court, common attacks Apple sees across the computing ecosystem: Scams, Ransomware, Surveillanceware, Vandalism and Sabotage, Info Stealing.

I’m not taking detailed notes here. Federighi is going to through in exhaustive technical detail with descriptions of each type of attack and Apple’s defenses.

Federighi says Apple has many layers of security to protect users. "We try to stack up many layers of defense," he says. There are three broad categories: malware scans, signatures/certifications, sandboxing

Federighi says iOS has many additional security features beyond those in MacOS.

Displays an image of a Mac next to an iphone. The Mac is surrounded by 8 red human figures, the iPhone is surrounded by dozens, says the red people are “bad attacker people.” Indicative of the many more security threats faced by iPhones v Macs.

Federighi says The App Store review guidelines is the “single most important” line of defense against security threats. The automated processes and human app reviewers are making sure the app is what it says it is and does what it says it does.

Federighi says developers have to ask for “entitlement” permissions. “Why is this calculator asking for permission to access health information?”

Sideloading apps would “dramatically” increase the security threats faced by iPhone users. It would completely remove app remove from the security checks. Users could download a fraudulent microsoft app for example

“If policy could be signed and downloaded directly, you could put an unsafe app up and nobody would check that policy,” he said. “You could say, ‘I’m Microsoft Word, here I am,” he said. “You could think you’re downloading legitimate software and you’re downloading a Trojan.” 

YGR: “There are multiple [app] stores on the mac, why should we not allow the same stores to exist on the phone?”

CF: “it is regularly exploited on the Mac.” iOS has a much higher security level “the mac is not meeting that bar today” and “If you took mac security techniques.. iOS would get run over” 

CF: “It would be a very bad situation for our customers”

YGR: What about android?

CF: says android has a bad malware problem, “it is a problem for android. With iOS we have aspired to create something far more secure… dont want to slide back” to the level of security of a Mac.

YGR: Mickens [Epic’s security expert] said otherwise, that MacOS and iOS are comparable.

CF: says every report he’s read said iOS is much more secure. Said Android has something like 30x more attacks than iOS. “The results in the real world are dramatically different” 

CF: Says with centralized distribution, we can be pretty confident that bad actors will get shut down. “This is dramatically different from what we see on the mac unfortunately”
Says blocking security threats on the mac “is an endless game of whack a mole” 

CF: Mac users also expect a greater degree of flexibility that is useful for what they do”
“The Mac is a car that you can take off road, can drive wherever you want… with iOS, children, heck even infants can operate an iOS device.” Your pool reporter can confirm this.

CF: “There is a significant large malware problem on the Mac”

CF: Removing the App Store would as the sole means of software distribution on iPhones “Would subject iOS users to a huge decrease in their safety”

CF says Apple occasionally deals with well-funded “nation-state-level attacks” using “previously unknown zero-day exploits” that are “extremely targeted,” perhaps against a political rival or a dissident journalist. Such attack attempts are rare.


CF: The primary security concern Apple has about most users is protecting their privacy. Apple wants to give users as much control over their own data as possible. 


CF: While apps can ask for certain information, they cannot withhold functionality if a user doesn’t give up information. “Incentivized access,” when an app asks a user basically “are you sure?” showing what a user gets in exchange for access to, say, a user’s contact list. This practice, which CF calls a trend among developers, is banned by the App store, because he says it compromises a user’s privacy.


CF talks about Apple’s enterprise program which allows companies to develop and install internal apps on work phones outside of the App Store. Says those stores are ”Absolutely full of virus and Trojan software.”

CF says microsoft is still the most exploited platform because they have the most “motivated” group of attackers.


Back from lunch at 1:17, End of direct exam of Federighi by Jason Lo, ends at 1:32


CF: continues testifying that third-party app distribution on iPhones would open up phones to malware. Says it could also cause users to lose trust in less known, yet reputable developers.


CF says security and app reviews would be difficult to hand off to third parties. Fear many companies would not enforce the same sorts of guidelines that our customers and we care about. "I would have grave concerns"

I don't think anyone cares as much about maintaining that promise” as Apple does.


Q: Does iOS support streaming games?

A: We do

Q: Streaming games have to comply with human interface requirements?

A: Yes

Q: Are streaming games on iOS devices required to be individualized? 

A: Apps are the center of the iOS experience. And so, for streaming apps, our policy is, each streaming game be distributed as a distinct app that they can download and launch independently from the streaming service. 

Q: Any privacy control reasons for this?

A: Yes. There are privacy and management reasons. It can help with setting parental controls. When it comes to privacy, for each app, the user is given what they allow the app to access. If I was playing Pokemon Go, I might allow that app access to the camera. Or I might be playing Assassin's Creed, and I wouldn’t give that kind of access.

Q: Are you familiar with games that have user-created content? 

A: Some games, like Minecraft, let you modify the world, creating another place to play.

Q: Are you aware of apps in the iOS store that allow for streaming media, like Netflix? How does iOS view that?

A: Media experiences are not different application experiences from the user’s point of view. The user often doesn’t have with a single episode the kind of 30 to 100 hour relationship that they might with a given game title that they’re coming back to continually. 

Q: When something like Netflix have different movies and different shows, does Apple make them have separate apps?

A: No, that wouldn’t make sense.

Direct ends at 1:32, Cross starts by Epic lawyer Yonatan Even. 


Directed to deposition: Asked if he has any numbers on the prevalence of malware downloaded from third-party stores? During deposition, he said he did not have any numbers. Now he does, CF said. 


CF: says he wasn't at Apple when the first iPhone or App Store launched. When he took over iOS in 2012, he wasn't on the Executive Review Board [for app review]. 


YE: You have no first-hand knowledge about the design that went into App Store?

CF: agrees


Federighi and Even are discussing a Nov 2007 document about allowing third party apps on iOS. Document, prepared by Apple’s security team, discusses giving Apple absolute control over app distribution. Says “code-signing” will prevent malicious apps.


They go over one portion of the document apparently entitled  “guy in his basement,” which refers to a small developer v a large software company.


YE points out that the security team who wrote the 2007 white paper never said distribution has to be limited to Apple in order to keep the apps safe.


“I don’t think it draws a conclusion one or or another in that regard,” CF says. “You haven’t pointed me to any lines that said that.” Tries to say that code-signing is not a full security solution, but Even cuts him off.


[The whole discussion is difficult to follow since the documents they are discussing are not being displayed to the gallery]


Now discussing MacOS and how it allows third-party app stores. 


YE: asks if CF knows that if Epic get’s its way and a third-party store is allowed, would that remove Apple’s store from the phone.

CF: says he doesn’t know what remedy Epic is seeking but it's possible that Apple’s store would still be there.


YE: if third party stores are allowed, and users still only used the App Store, they would have same level of protections that the user enjoys today?

CF: “no the environment would change.”

YE: pulls up CF’s earlier depo where CF says that the same protections would still exist in Epic’s alternate world.


YE: Asks if Apple can offer a much bigger audience to developers than any other company since its App Store is preinstalled?

CF: There's a web browser installed, Federighi says, they can search that way.


CF is appearing exacerbated with YE’s questioning, repeatedly shaking his head and looking puzzled.


They are running through questions about Apple’s security processes, and what Epic perceives as the limits of those processes.


For example Even asks if Apple  could use PhotoDNA to look for pornography. CFsays that wouldn't work. Even says YouTube and TikTok do this now.


The exchange is getting testy. CF wants to explain why certain things are difficult or not possible. YGR tells him he can explain himself once Apple’s attorney takes over the questioning again.


YE mentions Parler’s removal from the App Store as an example of Apple booting out apps that don’t follow the rules.

CF: agrees


YE: says there’s nothing that prevents other stores like Epic and Steam from having their own set of policies and security checks

CF: agrees


YE: asks about the user base for the Mac, says there were record sales in 2020.

CF: agrees but says he’s not sure of the precise numbers 

YE: tries to be truthful with its customers?

CF: yes

YE: seeks out a very diverse array of customers?

CF: yes

YE: used to store a lot of information about users lives, web searches, telemedicine visits, education

CF: yes


There’s a line of questions about how many different types of people and uses for which Apple offers the Mac


YE: is photoshop available on MacOS?

CF: no

YE: nothing suggests, in the marketing material they are looking at, that getting photoshop from Adobe is a security threat?

CF: agrees, but adds that they are not looking at a security related document

This is the site they are looking at: https://www.apple.com/education/k12/ 


YE: nothing that says “if you are a novice, stay away, buy an iOS device”?

CF: no


Even is taking a very long time to make the point that if MacOS is so bad, Apple would send all but the most experienced users to iOS.


YE: if the court were to open up iOS tomorrow, Apple could continue with sandboxing? [a means of analyzing code for security threats.]

CF: yes

YE asks if CF knows how long Apple staff spend reviewing each app?

“It’s changed over time,” CF said, estimating that it’s “minutes.” 


He acknowledges that he is not directly part of the day-to-day app review process.



Cross ends at 3:01


Redirect by Jason Lo


JL: asked in depo if third party stores existed, would the same protections currently in the App Store still exist?

CF: the sophistication of attacks would be greater, so malware risks would increase, even if the original protections were still in place in the App Store.


Asked about enterprise program, and says no matter how thoroughly it was reviewed upfront, it wouldn’t prevent that enterprise security certificate from falling into the wrong hands later. “Many things can happen after the fact that can cause that certificate to become abused.”


JL: has anything changed with security threats to iOS devices since 2007?

CF: absolutely. And we’ve seen how successful iOS has become and how that’s made it a larger target.


CF says centralized app distribution and review “is critical to the safety of our users”


JL: asked about app privacy and “nutrition labels”

CF: developers must submit accurate information about data collection and if its not accurate we will work with them to fix it. However we some auditing on our own to make sure its accurate


There’s a discussion about Jekyll and Hyde apps that change their behavior after they are approved. Says “sophisticated attackers could bypass” security measures. “Its a bit of a cat and mouse game.”


Direct ends at 3:24

Recross by Even ends at 3:26


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Epic v Apple Daily Pool Report Day #12

Bobby Allyn
 

Here are all our feeds from the day, written by both me and Josh.

 

We are done for the day, until 8AMPST tomorrow. Phil Schiller is off the witness stand. Now on is Apple’s Michael Schmid, who is being questioned on direct by Apple’s Jay Srinivasan, resuming tomorrow morning.

 

Final feed of the day, from Josh and me:

 

Redirect of Schiller started at 1:45PST by Apple attorney Richard Doren

 

Schiller was asked about Apple’s enterprise program, which allows companies to download company-specific apps on the iPhone and bypass the app store. Schiller says Apple works with large companies, vets them and gives them a special security key to allow them to download to devices. They have to sign an agreement they will only download to employees and not "consumers in the wild."

 

RD: Are there abuses of the enterprise program?

PS: Apple has found places where employees of a company have, unbeknownst to the employer, will pirate software. And there have been actual malware attacks created by stores that used an enterprise key to get their software onto the users device. It’s a great concern,  and we have been tightening the security around the enterprise program

 

RD: you shown a lot of news articles about various investigations. Has the Coalition for App Fairness played any role in testifying in those investigations, have they testified before congress?

PS: spotify, tile, match

RD: have any of the members advocated at the EU?

PS: spotify and match, as well as epic

RD: is shown a document about a russian investigation, and a law that was passed in russia

PS: The Russian government required earlier this year that smartphone makers preinstall a list of Russian apps defined by the gov to encourage russain users to download russian apps; It had nothing to do with app review, and didn't allow for stores within the app store

 

 

On App Store Profit

 

Apple lawyer Richard Doren, responding to the line of questioning on cross in which Phil Schiller indicated that he had no idea whether the App Store was turning a profit:

RD: Do you question whether the App Store has added to the bottom line of Apple?

PS: No I do not.

 

On Porn-y apps

 

RD moved the fetish/data/quasi-porn-sounding apps that Epic pointed out during cross-examination.

Epic was demonstrating that there appeared to be apps in the App Store that violated the company’s terms and that Apple’s reviewers have missed, yet Apple says there is a large gray area in the world of dating/fetish apps.

“This is certainly and always a difficult area for us,” Schiller said. “There are categories of things we don’t want on our store, like pornography.”

Developers. Schiller said, sometimes try to see “where’s the line” with dating/nudity apps.

RD says: “Sir, during lunch I became the proud owner of Sex Position 3D,” asking if models in the app are clothed. “I assume,” Schiller replied.

 

On Tracking

 

On direct, Schiller pushes back on Epic suggestion that Apple is intrusively tracking users.

To Schiller, when a developer needs information from a user to deliver a service, that is not tracking. “That’s delivering a service,” he said. “Tracking comes in when data is shared with third parties and data-brokers.”

If one goes to vacation France, for instance, country-level location data could be used to make local recommendations, like an app for the Louvre, or a translation app, but that information is now provided to third parties, he says.

Schiller says Apple does not sell data or share user data with data brokers.

 

On remedy

 

RD: you were asked questions about the remedy, Epic is seeking have you read the language in Epic's lawsuit about what it wants?

PS: no

RD: KF said Epic doesn't intend to end the whole app review process, but it does want Apple to allow stores within stores. Would that eliminate app review for the apps in stores within stores?

PS: yes, and we try to make rules that apply to all developers, so if there's a rule that allows stores in stores then it's unbounded. "I don't know how this scales… how it can be reviewed and managed.”

RD: re IAP KF suggested third parties should be able to use their own payment system. As a businessman do you object?

PS: I have a number of objections. Users really value the ability to manage the subscriptions, and there's a number of features that all work because they connect to that payment system; Apple would also lose the ability to understand the various "fraud vectors" that put the App Store at risk

 

On commerce in App Store pre-IAP

 

KF points to emails with Apple about commerce happening in apps downloaded from the App Store prior to November 2009, when IAP Services launched.

Schiller balks at this suggestion, saying that is not true.

KF: “It’s your testimony that there were no in-app commerce opportunities that developers availed themselves of prior to November 2009?”

Schiller: For digital goods consumed on the iPhone, yes.

 

On podcasts:

 

YGR: asked were by KF about Apple’s new program for podcasts, and said it didnt relate to the app store, can you explain?

PS: we were talking about the different ways apple makes money from the store, and the podcast service is a separate service

YGR: how do they subscribe?

PS: through your same apple account you pay for your podcasts and apps

YGR: how does that work logistically?

PS: you can use your apple id in the app store, as well as for music, podcasts etc

YGR: podcast subscriptions still have to go through your payment structure

PS: yes

 

Phil Schiller is now off the stand.

 

Taking the witness stand now is Apple’s Michael Schmid, who heads games business development, questioned by Apple’s Jay Srinvisan.

 

So far with Schmid:

 

Goes through background, describes himself as the "developer advocate" at Apple.
Started at Apple in 2017, prior to that was in mobile games in customer service, before moving to mobile analytics and marketing.

Schmid said he worked with Apple a lot in his earlier jobs. In his current job, he gathers feedback from game developers about Apple

Says developers get to choose their own category in the App Store, and Epic chose “Games”.
Games are treated differently in the store, there’s a separate tab in the store and business development team at Apple

Schmid says there are many game apps and non game apps that are available on various platforms, android, desktop, ios. Says its very common for games to be developed across platforms, ie Heartstone, Minecraft, Roblox are all examples

Schmid says many games are also cross wallet, where the currency purchased in a game will transfer across platforms, ie Fortnite, Roblox; These games have become more prevalent bc they allow developers to “control their entire economy”

 

XXX

 

KF questioning of Schiller continued. She calls up email with an Epic official, who wrote about a leak from Apple that concerned Epic: “We have suffered a major blow to the unveiling of our next season. There were concerns about a leak coming from Apple in the lead up to the season, and those fears ended up being substantiated. The media damage alone is significant.”

 

Moved beyond this issue without really concluding it and then revisited from earlier the apps including TikTok, Snap, Reddit, where BDSM and other sex-related apps are available in the Apple App Store. KF’s point here is that such content is arguably prohibited under Apple App Store rules (contained in a large binder to be entered as evidence).

 

When App Store launched, in 2008, Apple only had a mechanism to get paid for apps, not in-app purchases, KP noted, suggesting that Apple execs spied opportunity here.

 

For example: Forrest calls up a 2008 email from Apple exec Scott Forstall. He wrote that there was a “healthy after-market” for “game levels, enhanced graphics, in-game activities.” Many for a fee. “Some developers will want this for their iPhone app”

 

Re IAP 

 

KF: says In 2008 not using IAP would be grounds for rejection, but the guidelines werent published until 2010

KF: “secret guidelines”?

PS: no, we would have told the developers why they were rejected

 

Dec. 2014 developer complaint: guidelines are vague, should be just focused on security, says they won't develop for apple watch

 

Re: self-preferencing:

KF: yesterday you said apple doesn't allow search ads for apple products, (in response to a YGR question,) but the algorithm actually preferences apple products

PS: don't agree

KF: shows an app store still image, a search for "books", first return is for Audible, Apple Books is the first organic entry, same for music, pandora is the paid result, but apple music is the top search result; same with news; Apple has changed the algorithm that relates to search and preferences its own apps?

PS: no

KF: It happens by chance?

PS: no it looks at 42 variable to give the user the best result, doesn't know how the 42 variables are each weighted

 

XXX

 

And we’re back. YGR is back on the bench. Cross of Apple exec Phil Schiller resumes.

 

 

Sorry: Lunch break started at 12:35PST. We resume at 1:15PST

 

XXX

 

We’ve wrapped for lunch at 1:35 . Cross-exam of Schiller will continue after lunch, at 1:15PST.

 

Josh wrote some sections, and I wrote some sections.

 

After the morning break Forrest starts by asking about whether Apple's small business program - which dropped the 30% commission to 15% for developers with under $1 million in revenue -  was to help Apple out with its competition problems and Schiller says those issues and the developer interests “aren't mutually exclusive."

 

Forest says the pandemic isn't mentioned as a reason for the program in any of the documents about the program 

Schiller says he believes he had communications that it was one of the reasons.

 

Schiller says: “It was pushed by me, specifically,” saying there was growing App Store scrutiny, but many things led to the Small Business Program.

 

Questions about App Store profits:

 

KF: says the App Store has been profitable since 2009, but PS says he does not know that.

 

KF: “How is it that the executive responsible for a major business in the country, you don’t even know if it is profitable? How can that possibly be?”

 

PS: “Because that’s now how I look at the business and not what I measure the team on.”

 

KF, raising voice: “Doesn’t anybody ever wonder, ‘Hey is the app store profitable?’ Doesn’t that ever come up?”

 

PS: “No, it doesn’t come up”

 

Forrest cites a 2017 Apple press release about paying more than 70b to developers since the store was created which would give Apple about 20b, and Schiller agrees

 

Schiller says Apple hasn't calculated app store profits. Doesn't deny that it probably is, but says they don't specifically calculate it.

 

Series of questions about antitrust allegations and investigations of Apple:

 

Schiller acknowledges that Spotify filed an antitrust complaint in EU in march 2019; shown emails about the House Judiciary committee’s tech antitrust investigation, a 2019 Russian antitrust probe of the app distribution market, and the EU investigation opened last summer, and negative press generated by Basecamp executives complaining publicly about Apple’s App Store policies

 

Schiller was shown emails from June 2020 and asked questions around Apple looking to put together a list of developers “that will put out public statements in support of Apple.” That was supposed include developers with apps in both the app store and arcade (Apple's game store)

 

KF: this was to counter the bad press and regulatory investigations?

PS: ”I wouldn’t say that,” says there was a developer that reached out to Apple to offer support and so “we were looking for others”

PS: “Don’t think this is related to basecamp at all” 

KF: related to competition issues?

PS: “Certain people were complaining about it and we wanted to show” that others were really happy with it.

 

KF: Asks about reports that DOJ and states were investigating Apple and the App Store for antitrust violations

PS: doesnt admit to the probes, and says he doesn’t remember the press reports; “we get a briefing email every single day i dont remember which one was in [what] and when.”

 

July 29 email from Apple PR official Fred Sainz about the upcoming House antitrust hearing with Google, Apple, Facebook and Amazon exec that was sent to Tim cook, schiller, katie adams (general counsel), kyle andeer (antitrust head), lisa jackson (Policy head), and other lawyers. The email references a nyt editorial about what questions lawmakers should ask the four execs 

Schiller says he’s “sure” he read stuff about the house hearing but doesnt remember what exactly

 

Shown articles about App Store investigations in South Korea and Japan; 

 

KF: Do you recall receiving a powerpoint that japan represented one of the biggest threats to the app?

PS: no

 

Asked about Australia’s app store investigation and he remembers that one

 

Back to the small business program

 

KF: Apple’s intent was to find a way to have the least possible financial impact on apple

PS: i dont agree with that characterization

 

Back to the House antitrust investigation and the announcement that it was completed in oct 2020

PS: says he doesnt recall the announcement, and doesnt recall the investigation into competition in digital markets

 

Px 1911 Doesnt remember seeing a story about the UK antitrust investigation announced earlier this year, or recalls ever learning about a CMA investigation of the app store

KF: no one ever told you?

PS: they may have, they may not have

 

Schiller does remember the Senate antitrust app store hearing from last month

He’s also aware of a fine the Russian antitrust agency imposed last month

 

Was the small biz program bc of a "cascade" of bad PR, regulatory and judicial activities?

PS: that's part of it, but the pandemic was also a major part of it.

 

The conversation then moves to privacy.

 

KF walks Schiller through all that the App Store collects and retains on users: browsing history, searches, purchases, downloads, user’s IP address, iPhone model, amount of storage on iPhone, etc., all spelled out on Apple’s website (KF makes it a point to show the court how it takes some clicking through to find the data collection disclosures.)

 

KF: “Apple can basically follow you to locations? It can find you. It knows where you care?”

 

PS: “It’s not about tracking where you are. It’s about giving you geographically relevant applications.”

 

On opting out of data collection for ad targeting, KF asks: “You have a way to prevent from getting ads but there’s no way to prevent it from being collected?”

 

KF: It’s a lot of information, wouldn’t you agree?”

 

PS: No, I wouldn’t.”

 

XXX

 

Greetings from Oakland. I'm Josh Sisco with The Information. Bobby and I decided to tag team the pool reports 

Questions/comments/concerns at josh@... or 707-695-4512.

 

Back from the morning break at 10:38. Will be better about time stamps going forward.

 

Schiller cross exam continued by Katherine Forrest, the notes pick up after the questions about the Goldman Sachs report. 

 

KF asks Schiller a series of questions about transferring movies from iOS to Android. 

Schiller says most people actually are streaming movies so owning a large library of movies isn't a barrier to switching 

KF: How easy is it to transfer movies from ios to android, can they be moved?

PS: “I dont know if they can or cant”

Forrest shows him some comments from Apple exec Eddy Cue that says if you own a movie in iTunes, it can't be transferred to Android, and Schiller agrees.

KF then shows a long list of movies starting with My Cousin Vinny, which YGR says is "great" 
KF: It wouldnt take much to exceed $100 in a film libary?

PS: if thats what you choose, 
Re icloud

KF: if im an android user can i get icloud?

PS: i dont believe so

Q: if im an android user in an iphone family i cant participate in a shared icloud account?

A: correct


From june 2013 email, Schiller: says itunes and icloud factor heavily in the difficulty to switch to android

KF: do they still?

A: not as much 

 

There was some aggressive questioning from KF about whether schiller wanted to learn “how to explain” the emails that he didn' remember in deposition from earlier this year.

Schiller says no, he just didn't remember 10 year old emails and wanted to refresh his memory

 

Schiller was asked about whether Apple decided to only use its own APIs for third party developers instead of also offering APIs from Sun, Adobe, Microsoft, Qualcomm and others 

KF: was your intent to drive your competitors out of the app business?

PS: absolutely not

 

Schiller was asked about an Aug 2008 email to Scott forestall (px 00879) about how Android will be completely open, Schiller says “Idont think we can have anything like their license and business model.”

Q: was this the back and forth about opening ios up to third parties

A: no 

Q: It wasn't a debate about opening up app distribution to third parties?

A: no i dont believe so, says doesn't recall ever having a discussion opening up the app store to third party distribution


Asked about Px505 an email from steve jobs to schiller, forestall oct 2008, Subject “Is google working to target iphone ad market” Jobs wrote “The more energy they devote to ios the better”

KF: You wanted Google to be beholden to apple?

PS:No

KF: You were basking in the power to destroy a company's business?

PS: No


Discussion about an app user who complained that app review was keeping him from playing his favorite games. Schiller says in an email "It all comes down to whether we will ever open up the iPhone for app developers to distribute" on their own.


There was an aug 2016 Verge article about imessage that Schiller forwarded to Cue, Federighi and Joswiak with the comment “imessage as the glue that kept me stuck to the iphone”


Questions about ebooks price fixing case from 2014, where the judge in that case said the conspiracy was at the highest levels of the company. Apple lawyer objects, YGR overrules

PS: If you’re suggesting that I had anything to do with the ebooks case, I did not.

KF shows an article from dec 2014 where cue says he would do it again “but take better notes”


KF: asks about px 0842, an email thread about stopping phishing attacks. In the thread theres an email from dec 2019 from Tim Cook “what could we do that would give us a long term competitive advantage?”

Thread discussed password autofill and Sign in with Apple, two password management methods from Apple. Schiller (I think) wrote they will make the platforms more "sticky" but will have trouble competing with because “the capabilities themselves are unlikely to be protectable differentiators because of heavy users of chrome"

KF asked a series of questions Apple's ability to store passwords will keep users in the iOS ecosystem.

PS: users just have to reset their passwords

KF: you have to do it for every app

Schiller: just do it as needed 

KF keeps pressing to play up the difficulty in relogging into other apps after switching to android, and Schiller says you could use a third-party password manager that works across devices, he says.

 

KF asks PS if he knows about the big App Review Guidelines book, almost like a giant phonebook, for App Store guidelines.

 

“I got one for you,” she says. “Today is your lucky day.”

 

Some quibbling about whether the large binder has officially been entered into evidence. Apple says there are sections they’d like to redact before it is publicly entered and judge allows it in, under the condition that Apple can have a chance to make redactions.

 

KF points to a rule that bans porn or adult stars; or an app when the sole purpose of the app is sex; escort service locators; sex toy catalogs, etc.

 

KF then walks through numerous sex-related apps, including Kinkoo, a BDSM dating app; an “obedience training app;” a BDSM habit training app; a foot fetish app; a “sex positions 3D app.”

“Apple’s getting a 30% commission on any in-app purchase if it’s digital content consumed in the app, right?” she says.

 

Schiller agrees.

 

She points out that some of the apps offer “in-app purchase opportunities.”

 

KF then calls up TikTok, Instagram and Reddit and points to BDSM and porn-related trending topics, accounts and subreddits. She pulls up the Instagram page for PornHub.

 

KS: You know PornHub is a porn site?

 

PS: I do not know that.

 

 

XXX

 

The morning started with Apple lawyer Richard Doren finishing questioning of Apple Fellow (his current title) Phil Schiller.

 

Schiller described the various ways in which Apple helps developers and users to ensure that “people have better software and better experiences,” pointing to Core ML and training and events for developers. Schiller said Apple has built facilities around the world in places like Brazil, Indonesia, Italy and China, to create the next generation of developers “to unleash their visions around the world.”  

 

They then moved to the topic of intellectual property (IP), and how Apple values and protects its IP. Schiller then, with some glee, described how he helped come up with the iPod wheel, during an early generation of the iPod – when it moved from 25 songs, first generation, to 1,000 songs. Would be too hard to just go up or down, so Schiller said that’s when he helped device the wheel.

 

CROSS of Phil Schiller (PS) started with Epic’s Katherine Forrest (KF).

 

KF peppered PS with questions about how Apple’s developer tools (the APIs) work on iPhones, and not web applications. She went through eight examples.

 

“Out of eight, seven of the ones we just talked about, web app developers can’t use,” KF asked. Schiller agrees.

 

KF then says Apple has relied upon “the innovations of many developers,” many of whom are not Apple developers, for open-source software.

 

For example: KF says: Are you aware that if one goes to one’s general settings and scrolls down to Legal and Regulatory and scrolls down to Legal Notice one comes up with (exhibit number) PX1891 which is in your binder. Turn to Attractive Chaos.  “Permission is granted free of charge … any person obtaining this software…”

 

KF cites further examples, to which YGR interrupts to say: Are you arguing that software isn’t copyright-able?

 

KF: She says no. “Our point is Apple is taking total credit for all innovations” and there is a fair amount of third-party, open-source innovations that Apple didn’t create but Apple effectively takes credit for.

 

KF: then calls up exhibits PX79 and PX80 – relating to a 2013 Goldman Sachs Switching Report.

 

KF notes that PS was asked about the report, and Schiller’s sharing the report with other Apple executives, during a February deposition.

 

PS does not remember sending an email to Apple’s Eddy Cue and others calling the report “an interesting report,” but he did, per the email he sent in the exhibit.

 

The Goldman Sachs report pertained to the significant switching costs of moving data from an iPhone to an Android.  

 

KF noted that yesterday PS noted that changes in the industry have mitigated those costs and made switching far easier.

 

XXX

 

Hello. Bobby Allyn here with NPR. In the courtroom with the Information’s Josh Sisco.

 

Questions/concerns: ballyn@... or 570-814-0887

 

Exhibits: http://tinyurl.com/epicvapple

 

Judge Yvonne Gonzalez Rogers (YGR) is wearing a maroon mask.

 

For Epic:

Katherine Forrest

Tim Sweeney

Gary Bornstein 

Justin Clark 

Lauren Clause

Jessica Choi 

 

Apple: 

Richard Doren 

Heather Grenier

Kate Kaso Howard  

Jason Lo

Karen Dunn

Harry Phillips

 

On the stand today: 

Apple executive Phil Schiller

Then Apple’s Michael’s Schmid

 


Epic v Apple Day 11 - Daily Pool Report

Erin Griffith
 

Hello from Oakland. Here's today's full pool report.


Judge Yvonne Gonzalez Rogers (YGR) is wearing a shirt with a yellow collar and black mask.

 

For Epic:

Katherine Forrest

Tim Sweeney

Gary Bornstein 

Justin Clark 

Lauren Clause

Jessica Choi 

 

Apple: 

Richard Doren 

Heather Grenier

Kate Kaso Howard  

Jason Lo

Karen Dunn

Harry Phillips

 

On the stand today: 

James Mickens (expert witness)

Phil Schiller (Apple executive)

 

Some housekeeping issues: Katherine Forrest (KF) wants to reserve some time for the possibility of rebuttal evidence as needed and for closing agenda - “we’re super close” to having an agreement between the parties and are prepared to submit that later today. 

 

Judge says she’d really like to finish off on Monday - doesn’t mind adding a bit of time but would find it helpful. Not inclined to give you any more time if that means we roll into Tuesday. “Monday I’m good, Tuesday I’m not good. 

 

Epic and Apple agree w/ that.

 

Gary Bornstein says parties have all reached agreement on written testimonies and plans to submit later. One objection Epic has is that one of Apple’s witnesses, Loren Hitt, "made a substantive change" to his opinion without the ability to respond. 

 

Jason Lo says the change came up in cross-examination and the professor struck out 3 words for clarification. 

 

Judge denies Apple's request to delete the words. 


Jason Lo, lawyer at Gibson Dunn on behalf of Apple, questioned Professor James Mickens, professor of computer science at Harvard and expert witness for Epic. In general Mickens was amiable and quibbled at a lot of the binary “yes/no” questions with lots of responses along the lines of “that’s not quite right” or “not necessarily” and Lo was mildly combative and cut him off several times in clarification. Paraphrased unless quote marks.


Lo began by pressing on the fact that Prof. Micken’s opinions about Apple’s security and app screening process are not based on “factual” information, aka direct internal data.


Lo repeatedly asks whether Mickens had “factual” information. “Did you personally examine the 17 apps taken down?” in an article Mickens referenced in his written direct.


Mickens repeatedly says his opinion is not based on “internal Apple statistics” but instead “general computer science knowledge” and “empirical effectiveness.” 


At one point Lo interrupted to say that’s not what he asked.


Judge asks to pull up a visual of paragraph 78 of Prof. Mickens' testimony and an article in which some iPhones showed certain apps stored things like passwords without proper encryption. 


Lo asks whether anything in his written direct conducts an analysis of the total number of security incidents. 


Mickens says yes but it wasn’t necessary to create his conclusions. 


Lo references Mickens expert report - Appendix A - including 3 books by James Levin. 

“Is there a reason why you relied on 3 separate books by Mr. Levin?” 


Mickens says the third book is older and there’s a newer version. 


We see the book cover that says “Mac S C and iOS Internals.” 


We turn to page 80 of the book, which says: “In actuality, Apple’s application security is light years (if not parsecs) ahead of its peers.” 


Lo explains parsecs is a Star Wars reference.


Mickens points out this is a 2013 quote.


Lo: In 2018, Fortnite launched its sideloaded version on Android. Fortnite had a security vulnerability as part of that. 


Mickens: It was fixed very quickly 


Lo: Was that common in Android? 


Mickens: It was not an Android error, but a Fortnite error.


Lo: Was it carelessness on Epic’s part? 


Mickens: Not sure how to apportion blame. 


Lo asks if there is any place where Mickens takes into account the speed Apple remedied the issue


Mickens: It’s not relevant to my determination 


Lo: “When I asked about Epic’s security shortcomings you volunteered information about the speed, correct?” But Mickensdid not take the speed to fix security issues in account for his testimony on Apple’s security. 


Mickens says he did. 


Lo asks Mickensto point to the paragraph where he did. Mickens says he didn’t memorize the report. 


(This was a tense exchange.)


Lo makes a cat and mouse metaphor and says Mickens took “snapshots in a moment” where the cat won. 


YGR: “You mean the mouse?” 


Lo: Yes. 


Mickens says his report spoke “indirectly” to Apple’s strong security culture. YGR jumps in to ensure she heard him say the word “indirectly.” 


Lo compares Apple’s security to Fort Knox and Android’s to “the local bank.” Mickensagrees it is harder to break into Fort Knox. 


We pull up a chart of ZERODIUM payouts for security breaches that looks like a Periodic Table of elements - it shows that the highest price paid for a “zero day vulnerability” for iOS is $2m and Android is $2.5m. (The range of prices goes from 2.5m to 100k.) Micken’s testimony said that that gap means iOS is now easier to compromise. (Lo’s point being that they’re fairly close in price, therefore not that much less secure.)


We are now talking about Micken’s claim that sideloading is safe on Macs so therefore should be allowed on iPhones.


We go back to the Levin book that Mickenscited 3x in his expert report which Lo argues contradicts that claim. The Levin book says “viruses and malware are rare on OS X” [the name for Apple’s OS at the time]

Lo reads: “indeed OS X and to an extent Linus remain healthy in part simply because they do not attract much attention from malware “providers.” 


Levin’s argument was there were fewer attackers because there were fewer Mac OS users. Therefore… greatest # of devices = most attacks. 


Mickens doesn’t necessarily agree with that analysis. 

“From the security POV that’s a difference without distinction.” 


Lo: Are there fewer attempted attacks on Macs vs. iOS because of the number of devices? 

Mickens: Apple doesn’t think that way - it doesn’t advertise its devices “as being less secure because there are fewer attacks.”  


Epic objects to use of document because not sure of the “non-hearsay purpose.” 


YGR: ”I thought each side - each witness's experts were relying on a certain amount of hearsay” that’s what the lawyers told her antitrust economists do. Allows it. 


Back to the ZERODIUM periodic table. 


Lo: Android has a higher payout than iOS - a reasonable interpretation of this data is that iOS is easier to compromise than Android phones


We turn back to a similar chart for desktops and servers. Two squares are orange for Mac OS, which are among the lowest paying “zero day” payouts. One says Safari RCE+LPE $100k. That’s 5% of the highest payout for iOS (which was $2 million). 


Mickens agrees its certainly less $ for Mac than iOS. 


Lo asks if it suggests iOS is more secure than Mac OS? 


Mickens: My logic was looking at a particular mobile category. Both sides are worried about, well, “iOS must be so much more secure.” 


Lo: Did you know the information on page 4 was there? Did you notice that when doing your analysis? 


Mickens: I did. 


Lo: So you saw it… but made a decision not to include that in your analysis. 


Mickens: “I thought it wasn’t relevant to my determination.” 


Lo asks if the relative security and popularity of IOS explains the difference in prices. Mickenssays “not necessarily.” Lo pulls up a new section of ZERODIUM document that explicitly states that the size of payments depends on popularity and security level of each software system. 


Moves Exhibit 5561 into evidence. 


Lo: “We’ve talked Star Wars, let’s talk enterprise now.” 


We look at a chart from Mickens’ written testimony describing on-device security. 


Lo notes that Mickens is a “former Microsoft guy” in a hypothetical and Mickens smiles and nods.


We are debating the difference between quality assurance (QA) and security issues. Lo says Apple’s attempt to search for features that could harm a user is a QA issue and quotes from Mickens’ report that says “‘enjoyable’ is defined from the perspective of Apple not from some universally accepted understanding of QA properties.”


“I think you’re taking some of these quotes out of context.” Nothing in the report or my testimony has said that trying to screen for these things is bad.


We look at another chart where I can actually see the annotation: “MICKENS DWR Sections V, VII” - it compares Off Device security on an app, on-device security for iOS and on-device security for hardware. 


Lo: If iOS distribution was opened up to third party developers - they would be able to do so running on the iOS operating system provided by Apple? 

Mickens: “Not necessarily.”



Now we’re talkin’ bout porn, pirated software, and other bad things that Apple prevents from its App Store. Lo asks: “Which policy should prevail” were Apple forced to change its app distribution methods?


Micken basically says he has not provided an opinion but that Apple should be allowed to prevent pirated software on its platform. Mickens also says there is a spectrum and Lo is assuming that this case will result in a “maximalist”  environment but there is a middle ground. 

 

Judge YGR jumps in: Have you provided an opinion with respect to some middle ground?

Mickens says he has not. 


We go to graph 79 of Micken’s written direct. Lo points out his definition of security for his analysis does not include “copycat apps, scam apps and review fraud,” which cites an article from the Verge on Feb 8, 2021  https://www.theverge.com/2021/2/8/22272849/apple-app-store-scams-ios-fraud-reviews-ratings-flicktype


Lo is saying page 25 of Micken’s written direct is supported by that. 


YGR is not following. “Pages 21-27 support Opinion 11 and nothing else?”

Mickens: “Perhaps I misunderstood what the page numbers meant?” 

YGR: Do I not understand how your entire direct testimony is structured - you have a number of opinions and the cross reference for the opinions gives me the page numbers. Do I need to strike paragraphs from your report because they don’t in fact support what you tell me in paragraph 11? 

Mickens says no, the citations are correct.

Lo asks us to just move on. 


Back to Mickens testimony: Point #80 refers to financial fraud via thumbprint via 2 fitness apps. Mickens says yes, financial fraud is one problematic aspect. 


(The overall point is that Mickens has excluded frauds and fake reviews from his analysis of Apple’s App Store security.)


 We are looking at a news article from Tom’s Guide. The article quotes a security researcher named “Bowne” who says that companies are not likely to fix security flaws. Is that the world that Mickens/Epic is advocating for? Mickens says no. Concludes Lo's session around 9:40.


Justin Clarke began questioning Prof. Mickens around 9:40.


Regarding previous q on porn: Are there technical engineering solutions that could be implemented to solve this problem [in the scenario of Epic winning the case that would allow Apple to make decisions over apps being good/bad]? Mickens says yes. 


YGR: “Where is that in your written direct?” 

Clarke says: This is in response to something Apple raised. 

YGR is not happy: “There’s nothing new in this case. It sounds like a new opinion. So it wasn’t in your direct. So now I’m getting something new.” 

Clarke also points to graphs 22 and 23 of expert report, not written direct. 


Mickens: “Just to be clear, I personally am not advocating a specific solution whereby there is no content moderation.” 


Clarke: Any technical reason you couldn’t do that? 

Mickens: No. Disney, for example, would be highly incentivised for reputational reason to make sure no harmful content made its way into that App Store. 

Clarke: Would Apple have technical ways to remove malware or bad content even if iOS is opened up to third party App Stores? 

Mickens says yes. “Apple could fundamentally turn off the spigot, if you will.” “That’s all compatible with a third party App Store.” 


Clarke asks Mickens about the Levin book - notes that some of Lo’s points were about things that were written about older versions of Apple’s operating systems. 

Mickens: “Apple does have a reputation for security and that is not undeserved.” But other companies are achieving similar levels of high security.


We put Exhibit PDX 81.1 on the screen -- it is a list of Mickens’ summary of conclusions. Asks if ZERODIUM periodic table changes any of his summary and he says no. 


Clarke makes the implication that the growth in the number of apps makes Apple’s review process less secure because the review process does not scale.  

Mickens: “This is a palace where allowing third party app stores would actually spur more competition here.” “It might also lead to more innovation in the way app stores screen for security issues.” 


Mickens: “What we’re seeing here are 3 points in a design spectrum for app stores. These are not the only 3 visual points.” Mickens makes the general point that Apple’s App Store system isn’t the only way mobile apps could be distributed.  


The image on the screen shows three blocks: “App store” - ”third party distribution (notarization)” and “third party distribution (unreviewed + unnotarized)” 


Mickens regarding Apple’s questions about not having access to internal Apple data: 

The security system has developed a variety of techniques to analyze closed systems. 

Mickens: “This is accepted in the community and it’s actually accepted by Apple, who runs a bug bounty program that allows outsiders to analyze Apple’s partially closed source software and hardware. So even apple understands that one does not have to be an apple employee to understand the security implications of Apple products.” 


YGR: Which company does it better?

Mickens: “Well, it’s tough in general. It’s tough in general.” He says he was tasked with evaluating the security and he notes that opening up the app store for third party distribution channels “Couldn't be punting on the security issues because those are mostly enforced by the OS which are mostly 


YGR presses again: “But in the industry today is there anyone who does it better?”

He says not definitively. 


Jason Lo back to redirect hammering the question of whether Mickens has offered an opinion on how this should all work if Epic wins: Sesame St. and Itch.io. both have app stores. Should they be allowed to do whatever they want? Note that Lo is saying it as “itchio” and not “itch dot I O.” 


Mickens says there is a middle ground between closed system and “absolute mayhem where anything goes.” 

Mickens: Ultimately it’s the court who decides. Court should consult with experts on content moderation and security.

Lo: “You’re not offering advice or expert opinions on that issue." 

Mickens: "If we look at Mac OS which currently already supports 3 diff models." 

Lo interrupts and presses again and Mickens pushes back with another "no, not quite."


Lo: "If Epic were able to prevail, should companies like Itchio be able to distribute on Mac iOS or is that for the judge to decide on her own without anything from you?" 


Mickens: "My opinion is there is a spectrum of possibilities from an engineering and security perspective." 

Lo: Have you offered an opinion?"

"I’m trying to offer it now." 

Lo: "I’m not asking you offer it now." Asks again.  

Mickens: "No, because my task was to evaluate the security of the iphone." 

Mickens done at 10:07. 


Katherine Forrest says Epic has no further witnesses called. 


Richard Dorn calls Phil Schiller to the stand at 10:09


Phil Schiller took the stand at 10:09.  


Judge YGR makes a comment to the effect of Schiller looking a bit different on the stand. She's seen him in a mask every day at the Apple table but now he's wearing a clear face shield.


Schiller is wearing a dark suit, striped tie, silver hair combed to side.  


Richard Doren is questioning.  


Schiller describes his 30-year tenure at Apple. He has been an Apple Fellow since this past August. Before that, he was SVP of Worldwide Marketing, a position held for 20 years. 


Schiller explained his return to Apple in ‘97 and the re-org that saved the company. Apple began operating “much as a start-up.” Before, each group maintained its own P&L statement, but Apple began using one P&L for the entire company.  


Schiller is effusive in his excitement over the “many” benefits to a unified P&L. “Now we work together as one team” and don’t compete with each other. This is related to previous testimony about Apple's refusal to break out App Store profits.


At 10:15 the court goes to recess for a short break. 


PS. I forgot to note that before the trial started, Tim Sweeney was pacing around in circles in the lobby and I eavesdropped on some small talk with the lawyers. Sweeney told a legal aide he went for a hike in Marin over the weekend and discussed his accommodations (an apartment in Oakland) with Katherine Forrest, who is staying in an Airbnb. 




Court resumed around 10:36


Richard Doren begins questioning Phil Schiller, Apple fellow, about the introduction with the iPhone. Pulls up a press release introducing the iPhone in 2007. Release describes it as a “revolutionary mobile phone.” 


Schiller: They wanted a next gen phone, an upgrade to the iPod - “If anyone is going to kill the iPod, we should do it ourselves” - and also, also Blackberries etc., weren’t that great at the Internet. 


Schiller describes how difficult it was to develop and the concerns over whether it would work.  


Schiller: “One, it had to be a phone.” It sounds simple… but “other applications or uses can’t get in the way of that capability.” It also had to be small and work with wireless networks. 

“Most important of all is the security and privacy issues. You’re carrying this around in your pocket.” 


Schiller: “These are highly personal devices with a growing amount of information available everywhere you go roaming on other networks everywhere you go.” 


Schiller: Apple does not license iOS data to third parties. Apple is not a hardware or software company but a product company. 


Schiller says Google and MSFT license their operating systems to other devices. Apple does not. If they did that, they would need to support a variety of other products (screens, vendors etc) and “in our opinion it reduces the quality and reduces the speed of innovation.” 

“You just can’t be as fast and efficient at innovating and you just can’t built as high of quality, in our opinion.” 


Schiller has some friction with the mic on his suit around 10:45, repeats himself about his view of the competitive landscape for mobile phones and names a bunch of large tech companies including Amazon and Huawei. 


What about app store competitors? Schiller names Steam and Handango and says they charge 30% commission. 


He describes the market for physical software where developers had to pay for retail distribution. 


Schiller on the apps available in the first gen iPhone: We wanted to have built-in native apps from Apple and the security and privacy risk of opening it up to other native apps was too great and not something we could solve. So we offered up the idea of web apps. There wasn’t time to consider third party APIs and tools and distribution. And didn’t know how to solve the risk of security and privacy for iphone users. 


Doren asks: Is there anything wrong with jailbreaking?

Schiller: “Yeah, there is a lot that I see wrong with it.” The software becomes incredibly unstable and unreliable. Might not work when updated and give access into the system in places that were not intended and risk privacy and security of users. Also put the functioning of the iPhone itself at risk. 


EXHIBIT 4566 - It is Apple’s external news site that shows a 2007 news item announcing the App store SDK - they announced it months in advance so developers could start working on official apps instead of those for jailbreaking. Schiller notes that such an announcement is not common. Includes a quote from Steve Jobs saying he was excited about welcoming “hundreds” of apps. Above that is a story from E! Online promoting buying iTunes music via Wifi on the iPhone. 


The idea is to convey how carefully Apple was rolling this out and how the phone is different and more crucial to get right, security-wise, than a computer. 

As a sidenote, Epic’s table is using PC laptops except Sweeney who is on a Mac. Apple lawyers also on Macs of course. Both reporters in the media gallery are LOUDLY clacking away on the Macbook Pro’s notorious butterfly keyboards. 


Exhibit PX0880  - A transcript of the launch event from the developer SDK. We go to page 20 where Steve Jobs speaks. Jobs points out that the App Store is designed to solve the distribution problem for every mobile developer, big and small. 


Schiller says it was important to treat all developers the same. That philosophy has never changed, he says. From the outset it was important that the App Store would be the only way to distribute apps, he says. 


Schiller: Over the years, the ways and methods bad actors have tried to get at users and their data have increased dramatically. 


From the beginning developers picked the price of their apps. 


Doren says Apple’s choice of 99c for iTunes songs helped grow the market for digital music but realized that didn’t work for apps. The announcement transcript shops that Apple began the 70/30 commission split from the beginning.  


Quote from Schiller in the transcript promoting the app store for “two classes” of developers - free and paid app developers. No commission on free apps. 


Schiller says “we believe” Apple’s 30% commission is still competitive. 

Schiller says developers of free apps did not have to pay for anything else.  


YGR jumps in: Did they pay for the SDKs? 


Schiller clarifies… Well we have 2 programs and a majority of developers don’t pay. Then we have the $99 program. 


Schiller discusses the risk of launching the App Store. Says the company didn’t create a forecast for it when it launched. 


Back to the transcript: In response to a Q&A in March 2008, quoting Jobs saying “this is not an open source project, this is a for-profit project.” 


We look at PX417 - Emails from Schiller to Eddy Cue and Steve Jobs July 2011. Email starts “Food for Thought: Do we think our 70/30 split will last forever?” 


Schiller then outlines a future of $1bn in profits and suggests ratcheting down the split, acknowledging it is “controversial.” 


Schiller says he was discussing a 2011 WSJ article that describes a future in which HTML5 threatens the App Store and Flash (heh). 


Have other app stores launched since the App Store?

Schiller: Yes, Amazon, MSFT, Google Play, Samsung etc. He considers the game consoles competitors as well.


Back to the announcement transcript: PX0880 - Page 21 - Jobs says there will be app review and it will cut out porn, privacy invaders and malicious apps. 


We see a screenshot for Exhibit DX-4287 which is a video of the App Store announcement. Other categories that Apple planned to moderate in its App Store included “bandwidth hog” and “illegal” and “unforeseen,” the latter of which Schiller points to because it was “rapidly evolving.” 



Continued examination of Phil Schiller by Richard Doren. Note: Doren said his questioning of Schiller will likely last the full day. “He may be on cross by the end of the day.”  


We pull up PX-0882, a 2008 email between Schiller and Scott Forstall. Yahoo asked Apple to allow it to distribute its own widgets on iPhone. Schiller’s email says “it is a horrible idea.” 

Email says opening up the App Store to further app stores is “the same as throwing out the whole plan we have in place.” 


This email was referenced in the Epic opening arguments as part of Apple’s plan to create a monopoly. Schiller says it was about its plan to simply launch the App Store SDK for developers. 


Schiller says that at the time 2m iPhones had been sold and 500 apps were available in the App Store. 


How much did it cost to join Apple’s developer program? Schiller says $3500 and he wanted to make it more affordable and available to developers, especially younger developers. 


We pull up PX2618 - Apple’s developer agreement. 


Schiller says the terms are standardized and large developers are not allowed to negotiate more favorable terms than smaller ones. 


And another exhibit, number not given, which is Apple’s Xcode and SDK agreement. Schiller says developers who use this are required to accept Apple’s IP terms that are embedded. Over 30 million developers have agreed to these contracts, Schiller says. 


We pull up PX2619 - Apple’s developer program license agreement, which gives developers access to additional tools, APIs, more data, and resources and technologies. With this one they get push notifications, Apple wallet + Pay, TestFlight, App Store analytics. Again no negotiating and required for all developers. Costs $99 a year. Education, nonprofits, govt, are free. 


Doren: “Are you familiar with the Worldwide Developer Conference?” 

Schiller: “Yes, I, I run it.” 


Schiller talks about how much Apple does for developers. The WWDC keynotes get 25-50m views online. It costs apple $50m a year to put it on and covers the costs for developers “particularly now that it’s all online.” Apple is also creating a developer center in Cupertino. Apple also has school programs. And one called “developer accelerator” for assistance and learning. 


Notes that these investments were not “charged” to the App Store - going back to the P&L point from earlier. 


Schiller discusses paid vs free app percentages. Says a lot of paid apps earn money with advertising. Apple earns no money from ads. Apple doesn’t take a commission on e-commerce sales, for example, because Apple has no idea if the item was delivered and decided not to get involved in those transactions. 


Schiller says in 2019 there was more than 400bn worth of sales of physical goods via the App Store. Judge YGR jumps in to clarify: “billion with a B?” 


We’re now looking at an email from Dec 2008 from Ron Okamoto to Schiller and Greg Joswiak and Schiller with a "keynote preso" about app commerce business models at Sony, xBox, Nintendo and Sony Playstation. 


Schiller said he viewed those stores as competitive and wanted Apple’s commerce model to look similar. 


Schiller explains that “preso” is short for "presentation.” 


Pulls up PX0888.3 - part of the “preso” 

 

An image of 4 categories: Subscription, Download & Install, In-App and Hybrid with some notes below each. Doren highlights that “download and & install” is most common. The next page says that that model is easy and least invasive, but it is “least optimal” because paying up-front for a game is not ideal. 


We skip to page 25 of the "preso" and then slide 18: Megaman 9 and Rock band 2 - these are examples of in-app purchase that the App Store did not yet permit. 


Back to page 25 of the "preso": titled “What Developers are Asking. Under headings titled Subscription and In-App Commerce, we get snippets of what The Weather Channel, EA, Zynga and other developers wanted, including subscriptions and in-app commerce.


Slide 27: Summarizing the preso’s summary, Schiller says “The app store’s “download & install” model is still widely supported on consoles and in-app purchases is new with no clear leader to compare to. Third, developers thought an in-app purchase model would put Apple in an App Store leadership position.  


We go to Slide 29 - “What Developers Want'' with a chart proposing a model for Apple to launch payment APIs. Going through each point (scalable, billing, micro and macro price points, security, ability to allow developers to manage implementation) in excruciating detail. 


YGR asks if Okamoto (who made the "preso") is testifying and Doren says no - “he’s retired.” 


We go to Slide 30 which includes more developers’ requests for commerce, including “micro-transactions.” Schiller says that has become a business model for various games including Fortnite. Schiller says Apple began engineering and store work to start thils. 


We pull up DX-4192 - It is a transcript of a presentation in March 2009 Apple event announcing a “developer beta” of the 3.0 version of the operating system. Schiller was not a speaker but attended. 


Doren quotes Joswiak saying that 50k iPhone developers have joined its programs, with 25k apps in the App Store. Doren quotes Scott Forstall saying over 800m apps have been downloaded. Also iPhone sales hit a total of 17m by then. 


Epic lawyers begin passing around a note. 


Doren quotes Forstall discussing Apple’s plans to announce “in-app purchase.”  


Forrest objects that Dorren testifying on Forestall’s statements are “hearsay.” Doren has Schiller testify that he took part in the creation of the document and argues the document is a business record and Schiller is testifying independently of the document. 


Doren shows that the 70/30 split was announced for paid apps only. Schiller testifies that it was soon expanded to free download + paid in-app content apps as well. 


Schiller says it took work from the engineering team and App Store team to build it. Schiller says none of that was charged to the App Store. 


Schiller defines “Freemium” and “paymium” (where you pay up front but still buy more things inside). Schiller says roughly 6% of apps are paid up front. [He also said another stat I missed the first part of, I think was that 17% of apps are freemium + paymium, please check the transcript if using for anything.] 


Why would a developer use freemium rather than paymium? Schiller says on average the developer can grow customers 10x by going from paymium to freemium. 


Schiller says Apple has never marketed IAP as a separate product. 

Doren says the phrase “IAP APIs” about a dozen times in the following line of questioning: 

-Apple has a formal process for developing and marketing new products, which Schiller developed. 

-It describes who is involved in the development and the phases a product goes through. 

-The “IAP API” has never done this, Schiller says. 

-IAP is not a product, Schiller says, “It is a feature of the App Store.”  


Forrest objects to a question she says is speculative about Apple’s IAP. 

YGR sustains and says “It’s also leading.” 


Schiller says Apple has 5,000 customer service people who work with customers about getting refunds on in-app purchases. They work under the “Apple care” division. Schiller says last summer Apple launched a product that allows developers to know when Apple has given a customer a refund. 


Schiller describes something called the “reader rule.” Essentially if you acquired the customer on your own and the user can log in with their account and get access to all the content they paid for and agreeing that you don’t need to do that from the store so there is no requirement to use IAP. Apple gets no commission for those subscriptions. Put in place, Schiller believes, in 2009.  


Schiller says you pay for an NYT subscription you can log into the NYT app and get the content. If you purchase the subscription within the app, you pay via IAP. If you change devices --


Forrester objects as “foundation” - YGR overrules. 


-- NYT could allow you to transfer it. Or you would have to cancel the subscription and start a new one on the new device. 


Schiller says in 2016 Apple changed its commission pricing to drop to 85/15 on the second year of the subscription. He says Apple did that to encourage developers to “maintain that content” in future years.


Schiller says the Apple TV Team created a “video partner program” a few years back to consolidate TV / video services together into “one experience” for users. The Apple TV team asked the App Store to lower commissions for developers to encourage them to join. In some circumstances, video partner program members don’t use IAP - in particular, cable providers with existing movie rental businesses with their customers. Amazon Prime is one of those. Canal+ (a French company) and one other I didn’t catch. 


Does Apple support “cross wallet” play? Schiller says yes, it’s been many years and was prompted by game developers asking for it, not by Epic.


At 12:34 we went into recess until 1:15.



We returned to session at 1:15. The judge noted that Doren was at the podium, Schiller was on the stand, and “Ms. Forrest is writing furiously.” Forrest froze, looked over and ultimately went back to writing slightly less furiously. Epic lawyers were also busily passing around binders and using those small sticker arrows throughout the examination. 


Doren pulls up Exhibit Dx-5627 - an email from Todd Teresi regarding a developer program


Schiller is on the email chain and said he proposed some programs to help “indie” developers and startup developers. “We had a number of different explorations.” It ultimately led to Apple’s small business developer program. 


Schiller says he was worried about money laundering - and suspected that if Apple lowered its commission below 15% for small businesses that it would lead to an increase in money laundering. 


Apple has told developers about this program “everywhere we could” since last December. Schiller said. Tens of thousands of small developers have enrolled. It’s a minority of those eligible. 


Talking about Apple’s app store search ads - when the program was first developed, we heard that it was expensive to buy ads on Facebook and other places. 


How does the pricing model work? Schiller says there is an auction and developers bid on it but is not the expert on the ads business. The apps are organic search. 


Doren notes that Sweeney complained about the notion that if someone searches for Fortnite there may be an ad that comes up before that. Said advertising for a competitor’s terms is called “conquesting” and claims it “helps” small developers compete with the likes of bigger developers like Epic.


YGR jumps in: How do I know Apple is fairly competing in that same market for search? Does Apple just not compete? 


Schiller: That’s right, we do not allow search ads for Apple’s products. 


Has Apple ever told Epic that it cannot charge less for Vbucks? Schiller says no. 


Doren pulls Exhibit PX 2790 - App Store review guidelines 

 

Doren points to Section 3.1.1. Regarding in-App Purchases says that apps cannot direct customers to purchasing mechanisms outside of IAP., as well as 3.1.3, which says apps cannot encourage users, via text, email or any other way, to use a purchasing method other than IAP.  


Schiller: If you were going to a nice retail store - Nordstrom’s - to buy a pair of Levis, you don’t expect to see a tag on it that says you can buy a pair of these at Macy’s. Refers to “reader rule” which says it’s ok if you already got the customer, but if Apple enabled you to get the customer, it is not fair to then direct them elsewhere. 


Has Mr. Schiller ever played Fortnite? 

“Absolutely, quite a bit”

Schiller says he stopped playing after the lawsuit / hotfix last August. 


We pull up Exhibit Dx5567

It is an email that Schiller got from Epic when he signed up in March 2018, which said the game was exactly the same as it was on the other gaming consoles.

Schiller said it did not violate Apple’s terms. 


YGR: But what if it said, you can buy Vbucks cheaper from your PC? 


Schiller? Not if it is sent generally to the user base. If It’s literally just me, Phil Schiller, that would be [a violation]. “Broad communications we’ve never had a concern with. It’s just the targeting of a brand new user.” 

Schiller says he’s gotten emails from Fortnite ever since he signed up. 


We look at Exhibit DX 5555 - it is another marketing email from Epic on April 29, 2021 to Schiller. 

There is a button with FIFA / soccer trophies, etc. It says “Get the battle pass” and it invites users to make purchases at Epic’s website. 


YGR: I thought I heard testimony that Apple doesn’t allow developers to have each others’ email addresses. 

Apple says you can get the email addresses, you just have to ask them for it. 


Why doesn’t Apple want to do a store within a store, as Epic is asking? 

Schiller goes through all the reasons Apple has said a million times. 

No ability to moderate. No parental controls. No integration with Apple’s systems. Lack of consistency of information about each app (age ratings, reviews, privacy info etc). 


Doren brings up Itch.io and pronounces it Itch dot I O. Schiller says Itch.io’s app store would not be acceptable to Apple. 


Doren brings up the ERV: Apple’s executive review board. Schiller says It was created at the start of the App Store to deal with issues or challenges that arise in the App Store. The ERV gets weekly reports on various cases and discusses them and modifies guidelines “at least yearly” when Apple runs into situations that are new or gets feedback from developers. Cross platform play was an example of that in recent years. 


YGR asks if other App Stores publish their guidelines and Schiller says he’s not sure.  


Doren asks Schiller what Roblox is and he says it’s a game. This type of game, where lots of games exist inside a game “is a new phenomenon in our industry.” 


Schiller elaborates: The games inside Roblox aren’t required to go through App Review. The developer of the Roblox App is the Roblox corporation. The content within it must follow the App Store guidelines. Creators are able to create games within the Roblox app and those are added to Roblox and are released as content within the app. 


Switching to Epic: Schiller says users within Fortnite are able to create things inside the app as long as Epic is responsible for making sure all of its users are following the App Store rules.


Schiller says the “creator vs developer” debate is a discussion within the ERV. Stresses that it is a new phenomenon and Apple is trying to “apply the same philosophy we’ve applied from the beginning.” 


Schiller says the “FEAR team” within Apple handles “Fraud Engineering Algorithms and Risk.” That includes piracy, spam, fraud, potential risks of new features Apple is working on. This is different from the App Review team which has “the goal of trying to help developers get on the store.” 


Schiller gives the example of how the FEAR team will see a big boom in fraudulent accounts in one region, for example. Eric Friedman heads up the Fear team. 


Exhibit PX-0250: 

An email from Friedman from 2013 who says “App Review is bringing a plastic butter knife to a gun fight. Investment will have to be made in making that process more robust or they will keep getting rolled.” 


Forrest objects. Forrest wants to know if Schiller can speak to this particular document because he’s not on it. YGR tells Doren to “lay some foundation.” 


Dorren pulls from elsewhere in the email chain, where a different executive is raising the issue of Chinese developers padding their ratings. Phillip Shoemaker says that behavior would be rejected in App Review. 


Doren gets a note from his legal team and goes back to Roblox. Is all creator content using tools and content that are approved through App Review? Schiller says yes. 


Schiller says the App Store has exceeded his expectations from 2008 about how it would be. 


Exhibit DX - 4608 A transcript from a 2009 Apple event. 


Doren points out that Steve Jobs said Apple sold 30 million iPhones in a little over two years and attributes it to the App Store, which had 75,000 apps. 


Schiller testifies that today there are: 

-Over 1bn App Store users 

-500m+ weekly app store visitors 

-2m apps 

-280k are games


Schiller said that around 2017 - he isn’t 100% sure - Apple embarked on a cleanup operation to get rid of apps that hadn’t been updated in years or had extremely low download numbers. It was ongoing, and roughly 2m+ apps have been removed. 



Continued examination of Apple fellow Phil Schiller by Apple lawyer Richard Doren. 


Doren brings up “Switching costs.” 


“Since 2010, what has happened with switching costs?”  


Forrest objects. 


Doren says “I’ll admit it was a lazy question.” 


Doren asks if it has become easier to switch devices since 2010. Schiller says yes, because of the magic of the cloud. Also, OEMs, ie, Apple, Samsung, Google, etc, have developed tools to help users switch over from other operating systems. 


Schiller says Apple has invested in tools to help people switch from Android. Has Apple created tools to help Apple users switch to Android? Schiller dodges and says the tools usually come from the company trying to lure a company over from another OS but overall it is easier to switch. 


Doren pulls up PX-0079 

It is a Goldman Sachs analyst report from June 19, 2013 about switching from iPhone to Android.


Schiller had emailed this report to other Apple execs at the time, noting that iTunes and iCloud “figured pretty big” in the ability to switch.  


Forrest objects because Schiller denied remembering this email in his deposition. Dorren says he’s asking about what is discussed in it, not about his recollection of it. Judge YGR allows him to continue. 


Doren and Schiller make a big point of the fact that the technology has changed since the writing of the report in 2013. (For example, “DRM,” or markings on iTunes files, is outdated technology, as would the paid version of a music management app.) 


The analyst describes the “pain in the neck factor” and Doren asks if it has lessened since this report. Forrester objects and YGR sustains. Schiller goes back to the cloud point. 


Doren pulls up Exhibit PX-0892

It is an October 2010  email from Steve Jobs titled “Top 100 - A” to the executive team. It is a draft agenda Jobs shared asking for input. The “Top 100” meeting covers the next year coming up. The fourth item says “2011: Holy War with Google,” noting all the ways Apple will compete with Google and is described as the primary reason for this Top 100 meeting.


Jobs stresses the move to the cloud and says Apple is in danger of hanging on “to old paradigm too long (innovators dilemma).”


Jobs further writes that if Apple ties all of its products together it will “further lock customers into our ecosystem.” 


Schiller says this is about having your calendar, email and contacts synced on all your devices, and if Apple can do that, Apple would have a better platform customers would want to stay with. 


On the next page, an item called “MobileMe” - which was Apple’s service to begin creating a cloud-based infrastructure. Doren and Schiller discuss further points by Jobs expressing that Google was way ahead of Apple on the move to cloud. 


Schiller: “It sounds simple today, the idea that your calendar, contacts and mail all sync to your phone?” But at that time, he said, “we didn’t have that.”  


Schiller says he is a gamer. (“I think so.”) 

He has an Xbox, a Nintendo Switch, his various Apple devices, one or two other consoles I didn’t catch, as well as a dedicated VR auto racing simulator rig.


Doren notes that that qualifies him as a gamer. 


Schiller says the App Store competes with Steam and the Microsoft Windows Store. 


Schiller testifies--in his capacity as a gamer--that MSFT’s Windows Store is not as robust as its Xbox store.


Testifying as an Apple business executive, he said he had only recently learned about MSFT’s reduced commission announcement, that the announcement was not yet effective, and that it did not come from the Xbox division. 


Schiller is asked to describe his discussions with Microsoft about their game streaming service. Schiller said he would love to have them stream games to users on our platform as long as they follow the rules that others have to follow. Each game would have to be separately submitted because when a user goes to look for a game, they want to see the product page, age ratings, privacy policy, parental controls, other features, etc. “As a store we want to provide that information to the users.” 


Judge YGR: So how is this different now from Netflix? 


Schiller: Netflix flows all the content through its app, we are not reviewing the content, just the features of the app. The Xbox cloud is a separate app, and users do much more than just view video, they play games. Secondly, the App Store is not a movie store. It is an apps and games store. 


Worth noting Schiller has been very relaxed throughout his testimony but there was tension in his voice on this response to the judge. 


The judge jumps in again to ask more clarifying questions about how MSFT/XBox’s streaming apps would appear in the App Store. 


Schiller says Apple suggested to MSFT that they should go directly through the App store for these streaming apps. But MSFT also had the option to go through Safari and do web streaming. 


Doren changes the topic to R&D. 


Schiller says Apple spent around $500m in 2005 on R&D. Last year Apple spent $18 billion on R&D. Schiller says Apple has spent roughly $100bn(!) in R&D between 2005 and now. 


Doren shows a “demonstrative” slide titled “Innovations and Investments” which lists the following items:  


Hardware: 

2007 Accelerometer 

2010: Gyroscope

2014: Taptic Engine

2016: Stereo Speakers

2017: Neural Engine

2020: LiDAR


Cellular:

2008: 3g

2012: 4g LTE

2020: 5G 


They are iPhone specs. Schiller goes through each item on the list and describes how these features, introduced in the years listed, helped developers make their apps better. He also specifically notes how each of them helped game developers.


Doren shows a demo of an app called “magicplan” from a company called Sensopia that uses Lidar technology to create floor plans via an iPhone. Schiller describes how the app uses the technology and notes that it is brand new as of last year.


In general the mood in the room is getting a bit antsy and tired as the day drags on through a detailed description of the evolution from 3G to 5G. The latest Forrest objection (“leading”) was not particularly energetic, Doren offered to “slow things down” almost as a threat and Judge YGR sighed when she told him to “change the form.”


Schiller, however, is enthusiastic to discuss the technical details of Apple’s investments in 5G. 


Another demonstrative lists more “Innovations and Investments.” This one is a list of every year for the past decade with all the improvements Apple has made in its custom chip technology. 


In 2010 Apple’s A4 Chip was the first Apple-designed chip. It typically issues new chips every year, Schiller says. In 2020, the A14 chip introduced more machine learning and better performance and battery. 


There is another “Innovations & Investments” demonstrative. This one shows a bunch of Apple’s developer tools, including SDK, Core Motion (2010), SpiteKit (2013), Metal (2014), GameplayKit (2015), ReplayKit (2015) ARKit (2017), Core ML (2017), RealityKit (2019), Reality Composer (2019). Schiller goes in detail about each of these, too. 


The general thrust of this part of the testimony is that Fortnite would not have been able to launch on the App Store back in 2010, but Apple’s vast investment in technology made that possible.  


Schiller says he and his colleagues at Apple considered Metal to be an improvement over OpenGL or other tools they had used. It is named after the idea of “close to the metal” which means operating as close to the chip’s physical capabilities. 


He said Apple brought Epic in to look at a preview of Metal. 

Doren: Did, in fact, Epic do something incredible with it? 

Schiller says they did and Apple invited Epic to take part in helping them launch Metal. 


Exhibit DX-3462 is a video of Tim Sweeney on stage at WWDC in 2014 showing off some of the possibilities of Apple’s Metal software with something called “Epic’s Zen Garden.”


Schiller says “We were proud to include them on our stage and have them take part in it with us.” 


Schiller says Apple also asked Epic to place its demo on the Apple App Store for users to experience “because it was so beautiful.” 


We break at 3:13. Tomorrow will begin with Doren and Schiller.


But wait, Judge YGR has a question for Tim Sweeney, noting “it doesn’t have to be under oath.”  


“We’ve been in this trial now for over a fortnight,” she said. “What does that name mean to you? How did you come up with the name Fortnite for your game?” 


Sweeney explains the origin of the game - it came out of a “game jam” where employees experimented with building their own games. 

“It had a day and night cycle - every hour you go from day to night.” The clock is running so players must create forts during the day to hide from the zombies at night. 


YGR: “So fort-related, as opposed to two week-related?” 


Sweeney says yes. 


YGR: “I wasn’t going to have any other real opportunity to ask, so why not.” 


Judge YGR also tells the lawyers that with jury trials she always meets with jurors afterwards to see what the experience is like. Since this is a bench trial she said she would get coffee on Tuesday morning with some of the junior lawyers on the case, and both sides are very eager to participate. 


Judge YGR adds that she is impressed by the diversity she’s seen working on this case, particularly the number of women. She told the legal teams they should take pictures of themselves. “Given how many of these cases I’ve presided over, this is very different from what I have seen in the past and I think it’s a terrific example of what I’ve seen for the future.”



Epic v Apple Day 10 - Daily Pool Report

Dave, Paresh (Reuters)
 

Hello, Paresh from Reuters here with Michael Acton from MLEX. I’m at 415-565-1302 or paresh.dave@....  We’re on the judge’s far right in rows 2 and 3 of the gallery. 

 

A reminder that exhibits can be found here: http://tinyurl.com/epicvapple  

 

Judge Yvonne Gonzalez Rogers (YGR) is on the bench in a bright pink top, with a stone paneled wall behind her, the US flag behind her right shoulder and the US seal high on the wall behind and above her. 

 

The court reporter and clerk are in front/below the judge and the attorney asking the questions is on the other side of a shield as the court reporter. 

 

Epic’s attorneys are seated in rose brown leather seats around a rectangular table that’s in line with the court reporter, attorney podium and judge. Apple’s rectangular table with the same seats are on the judge’s left, beside the Epic table.  The jury box is on the judge’s right with a couple of people unknown to me sitting in it. 

 

Apple’s folks have Crystal Geyser normal-sized water bottles on their table, Epic has mostly the tiny Nestle water bottles and couple normal-sized Arrowhead bottles. 

 

There’s two computer monitors on each table with the slides, one big screen facing gallery, one big screen facing judge, one monitor in the witness box and two monitors on either side of attorney podium. 

 

Today’s teams include: 

 

Epic:

Katherine Forrest

Gary Bornstein  

Yonatan Even

Monica Coscia 

Tim Sweeney 

 

Apple: 

Richard Doren

Heather Grenier 

Jen Brown

Dan Swanson

Phil Schiller

 

***

KF asks for time to be set aside for closing argument. YGR skeptical.

 

YGR: So nothing has really changed, I heard your opening, read your briefing, the hundreds of pages. So perhaps for the public you want to do this?I just don’t know how it’s going to be any different. What would be most helpful, and what I don't think you would be interested in doing Ms. Forrest, is what I do in my patent cases. For every term that the lawyers are disputing, both lawyers are up here and we go back and forth. It’s more like a debate. I take each issue and each side gets to go back and forth and respond to my questions and each other. Your [arguments] talk past each other very frequently...Until I have a chance to go back and really assemble and re-assemble and look at all this evidence, another single presentation doesn’t help me. If the two of you are willing to stand up there and debate these elements, I would find that helpful. 

 

KF: We would be prepared to do that.

 

RD: Certainly would be fine with us.

 

YGR: It doesn’t seem to me that anyone really disputes the legal approach i took with the preliminary injunction order. If each of you have a shared framework, we could go back through that legal framework and work through it that way. ...If you cannot agree that is what I would use myself. These are important cases. And it’s tse factual elements that are going to drive the decision. If you all want to agree on a one page outline of the various elements, then we are all on the same page. … We would do this (back-and-forth debate) after close of evidence. 

 

KF: We can meet and confer over the weekend and present court with an agenda Monday, so court can weigh in. And be prepared to do this next week.

 

RD: (asks to present on Monday the 24th)

 

YGR: (Agrees, says she expected case to hang over and had already reserved courtroom for 24th)



First up David S Evans, chairman at Global Economics GrouP takes the stand for Epic with a face shield, examined by Gary Bornstein

 

DE says he listened to Schmalensee, Hitt testimonies.

 

GB asks about Hitt’s testimony about Apple’s success.

 

DE: There has been tremendous growth in the smartphone business over the last 10-12 years and there’s been incredible growth for Apple.

 

GB: Does that cause you to rethink your views?

 

DE: Not at all. It’s useful background. But in terms of being relevant to assess conduct here, it’s not relevant. It doesn’t permit antitrust economist to make causal inference about whether the conduct has interfered with competition.

 

GB: Do you recall Hitt’s criticism of your testimony? And that one of the criticisms leveled was there was not an obvious change in trajectory of Apple’s growth. What’s your reaction?

 

DE: That’s not a very sensible way of thinking about market power in this context. It’s not like a switch goes off. The other point very important for this kind of business is in a rapidly growing industry it’s not possible to look at time-series of growth and refer to the growth to [assess] changes in market power.

 

Brings up DX-4767, showing 115 million total users and 35.9% being multi-platform users. From Hitt’s testimony. 

 

GB: Can you tell us what a population of Fortnite users this slide covers?

 

DE: The title says iOS Fortnite user accounts. It’s anyone who has touched iOS. Someone who logged in for five minutes to someone who uses it all the time. It’s the full range of interactions. The second dimension is time period. This slide covers march 2018 to July 2020, it’s about a 29-month period. 

 

GB: What does 35.9% mean?

 

DE: I would say 64.1% were single-homing on the iOS Fortnite app. Over that 29-month period, 64.1 were only using IoS. What it says is there is a large group of individuals who are only using their iPhones to play Fortnite. That tells me first of all there is a large group of individuals who just like using their smartphone to play. I can’t say this with 100% certainty but they probably don’t have a game console. 

 

Brings up “switching after hotfix” slide in DX-4824 from Hitt’s testimony

 

GB: 81-88% of Fortnite spending by iOS users was retained. What does that mean?

 

DE: The calculation is the amount of spending that Epic had with the Fortnite app for this group of users after this app was removed by the App Store divided by how much spending would have occurred as an estimate had it not been removed.

 

GB: Is it a good measure of substitution?

 

DE: It’s not a measure of substitution. Let’s take an individual spending $100 a month. They spend $80 using PS4 and $20 using their iPhone to play Fortnite. Before removal. In this extreme example, let’s imagine this person continues to use their game console but without having access to Fortnite app, they drop from $20 to $0. He would calculate in this example a retention rate of 80%. 

 

YGR: If someone has access to both devices and they have V-bucks and they know they can spend it they don’t spend it just because they don’t have the phone?

 

(Judge appears frustrated, swivels chair other way, that she doesn’t really get an answer after GB tries to ask her question a different way.)

 

DE: The better measure of substitution is how much of the $20 was spent on game console. That’s the number we want to focus on. Out of the $20, what does that user end up switching over.

 

YGR: What if they spend $20 on other games on iOS?

 

That would be a different form of substitution. That is a form of substitution that could very well happen in the marketplace. But in that case, they are not substituting to game consoles. They are substituting within the iOS ecosystem. ….That behavior is consistent with a market definition that does include PCs and consoles.

 

GB asking several basic questions about Schmalensee testimony criticizing Evans’.

 

GB: (You were in US v Microsoft. What was market definition accepted by court in Microsoft case?)

 

DE: OS for computers. It included Windows. It included Linux, which was and is a free operating system. 

 

GB: (Do you agree with Schmalensee saying you’re also condemning the business models of gaming consoles?)

 

DE: The analysis I’ve done in this case has been very specific to the facts and circumstances in this case and the analysis of the operating system. In the case of game consoles, that’s a very different business. In the foremarket, there’s competition to sell game consoles. In game consoles, the main thing in the aftermarket consumers are buying is games…. It is very hard for me to imagine it would have the anticompetitive concerns we have in this matter. … Game consoles as we talked about is an industry. When we talk about iOS or the iPhone, we’re talking about large platforms that are foundational to the digital economy. They are foundational platforms that support the app economy, which is a big portion of the digital economy, which is sucking up more and more of the physical economy. 

 

YGR: Are they utilities? Given you keep calling them foundational. Are smartphones utilities?

 

DE: I would not use the word utility as an economist.

 

YGR: In the antitrust context? It sounds like you are saying these are so fundamental they are utilities. 

 

DE: It’s a matter of gradation. The electric company that I depend upon to have electricity to function. Economists would attach the word utility to that because of the history of utility regulation in this country. I’m not prepared to say not being able to access a smartphone at this time rises to the same level as not being able to access electricity or water.

 

Oftentimes when economists talk about utilities we are talking about one company and it’s an essential service. 

 

YGR: Let’s say they are two companies and that’s why despite the fact apple and android have created all this technology, they give it to developers. I’m having a hard time understanding the gradation given how essential you say it is.(she says while moving her left hand up and down in the air while chair swiveled to the left to face Evans, who is in the witness box on her right. ) Do you don’t think the government should break them up to add competition like they did with steel?

 

DE: I am a moderate on that topic. There is significant debate going on concerning what do with the technology companies including Google and Apple. I would not advocate a reg solution or breaking them up. I would advocate that the antitrust laws could deal with these companies. I would argue it would be a mistake to go down the road of extreme solutions. Antitrust law is a flexible method that can be useful to reining in competition in the digital economy. I would have colleagues that would take a more extreme view.

 

Okay, that’s all from me.

 

GB: (Asks about Schmalensee testimony - brings up slide PDX0043-008) Asks about “second lane” in slide. Physical in-app purchases.

 

DE: The starting point for this exhibit is with respect to the install base of iPhone users, these are the only roads into town. These are the only ways for developers to get consumers with an app. There is also the notion of having a toll on the path. 

 

Brings up WRD-005...paragraph 4 of DE’s testimony--- Apple’s experts do not accept some of these principles…

 

GB: Do you agree with Lafontaine?

 

DE: I do not. The starting point for the market definition is the supplier. (Then) what substitute suppliers are out there to which consumers could turn. ….It always comes back are there enough customers that have good enough substitution options that they would move and discipline the hypothetical firm with market power. 

 

DE takes a moment to sip water from a plastic bottle (he takes another one amid the questioning by Swanson) and Swanson/Apple takes over questioning with GB planning to ask more questions in closed session.

 

DS: (View Apple as providing an essential facility?)

 

DE: The way I am using gatekeeper and foundational platform, I am not connecting to the legal term of essential facility.

 

DS: Aren’t you saying Apple has to offer its IP for free?

 

DE: I am not saying that.

 

DS: If Apple were required to offer the typical deal to avoid anticompetitive conduct, wouldn’t that be the antithesis of innovation? Asks several times, Evans doesn’t understand each time and DS moves on.

 

DS: Who are the successful mobile OS providers in the U.S. who have offered access to developers for distribution for completely free?

 

DE: You’re combining two things together. Apple requires certain developers to pay for app distribution, and Google does as well. Google Play and the App Store are the two app stores globally outside of China and in the United States.

 

DS: (What about Windows Mobile?)

 

DE: Windows Mobile I believe had the same model as Apple. They provided access to the platform for a nominal fee and they had an App Store and charged a commission.

 

(Several basic questions)

 

DS: Does a firm have right to decide who to deal with?

 

DE: As a general matter

 

DS: Restricting duty to deal to extreme cases?

 

DE: I do [agree]

 

DS: Do you agree if a firm went to monopolist and said for the sake of competition give me a loan so I can compete with that that would not be anticompetitive conduct?

 

DE: I agree. 

 

DS: Asks about paragraph 49 in rebuttal written testimony about average dollar commission paid by developers has increased dramatically. You agree each developer selects the price of IAP?

 

DE: Yes, subject to Apple’s guidelines.

 

DS: You understand from Hitt that average IAP transaction price has been rising?

 

DE: Yes

 

DS: You understand developers have raised prices 400-500%?

 

DE: I believe there is an exhibit from Professor Hitt that says that. 

 

DS: You didn’t study why there has been that increase?

 

DE: That’s true.

 

DS: You don’t have a firm opinion on why developers have raised prices?

 

DE: If that’s what I said in the deposition, I don’t disagree.

 

DS: Anti-steering in AmEx. Do you understand they prevent merchants from expressing preference for non-AmEx cards?

 

DE: Yes in the sense that if I an AmEx cardholder go to a merchant, the American Express anti-steering rules prevent the merchant from doing things to dissuade the customer from using that card, or otherwise interfering with the consumer’s preference to use the American Express card. It prevents the merchant from discouraging… I do [view that as anticompetitive]. It’s targeted to a situation where a consumer with multiple cards has a desire to American Express card and a merchant has put logo on door but turns around and says to consumer - I'm saying this imprecisely - I would really prefer you not use that card. 

 

DS:  The purpose of the antisteering provision is to prevent merchants from steering business to American Express’ consumers? Yes?

 

DE: The rules discourage the merchant from preventing the consumer from doing what they would otherwise do. 

 

DS: But they don’t prevent from steering to debit cards, checks or cash?

 

DE: With respect to cash, you’re right. With respect to debit cards, I would have to get a refresher course. ...My recollection is they prevented merchants from steering customers to other credit cards, not to cash for sure. The part I didn't recall is what the rules had been for debit cards.

 

YGR: Is Apple saying it is a competitor to developers?

 

DS: It is a competitor to platforms developers would steer business to.

 

DS: Aren’t you assuming those other platforms and websites are competitors?

 

DE: The two situations you talked about Mr. Swanson are absolutely positively not analogous.

 

DS: I asked you a question about whether they are competitors.

 

DE: For conducting that transaction, given the prices, those are alternative avenues and therefore substitutes for doing the transaction. 

 

DS: There must be independent competition for an anti-steering provision to have a rationale

 

DE: The rationale is it prevents developers from undoing the tie, which is different from American Express.

 

DS: If you're right that Apple has no competitors, then why is Apple concerned about steering?

 

DE: Because with a 30% commission, developers have an incentive to direct consumers where they have an ability to operate on a different platform in the absence of anti-steering rules to have consumers not use IAP but make that purchase somewhere else. To prevent the developer from informing the consumer that there is another alternative available to them.

 

DS: Apple’s rules prevent developers from providing any information about purchases on other platforms?

 

DE: My understanding of the app store’s antisteering restrictions is they prevent developers from providing any information, any call to action that would provide that app user with information that they could or should go off the app store and somewhere else for that transaction.

 

DS: You testified Epic is not allowed to message users that they could go to the web and get v-bucks more cheaply?

 

DE: I don’t recall that statement without qualifications. 

 

DS: Does epic sell v-bucks more cheaply on the web than they do on consoles?

 

DE: The price on consoles and the price on the web is the same obviously they don't sell them on the ios app.

 

DS: And that’s obviously a choice they made.

 

DS: Do they sell V-Bucks more cheaply on the web than any other platform?

 

DE: Not to my understanding.

 

DS: (Did you familiarize yourself with Epic’s communications to users on different options?

 

DE: (No didn’t collect data on that)

 

DS: Would you agree competitors shouldn’t get a free ride?

 

DE: Yes

 

DS: Are you aware Spotify has anit-circumvention rules for artists?

 

DE: I don’t know one way or the other.

 

DS: Has Spotify ever been a client? 

 

DE: I am not free to disclose that. 

 

(Same questions around Samsung Galaxy app store, Airbnb, eBay having anti-circumvention rules. DE says Airbnb and eBay do have rules. Not sure on others. DS moves on to asking various questions about App Store Review Guidelines)

 

DS: Who would decide if Apple’s criteria were objective enough?

 

DE: If we’re talking about this case, it would be ground rules typically set with antitrust remedies concerning preventing the party from engaging in anticompetitive behavior. Typically when remedies are established that’s something thought about.

 

DS: You’re saying the court would decide?

 

DE: Or no one would decide because the ground rules are clear. You can’t engage in antocompetitive behavior. 

 

YGR: Would a rogue app store be one that offers pornography?

 

DE: So I don’t know if a good answer for you. 

 

YGR: That’s not stark enough for you?

 

(DE starts speaking, judge speaks over)

 

YGR: I’m trying to understand what you classify as a rogue app store

 

DE: The only reason I am hesitating is..in the case of an app store that had pornography i would like a world in which Apple is able to prevent that. I do think that is something Apple could do. The one - I don’t want to make it a qualification- but it’s not like the iPhone is designed now in a way that iPhones can’t access pornography. Apple has a matter of business policy could decide it doesn’t want pornographic app stores to use iOS.

 

DS: In the but-for world, Apple isn’t allowed to decide who competes with it with an App Store but it could revoke a license it is compelled to give if an app store has gone rogue?

 

DE: I don’t have a view on what scrutiny it could give before and after.

 

(DS asks several questions about privacy, meanwhile he’s getting little notes from Apple’s table handed off to him.)

 

DE: The whole issue here - we’ve talked about privacy - we’re basically to Apple being able to dictate what other App Stores can compete. ...It’s possible Apple could make decisions with respect to privacy that are for pro-competition reasons or ...it could be for advantaging its advertising-supported business model.

 

DS: Do you view competition on Android in China as the road you would like to see Apple travel?

 

DE: The road I would like to see Apple travel is not replicating China. I would like to see it having competition. In my but-for world, Apple still has the App Store, is able to bundle it with the iPhone and there is the possibility of competition. 

 

DS: Do you believe Apple’s App Store is a monopolist in China?

 

DE: (Yes)

 

(YGR asks for ballpark estimates of iPhone market share in China.)

 

DE: I think iPhone in China is above 20% of total smartphone revenue. 

 

(DS asks about malware, IP theft on Android Chinese app stores. DE says he’s not aware of these issues.)

 

DS: Isn’t it true there’s 50% commission on game apps in those stores?

 

DE: (Yes that’s headline rate, but there’s negotiations)

 

DS: (Asking about how DE’s analysis applies to console industry. Do you realize Sony was sued since this trial began for similar antitrust issues?)

 

DE: (Not aware)

 

GB takes over questioning. 

 

GB: Do you know what Supreme Court said about whether AmEx had market power?

 

DE: The government had not proven AmEx had market power.

 

GB: (Anything in anitsteering of AmEx that prevents prominently displaying saying accepts Visa, etc?)

 

DE: (There is not, whereas Apple essentially prohibits that in its similar rules)

 

GB: Does market power mean a firm has absolutely no competition?

 

DE: No. When a firm raises its price and has substantial market power, consumers at the margin think about substitutes. To put it plainly, boy this price is so high what else could I turn to to defeat it?

 

GB: What is purpose of antisteering rules then?

 

DE: It is to prevent customers from seeking those other alternatives.

 

Breaking at 10:15, returning at 10:35 in sealed session.

 

***

 

GB resumes questioning DE at 10:58 with a couple of basics.

 

DS resumes recross at 11:00. Phil Schiller and Apple’s two internal attorneys, both carrying iPhones, return at 11:00 in the courtroom. 

 

I would note that the two attorneys’ computers easily visible to me at the Apple desk are not Apple laptops.  

 

DE excused at 11:02.

 

Epic calls Ned S Barnes, managing director at Berkeley Research Group (BRG) and a CPA and forensic account. He is wearing a face shield. Being questioned by Brent Byars. 

 

NB: I was asked to investigate, analyze and report on operating profits for the Apple App Store and certain online marketplaces, based on parameters and information provided to me by Dr. Evans. 

BB: What is operating profit?

 

NB: Operating profits is basically the income that is generated by a business or business unit from its core business activities. It’s revenue less the expenses required to generate that revenue. There are two expenses principally excluded, interest expense and income taxes.

 

BB: Did you see Schmalensee saying operating margin is not a measure of profitability? (And his example)

 

NB: Yes. // I disagree with that. () Depreciation expense is how businesses and accountants account for the cost of acquiring capital assets.

 

BB: What were your estimates for Apple?

 

NB: 79% in 2018 and 2019.

 

BB: What steps to get those estimates?

 

NB: (looked at documents and depositions and then specifically P/L statements for the Apple App Store and Mark Rollins’ deposition about certain expenses missing. I tried to estimate what those operating expenses would be and sued those to derive my estimates). After my report was submitted, additional documents were made available produced by corporate finance department at Apple that came directly from Mr. Cook’s files and were circulated with the CFO. They calculate operating margin for App Store and other business units.

 

Veronica S Moyé objects, saying sealed information. BB says it comes from unsealed testimony. So they look up paragraph 2 of his written testimony. Sentence of operating margin percentages there.

 

NB: These documents show Apple calculated its own operating margin at 77.8% for FY2019 and 74.9% for FY2018

 

BB: Were you able to determine that Apple had allocated costs to its App Store?

 

NB: Yes

 

BB: Could you compare to public financial reports? Confirmed that they match?

 

NB: Yes, and I was able to total them up and agree to what Apple reported publicly for its companywide revenue and expenses. 

 

BB: What is a joint or shared cost?

 

NB: Generally an expense that has benefits to more than one business unit, product line or service line in an organization.

 

NB: (Reports I reviewed clearly showed Apple was making these allocations respectively and prospectively to calculate margins for different units.)

 

BB: (How did you ensure your comparisons were substantially similar between App Store and other marketplaces?)

 

NB: When a company resells goods, including digital goods like apps, there are two ways revenue can be recognized under GAAP. If you think about App Store for example, when a hypothetical app is sold for $10 and Apple keeps $3 commission, Apple recognizes just $3 as revenue. That’s revenue recognition on net basis. If Apple were to recognize revenue of $10 and report cost of sale of $7, that’s revenue on gross basis. (Apple looks at net basis). I wanted to limit my investigation to marketplaces that recognized revenue on net basis (as a result). I wanted to identify firms primarily operating online marketplaces or they had separated information on their marketplace activities. 

 

VM, one of the few people of color in the courtroom, takes over questioning for Apple. Starts by asking about Sweeney’s testimony on how Epic accounts

 

VM: (Isn’t any attempt to spread out shared costs artificial / arbitrary?)

 

NB: I have not investigated how Epic internally accounts for its operation.

 

(...Several similar questions pulling from Sweeney’s testimony…

Schiller and RD exchange whispers and laughs at one point during this time. 

 

After VM expresses frustration about NB’s answers going beyond her direct question, VM admonishes him and then asks again,)

 

VM: Do you have an opinion as to whether it’s a good way to run a business to focus on innovation rather than business unit P&L?

 

NB: I don’t have an opinion on that.

 

(NB says he made some adjustments after Rollins’ testimony that lowered the op margin estimates)

 

(KF leaves the courtroom, holding her phone, as VM keeps asking about NB’s calculation methods)

 

VM: (Did Rollins talk about other categories, for which you didn’t make adjustments?)

 

NB: I don’t recall that.

 

(VM asks to look at Rollins deposition, 216, line 9)

 

(KF back in the courtroom)

 

VM: (Does that call you to recall that Rollins may have been thinking there were other categories?)

 

NB: I think he provided a pretty comprehensive list.

 

NB: (There’s actually four adjustments. One category is three)

 

VM: If the level of expenses attributed to the App Store were higher than you estimated, wouldn’t the margin decrease?

 

NB: Yes it would go down. That is math. 

 

VM: You don’t know how the documents were used, How often they were prepared. Are both of those statements true?

 

NB: I don’t agree with the statement.

 

VM: I am talking to you about the three documents that confirm your conclusions. Are you with me? Have you seen testimony about those three documents?

 

NB: No. I have seen no testimony.

 

VM: And you don’t know if they were prepared on fully burdened basis? And if an Apple witness were to testify it was not calculated on a fully burned basis?

 

NB: No that would be incorrect. I am not assessing the credibility of witnesses. But that statement would be incorrect. 

 

VM: Do you know the level of cost for R&D?

 

NB: Generally yes.

 

VM: Do you feel like you know that costs have been properly attributed to the app store in these new documents? 

 

(NB starts talking)

 

VM: Answer my question, sir

 

NB: The answer is I don’t know.

 

VM: Now let’s talk about your online marketplace work. (VM’s ring and gold watch on your left hand and wrist sparkle as she raises her arm while asking couple of questions about those calculations)

 

VM: You didn't search for online marketplaces comparable to the App Store?

 

NB: That is correct.

 

VM: Did you try to calculate op margin for Google Play Store?

 

NB: They did not have sufficiently separable information. No I did not.

 

(Goes on same way)

 

Sony?

 

No 

 

Microsoft?

 

No

 

Samsung? Nintendo?

 

I did not

 

VM: Those companies do not report separate financial reports for their app stores, just like Apple. Yes?

 

NB: I’m struggling with the last part of your question.

 

VM: Does eBay operate a hardware business?

 

NB: I don’t believe so.

 

VM: Does Etsy? Alibaba? Mercadolibre? Rakuten?

 

NB: I don’t think so.

 

Epic’s BB back on redirect

 

BB: Why no testimony about the later documents?

 

NB: The documents were produced on the last day of discovery in this case.

 

PX2391, which is under seal, being discussed.

PX2385, also under seal and also being discussed.

 

BB: It depicts the way in which Apple assigns costs, whether they be direct, shared or allocated costs?

 

VM objects for foundation

 

BB: Did you use this page for your analysis?

 

NB: Yes. It was indicative that Apple was using a rigorous method on how to allocate costs.

 

NB: Right hand side of document has figures of costs that go in different product buckets. I was able to reconcile that with other pages of this presentation, where the App Store’s cost allocations were flowing.

 

BB: What other pages?

 

NB: dot-11 and dot-12. /  (For fiscal year 20, a forecast period, shows breakdown of revenue, gross margin, operating expenses and operating margin across different Apple businesses). I was able to tie this to dot-24. 

 

BB: How do you tie something out?

 

NB: It’s just simply an accountant’s term for taking two sets of data, adding up the numbers and getting them to agree. 

 

(Schiller rocking back and forth in his chair. Currently wearing glasses, but sometimes takes them off throughout the morning)

 

YGR: Dot-24, looking at iPhone number?

 

NB: No, your honor, I was looking at last item on right-hand corner.

 

NB excused at 12:14

 

***

 

Peter Eric Rossi, professor of marketing, economics and statistics at UCLA, next up for Epic. Expert in survey methodologies and statistics. Lauren Moskowitz asking the questions.

 

LM: What was your assignment?

 

(Exhibit PDX-0091.4 on screen)

 

PR: (Undertaking reactions of consumers to a 5% increase in cost of certain purchases on App Store.) (Slide say in-app purchases and subscriptions)

 

LM: You asked for actual purchase data from respondents. For how long?

 

PR: 30 day period. (The quality of the data would be compromised if went too long. And people also think about purchases on monthly basis)

 

YGR: When was this?

 

PR: January of this year. I believe survey was administered late January. 

 

YGR: After the holidays?

 

PR: Yes

 

From the slide: 

 

Hypothetical Scenario

 

“Imagine that, starting 30 days ago, the Apple App Store increased the prices of all IAPs/subscriptions by 5%.

 

You told us that your spending on IAPs/Subscriptions during the past 30 days was $4.04. The higher prices mean that the same purchases would have instead cost you $4.24.

 

Nothing else about the apps or IAPs/subscriptions has changed. Prices at other app stores (e.g. the Google Play store) or websites remain the same.”

 

Another slide shows this survey question:

 Thinking about the same 30-day period, would you have made the same purchases of IAPs/subscriptions from the Apple App Store with the higher prices?

 

Yes, I would have made the same purchases and spent $4.24

 

No, I would have changed my purchases and spent less than $4.24

 

Not sure what I’d have done

 

YGR: (What about the fact things are on discount during holidays and consumers believe that prices rise in January?)

 

PR: That I don’t think applies to this class of goods. And purchases happening in post-holiday period. 

 

(Next slide shows Q17 about where costs would have shifted PDX-0091.6. Other questions about how much spending would change)

 

LM: (What were results?)

 

PR: The total sample size was about 2,600 (2,595 to be exact). 81% were stickers, 19% were decrementers. 1.3% were switchers. -11% overall spending reduction. Elasticity -2.19 (+- .66)

 

Break at 12:36 until 1:15

 

****

 

(Parties agree withhold the Rossi exhibits from the Box until the two sides can agree on what can be publicly released)

 

Back in session with Rossi on the stand

 

(PDX-0091.10 on the screen about the reliability of survey results to show survey population representative of target population, had small margin of error and robustness testing. 

 

LM asks some questions to walk through those^)

 

VM begins cross of Rossi

 

(Asking about draft of survey)

 

VM: In the initial draft you were asking survey respondents what they would do about hypothetical price increase in the future? 

 

PR: Yes

 

VM: You had never done a structured pre-test ever before?

 

PR: No I had not.

 

(VM also calls out Rossi through question for using the word “permanent” in terms of price increase his written testimony but not having word “permanent” in the question that was actually used, which he noted on direct was a key word purposely omitted because it was too ambiguous)

 

VM: Weissinger (Matthew, the Epic VP) said in May 10 testimony that primary demographic are boys/young men 13-25.

 

PR: I haven’t seen any research on their demographics. 

 

VM: If it’s true that Epic’s core demographic is 13-25, your survey only targeted people 17 and older?

 

PR: That’s true.

 

VM: Does that mean your survey results represent people 17 and older?

 

PR: Yes but may represent more. 

 

(VM through questions points out survey offered starting Jan. 30, so 30 days prior included holiday period purchases)

 

(Summary statistics on spending- figure 9 on the screen from Rossi report)

 

VM: 25% of respondents responding spending $5 or less.

 

(Slide shows

50% spent $12.99 or less

75% spent $29.97 or less

 

Apple’s transaction data from Jan. 2019 on 25%, 50% and 7% is redacted on slide)



(Rossi exhibit, page 36, question 17

Asks

What would have done to spend less than $4.24 in the Apple App Store?

In considering your reposes, keep in mind potential costs and time required to shift purchases to other devices. See more detail.)

 

(The see more detail -- For example, the cost of the new device and accessories, installing and/or repurchasing apps from a different app store, compatibility with other devices and learning how to use new features of the device and the apps.)

 

(Options for the question 17-

Would have kept my IAP/subscription spending in the Apple App Store but spent less than $4.24

Would have shifted some or all of my IAP/subscription spending to my other existing devices

Would have shifted...to a new device

None of the above)

 

LM on redirect of Rossi

 

LM: Why did you do structured pre-tests here?

 

PR: One unique feature of this survey is we ask people to enter their actual purchase history and what I learned from process of pre-test is IT’S hard to monitor conscientiousness of entering it. We’re better able to see the reliability and diligence of respondents. Made substantive changes based on that, like introducing reliability test.

 

LM: Does Fortnite demo have anything to do with survey?

 

PR: (No looking at all in-app purchases. Our data would reflect joint purchases made my older household members. Also know parental consent makes it difficult to get reliable data from under-17 population.

 

PR: Including paid apps would not affect my conclusions. (Reviewed highly confidential Apple docs to verify this)

 

YGR: Where can I find your data that shows me your thinking process for taking out words and getting to this formation?

 

PR: It’s described in detail in the appendices. 

 

LM: It was not attached but can add it. 

 

VM on recross asks couple of small questions.

 

YGR: You didn’t do any comparisons of spending habits of downloads vs IAPs/subscriptions?

 

PR: I just reviewed documents that looked at magnitudes of that spending.

PR excused at 1:58pm. 

 

***

 

James Mickens, professor of computer science at Harvard University and former researcher at Microsoft, now on for Epic. His first time being an expert witness, he says. Justin Clarke asking the questions.

 

JC: What was your assignment?

 

JM: I was asked to review security of iPhones.

 

JC: What were your conclusions?

 

JM: I found if you look at security properties iPhone provides to its user, most are enforced by the operating system, which in this case is iOS. When we look at the benefit the app review provides, it provides minimal additional security benefits. In lay person terms, the safety experience on the iPhone is mostly guaranteed by the OS. If third party app stores were allowed, that would not lead to a meaningful less secure experience.

 

(Showing PDX-0081.1 and .2)

 

JM: Describes middle layer as most important (slides show that as  -- digital signature validation, sandboxing, address space layout randomization, execute never, memory isolation, kernel integrity protection, page protection layer)

 

YGR: Why does Android have more security issues than the iPhone?

 

JM: If you look at various commodity OS, they are in the same equivalence class when it comes to susceptibility.

 

YGR: So you don’t think there is a difference?

 

JM: I don’t think there is a meaningful difference. Why am I qualifying it, if we look at the big picture, they are roughly equivalent. 

 

JC: (Walk us through how OS works)

 

JM: At lowest level is kernel, similar to chef in restaurant. Then middleware, like wait staff. When application wants to do something it sends request to middleware, which sends it to kernel, which then decides whether to fulfill and how. (Compares customers to apps and hardware to kitchen)

 

JM: It is the most important security layer because when we think what makes an application malicious, what makes a program malware, that’s a behavioral definition. It’s bad because it tries to do bad things. Those attempts to do bad things are happening on the client side. When we think about protecting users, we think about how to protest users on that device. That’s why the OS is the most important layer of security. 

 

JM: (Explaining memory protection for the kernel. Compares to person, bookshelf and desk. The bookshelf is a storage device full of things apps might need. But when apps want to work on a specific set of things, it needs to bring info from bookshelf to desk. These protection mechanisms prevent stealing information.)

 

(YGR looking at JM throughout his testimony, moreso it seems than with other witnesses as he explains all this tech and he looks in her direction)

 

YGR: Isn’t there risk of someone inadvertently having that on their device and then the whole system is compromised? That’s why you don't open emails where they come from?

 

JM: Sandboxing helps address some of those concerns. It’s one of the critical mechanisms to limit the scope of damage if somehow a malicious app ends up on the device.

 

YGR: (So even if an app ends up device through some means outside of Apple’s control, this will offer protection?)

 

JM: If you look at how sandboxing works, all of these security mechanisms are agnostic to the method by which the app gets onto the phone. 

 

JC: Are of the layers you just described dependent on the means by which the app arrives on the device?

 

JM: No. It’s all about what does that application try to do once it’s there. 

 

YGR: Have you ever created an app?

 

JM: Yes but none publicly released

 

YGR: Have you yourself gone through the process with Apple?

 

JM: No

 

JC: What security properties does review process screen for?

 

JM: (Per public facing guidelines it purports to screen for sandbox compliance, exploit resistance, malware exclusion, user consent for private data and legal compliance)

 

JC: (How does it compare to OS review?)

 

JM: (Walks through PDX0081.11 showing  sandbox compliance, exploit resistance, malware exclusion can all be enforced by the OS and that user consent app review is weak at best and legal compliance is difficult by both OS and App Review.

 

YGR: (Are you saying there is no value in human review?)

 

JM: What I am suggesting is the benefit of human review is marginal at best.

 

(Apple objects to these questions since JM didn’t address human review in his report.

 

JC moves on to asking about Apple Developer Enterprise Program and Internal Apple Testing Distribution)

 

(Now showing PDX-0081.13

App Store, ADEP and IATD -- all protected by on-device security. But no protection from off-device security (app review, developer identification and code signing).

 

ADEP has no App Review, partial developer ID and code signing is not by Apple.

 

IATD has no App Review, does have developer ID, but no code signing.)

 

JM: Apple already has other distribution mechanisms.

 

JC: (What about macOS?)

 

JM: Apple looks at the app, checks for malware and if answer is no, Apple generates a signed message saying we didn’t find malware in this app and then the third party developer is free to distribute the app by any method of its choosing and it is signed by developer, not Apple.

 

YGR: In your industry, is iOS viewed as more secure?

 

JM: Google people wouldn’t agree. In my expert opinion, there is rough equivalence between Android and iOS.

 

YGR: I said macOS. Is iOS more secure than macOS?

 

JM: I wouldn’t say it’s meaningfully more secure.

 

JC: Are iOS and macOS different?

 

JM: (Not totally). They share plumbing. 

 

YGR: Did you review proprietary data to draw these conclusions?

 

JM: No

 

YGR: If Apple’s experts come in and say these systems are different, you wouldn’t have a basis to disagree?

 

JM: (Says he can prove core components exists by looking at public materials, books written by Apple people, reverse engineering done by others. Speaks of the shared “Darwin” OS kernel).

 

JM: That shared kernel is responsible for memory protection, the infrastructure/the plumbing that makes sandboxing possible.

 

JC: How does security get enforced on macOS?

 

JM: There’s a lot of overlap (with iOS). 

 

JC: Does macOS do anything differently to enforce security?

 

(Notarization, Gatekeeper and Malware Scanners now highlighted on slide PDX-0081.18)

 

(JM talks about how they could be brought to iOS)

 

YGR: But they would have to create it new?

 

JM: The code that would have to be written would be quite minimal. 

 

(JM explains Gatekeeper tries to figure where the app came from, distribution wise and based on that may prompt user, this app hasn’t been signed by anyone or isn’t notarized)

 

JM: It shows empirically Apple devices already support multiple distribution models. Second, in those distribution models, the one-device security measures are supported. 

 

JC: Would opening up app distribution mean Apple’s App Review Process (would have to go away)?

 

JM: If iOS were opened up, the App Store wouldn’t have been changed at all.

 

JC: Why focus on macOS vs Android?

 

JM: MacOS and iOS - these are two operating systems which Apple itself has written and advertised as being extremely secure. But macOS which has been touted as very secure allows distribution channels in which apps have not been reviewed at all. That’s why the comparison is so important. 

YGR: Do you know how many people fall into this third-party developer category for macOS?

 

JM: I don’t know

 

YGR: Do you know how many apps?

 

JM: I don’t know

 

YGR: Would it make a difference if the third-party developer number were so small it could be managed vs hundreds of thousands of apps that go through this process?

 

JM: Well, I think that it’s a subtle and complex topic. Fundamentally what determines whether an application is malicious. It’s behavior. Let’s say the third-party universe was so small, the manager has a relationship with that developer and say tsk tsk don’t do that or punish that developer in some way. You still need insurance (Client-side protection). Plan for worst.

 

YGR: Could it be though that those third-party developers are so small (in number) it’s an acceptable risk? Versus dealing with hundreds of thousands if not millions of inputs and that risk is not necessarily a risk worth taking?

 

JM: Your question is touching on issue of scalability. If you do have a very large app universe, it can be difficult to find enough human reviewers with enough time.

 

YGR: Your analysis doesn’t deal with that scalability issue?

 

JM: Those on-device client-side mechanisms can be implemented regardless of the (quantity of apps).The human-driven, that aspect is harder to scale. I don’t think that is sufficient to open up a world of abject and total security horrors. We want to get to these quantitative numbers, but those numbers are oftentimes difficult to provide.

 

YGR: (MIT Technology Review article from a couple of months ago about Apple security informing my questions)

 

YGR tells JM he’s not getting back to Massachusetts this weekend but hopefully he can get to Wine Country in between cross-examine prep.

 

He says he will tell them “the judge sent me.”

 

 

Paresh Dave

Covering Alphabet for Reuters

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Epic v Apple Day 9 - Daily Pool Report

Leah Nylen
 

 

Day 9: I’m Elizabeth Lopatto of The Verge, today’s pool reporter, but you can call me Liz. Seated next to me is Dorothy Atkins of Law 360. You can DM me (I’m @mslopatto) or email me: liz@...

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: 

Epic:
Yonatan Evans 
Tim Sweeney 
Katherine Forrest
Alex Carvajal
Jin Niu

Apple: 
Cynthia Richman
Richard Doren
Heather Grenier 
Karen Dunn
Harry Phillips
Heather Grenier
Phil Schiller

Lorin Hitt, professor of operations, information, and decisions at the University of Pennsylvania Wharton returned to the stand for Apple, with Apple’s Cynthia Richman performing the direct examination.

YGR begins by discussing whether it is appropriate or not for a witness to speak to counsel on the break. Trial judges do have discretion, she tells us. Katherine Forrest for Epic thinks the conferring during cross is prejudicial. She asks for a standing order against it. Apple does not object. YGR approves.

Hitt was discussing analysis of competitive effects yesterday. We see a slide from yesterday title “Output Growth."

Discussion of commission rates. There’s a slide, DX-4083, that shows the average commission rate for in-game purchases. DX-2806 is a graph showing Average in-game purchase price and average commission. Hitt says that developers can charge higher prices on IAP, and because Apple’s commission is steady, Apple is earning more in commissions. Epic is one of the developers that’s raised its price over time, Hitt says. (Hitt is talking very quickly; YGR has asked him to slow down but unfortunately it didn’t take.) Looking at DX-4757, Hitt says that Apple’s prices have been constant and developers are making greater use of IAP and charging higher prices. “It does suggest that game developers and consumers are getting more value for these transactions.”

Generally, for all apps, the commission rates are steady or declining. The decline is due to changes in Apple policies, Hitt says. There are details of small-developer commission programs — small developers pay less to Apple. Hitt says Epic could have taken advantage of subscriptions, where Apple has lowered subscription commissions for long-term subscribers. (Change happened in 2016.) 

//average commission users pay Apple is 27.7% b/c it ignores free apps in the App Store. When you factor in free apps, the avg commissions rate on all transactions is 4.7% and 8.1% on game transactions, he says//


Richman: Did Apple raise its prices after it allegedly gained a monopoly (a date Epic’s witnesses have put around 2010)?

Hitt: No. “Apple’s commissions have been steadily declining throughout.”

YGR gets him to confirm this applies to both initial and in-app purchases.

Says David Evans, who you may remember from Day 7, has done very little analysis of commission rate. Evans omitted free transactions from his commission — which means that the results are different. Excluding those “makes the commission rate seem higher than they are.” DX-5469 shows a bar graph, with Evans’ “incorrect” calculation, compared to Hitt’s “correct” calculations. Fun labeling! The difference is due entirely to omitting free transactions, Hitt testifies.

There is some discussion of how to directly measure “quality” — anticompetitive measures make quality decline, Hitt says. One argument against a quality decline is that devs make more money, Hitt says: “They’ve been able to raise their prices because consumers perceive the value in what they’re offering."

Now innovation. There’s nothing to suggest Apple has decreased innovation, Hitt says. “That has improved the kinds of services devs can acces and the kinds of games that are available.” This is bc of technical improvements to the iPhone.

We now discuss game streaming services. If you’d like to play some high-end games, one way to do so is to stream it through a web browser. He lists Stadia, X Cloud, Luna, and Geforce Now. Weird — didn’t Microsoft and Nvidia testify Apple rejected their apps?

Onto user lock-in. Previous testimony suggested iPhone users were locked in, but Hitt doesn’t agree. “For one thing, consumers actually do switch.” As many as 26 percent switch platforms when it’s time to replace a phone. “People do indeed switch platforms when they can.” The 26 percent number comes from an industry study. A sealed document has a different document, but Hitt won’t say what’s in it because it’s sealed. 

High rates of customer retention aren’t evidence of high switching costs, Hitt testifies. “I stick with the product I have because I like the product I have.” He says he’s not sure this was considered in other analyses. Drivers of loyalty were put into switching costs, he says, and he doesn’t think that’s the right way to think about it.

Developers have a role in facilitating switching, Hitt testifies. Switching apps, locating apps or moving data from platforms may inhibit people from switching, but developers control those costs. In nearly all cases, the major apps are available on both platforms, Hitt says. Devs can make content portable, letting you transfer from one service to another, or portability of subscription content. “Developers do have a lot of control about how difficult that switching process is.”

Generally, re-purchasing apps isn’t a significant cost, but in the games market, the vast majority of games are free to download, Hitt says. 

Even if it’s free to download, unless there’s cross-platform or cross-wallet play in games, then if you haven't used all the money in your wallet on an app in an iOS device then you'd better use it before you switch to an Android device.” Is that right, YGR asks? Yes, Hitt says, but that’s a developer’s call. (You may remember earlier that some consoles do control this. Apple doesn’t, but Sony does, for instance.)

The relevant market is digital game transactions and 62 percent of all revenue in the App Store is game transactions, Hitt says. He looked at other choices for game transactions, per slide DX-4758. Says he identified 14 different platforms, including Google Play, Steam, Nintendo, and xBox.

Developers have choices for game transactions, Hitt says. They consider customers on platforms, the tools the platforms provide, services and technical support, capabilities of the platform, and cost — how to develop and transact. Those are the factors devs consider, he testifies.

“It’d be hard to play Pokemon Go with a console,” YGR observes.

One example is Epic deciding not to go through Google Play, initially. They later decided to offer their games on Google Play, Hitt says. Apple doesn’t provide restrictions on where you develop your games — Apple does not require exclusivity on iOS games, Hitt says.

Onto consumers. There are many platforms, mutli-homing for the same game (that is, to use multiple platforms), and the ability of consumers to switch. There are natural experiments, Hitt says, that provide insight onto how consumers move among platforms. 

Consumers switching between games matters, Hitt says. That makes these platforms potentially substitutable even if consumers aren't playing exactly the same game. That might be same IP but different games, or something else. 

Hitt analyzed multihoming for Fortnite. “That’s not something you normally are able to see.” Slide DX-4767: 35.9 percent of iOS users are multiplatform users. (There were 115 million iOS users.) On PlayStation 4, 104 million users, 32 percent on another platform. On other platforms, there’s a range between 20 and 50 percent for platform switching.

Another slide that Hitt seems particularly proud of DX-4769. 75.9 percent of consumers buy nothing. 15.8 percent only buy outside iOS. 5.6 percent purchase on iOS, and 2.8 percent buy on iOS and elsewhere. The data are restricted in time period, but it’s all transactions — no sampling.

Hours played and revenue, March 2018-July 2020, DX-5339. On iOS, users played 2,752 hours, or 10 percent of all time users played Fortnite. (90 percent of the time was on other platforms.) iOS was $745 million, and 13.2 percent. “The vast majority of spending and play is on other platforms.” iOS is slightly better at getting revenue per time played, Hitt says. 

Now we are discussing consumer substitution. Hitt analyzed switching after the hotfix, which may give an indication of whether consumers can move across platforms when given a reason to do so. (Other situations include introduction of Nintendo Switch, console and PC gaming companion app analysis, Spotify subscriptions, and Netflix subscriptions.)

We are now arguing about analysis methods; Evans used a sample. 

Post hotfix switching: 22 percent to 51 percent of the expected spending relative to what it would have been was retained for all iOS users. 22 percent to 38 percent for iOS only users. 81 to 88 percent of Fortnite spending was retained, per DX-4824. “Not all the iOS spending moved over, but as we saw a few slides back, a lot of the spending was on other platforms,” Hitt says. Some iOS spending moved to other platforms. “Consumers are willing to and able to move across platforms when they have reasons to do so." Says Evan’s data are different because of sampling, analyses. He uses a different methodology, which Hitt has “issues” with.

The Nintendo Switch. Fortnite launched there June 2018. Slide DX-4823. Customers who used both iOS and Switch spent less on iOS after the Switch introduction relative to users who were on iOS but not Switch. Spending varies from month to month, and is driven by new “seasons.”

Analysis of Console/PC Gamers substitute. Those who downloaded console or PC gaming apps had spending growth of 19 percent on iOS; those who didn’t download those apps had spending growth of 24 percent. When you have an additional option and spending on iOS slows, that indicates consumers are substituting, Hitt says.

Final two natural experiments: Spotify and Netflix. The two decided not to offer new subscriptions through the iOS app, so you can see whether that affected revenue. No change in revenue associated with this, Hitt says.

Hitt says that there are not high barriers to substitution.

Now friction. Other app developers do indicate they can participate on multiple transaction platforms, Hitt says. “Consumers can buy V-bucks through a web browser.”  Qualitative analysis is appropriate for this, YGR asks. Yes, Hitt says.

One of the things that indicate frictions are low is that consumers already do this, Hitt says. Web browsers are widely available, and you can transact there, as well as on consoles. “Maybe we’ve just got habituated to things are easy to do.” But if the friction is leaving an app and spending a minute or two on a web browser — that’s more convenient than leaving one convenience store to go to another. “Very small, compared to the ones you see in the real world.”

How can developers ease these frictions? DX-4777 The frictions are under developer control, Hitt says. Two possible things are “single sign on” eg can you sign on to the same account, and is the content portable. In all apps, the top 25 percent by revenue: 96 percent have single sign on, and 92 percent have partial or full  portability. Top 25 by downloads: 80 percent have single sign on, and 84 percent have portability. For game apps; the Top 25 by revenue: 92 percent have single sign on, 84 percent offer partial or full portability; in the top 25 percent of downloads, 32 percent have single sign on, and 32 percent have full or parietal portability.

We now discuss Tinder, which Applle’s counsel jokes that no one in the courtroom has ever used. (For the record: I have used it.)  It has single sign-on, you can use it in an iOS browser. These frictions are very low, Hitt says. 

“Whenever I talk about Tinder in my class, every one of my students has access to Tinder.”

CROSS.
Yonatan Even for Epic. 

Even asks about switching between Android and iOS. 78 million new phones every year, compared to 300 million phones in the US.  7 or 8 million switch out of about 300 million phones, Even says. That’s something like 3 or 4 percent of the installed base, something like that, Hitt says.

Streaming services: “You agree those streaming services are not able to be native apps on iOS.” If Netflix weren’t native, that would hurt Netflix, most likely, Hitt agrees. “It would harm innovation or competition, correct?” Hitt says he doesn’t know. “I haven’t done the analysis. I would think it would be harder to access Netflix.”

In that slide, you argue something wonderful happened to Epic in March 2018, Evens says. Fortnite came out on iOS, hooray! Essentially, Epic was able to sell at $5 before the introduction and $10 after that, doubling Epic’s IAP. Apple’s commission similarly went up from $1.50 to $3. Apple made more money on each transaction, the same 100 percent increase. But the transaction services weren’t different, Evens says. 

Evens: In March 2018, Apple did not introduce any new innovation into the sphere of app store transactions that completely changed the value it delivered, correct?

Hitt: Correct.

In the context of a patent license, they run out, right? Hitt agrees. But Apple’s position is that it’s entitled to 30 percent forever, Evens says. “There’s not a temporal element in that sense… it’s not a comparison I’d draw.”

We are looking at purchasing behaviors from iOS Fortnite users again. I will spare you the re-discussion of the numbers, which are above. “Do you recall that in your report, you found that 15.8 group who purchased only on Sony and other devices accounted for 65.4 of the spend by people who ever accessed Fortnite on iOS,” Evens asks. This seems to confuse Hitt and YGR. “Of that 15.8 percent, 65 percent did what?” YGR asks, apparently also confused. We go through a great deal of confusion, which I will not transcribe in full. There is some shuffling of binders among Epic’s lawyers. 

We are looking at exhibit 13 from Hitt’s rebuttal report. If Apple, for instance, raised the price on distribution of Fortnite on iOS, that would not affect the transactions that never touch iOS, right? If consumers behave as they have in the past, yes, Hitt says. 

E: If you look at what happened after August 13, you included those transactions in the 85 number

Hitt says his number does include that group. That means there's a guaranteed retention rate of 65 percent, right, says Evens. Yes, says Hitt.

More binder confusion as we look for Hitt’s deposition. Evens finds what he’s looking for. He now reads from the deposition. 

E: IF you look at the 23.1 percent that Epic obtained from people only ever purchasing on iOS and the 11.5 percent that sometimes purchase on iOS on others, Epic only retained about 50 percent, correct?

H: Correct.

This is Hitt’s first case on market definition, and he’s never published books or papers about it either, Evens establishes. Nothing on antitrust, either. Nothing about the antitrust implications of two-sided markets, for that matter, we discover.

We are now discussing the small business program, which lowered the rate on developers to 15 percent if they met certain standards. Before that, did any other platform lower its commission? Hitt doesn’t recall timing but thinks Valve lowered its commissions for very large developers, from 30 to 25 to 20. Microsoft may have done something as well.

In late 2020 or early 2021, there’s no decline in demand for ioS app transactions, right? Hitt didn’t examine this specifically but there’s nothing to suggest it. Apple said it was lowering commissions to support innovation, Evens establishes. 

If Apple lowered its price to support innovation, that means the price wasn’t set by supply and demand forces?

Yes, I would say that. It’s a response to enhance the overall size of the ecosystem.

If Apple lowered its price to support innovation, do you believe its current price is [unintelligble] 

I didn’t investigate that, and have no opinion, Hitt says.

Do you see any data that suggests Apple couldn’t increase its price tomorrow? Hitt hasn’t seen data on feasibility or impact on that. It’s not beyond the pale? I don’t like to speculate, Hitt says. People can raise prices from time to time? Given market circumstances, yes. As far as I can tell, Evens seems to be suggesting that Apple isn’t constrained by market forces — its pricing decisions are arbitrary.

Now back to Jobs’ statement about not making money on the app store. Hitt says he hasn’t modeled dev’s revenue if the app store did not make money. Evens also establishes that Hitt hasn’t done any modeling to determine whether the improvements in iPhone affect this. Hitt says that modeling isn’t appropriate.

Cellular bandwidth and speeds have grown exponentially since 2008, Evens says. Hitt agrees. Today we can stream apps on cellular, right? Yes. “We couldn’t do that in 2008?” I think that’s fair. “Today we can have video chats ove Zoom and Facetime?” Yes. Hitt agrees things have gotten dramatically better. Streaming games are now possible over cellular. All this growth has nothing to do with Apple’s restrictions on the App Store, right? Yes. Has Hitt controlled for the immense growth in cellular capabilities? Hitt says he doesn’t think that’s appropriate to the innovations Apple has contributed.

Hitt relied on other experts for Apple in forming his opinions, he says. He says he did not perform a hypothetical monopolies test. He didn’t offer an opinion about a hypothetical monopolies test is required.

We recess at 10:14 for 20 minutes.

We resume at 10:34AM. 

Lorin Hitt, professor of operations, information, and decisions at the University of Pennsylvania Wharton returned to the stand for Apple, with Epic’s Yonatan Even on cross.

YGR wants to know if he did any clustering in testing the market definition he rejected. There were some analyses I did to suggest the underlying economic considerations are different for games. Did he do entertainment, or IAP-driven econ apps, as opposed to others where everything is free, YGR asks. “Games in particular are unique, or at least very different, because they rely on IAP of individual items.”

Spotify brought the same complaints and allegations, but that would require a different analysis, Hitt says. Dev tools would require different analyses. Epic publishes House Party, a social app not within the games market. No analyses on EGS on iOS, either. 

E: When an EGS user obtains an app that’s not a game, is that a digital game transaction? 

H: It’s a digital transaction but not a game transaction, so that would be no.

E: You have not offered any kind of definition of what a game is? No. Do you assume Roblox is a game? 

H: “I don’t assume, I relied on classifications that were provided by developers.” 

E: Have you consulted with anyone at Apple about whether they consider Roblox a game? 

H: No.

Even is trying to establish whether a developer’s opinion of friction will matter separately from Hitt’s definition will influence decisions. 

Was there an analysis of how many users a developer would lose if they forced users to go outside the app to a browser for purchases, Even wants to know. He brings out Hitt’s deposition, where Hitt admits he did not perform this analysis. A game developer who wants to maximize their purchases are highly incentivized for IAP, but in HItt’s depo, he didn’t identify a single developer that was actively trying or had tried to encourage users to transact outside the app. Hitt is arguing about the definition of “trying,” and Even says, “they are not trying in their heart.” He didn’t study if there were discounts or advertising moving purchases to the web from IAP, Hitt admits.

Now onto substitution analyses. Hitt’s Switch analysis focused on half a million iOS users, so all he could show at most was 0.3 or 0.4 percent of Fortnite iOS users moved some of their play to the Switch.

About the commission rate: the argument is whether it’s appropriate to include free transactions in the analysis. Earlier this morning, on direct, Hitt pooh-poohed excluding the free transactions. Even is doing his best to make including the free apps look ridiculous. He does basic math, showing that an average of a $10 commission and a $0 commission is $5.

Real Rick Moranis vibe coming off Hitt during this cross, if I am honest.

We’ve moved onto data showing availability. Frankly, I’m not totally sure what this is meant to prove! The chart shows that 16 percent of the top 25 gaming apps by revenue and downloads aren’t for game consoles — and about 88 percent are available on PC. 100 percent and 96 percent are available on Android, though!

There’s some very confusing stuff about a spreadsheet that’s nearly impossible to make out from the gallery. I believe Even is trying to undermine Hitt’s analysis by showing that some games he’d said were available on PC, such as BitLife, are not, in fact, available there. World Story, another game listed as available on PC in the document, does not say it is available on PC on its website. When we go to the Microsoft store, we discover a “Word Story” exists, but it’s not from the same developer. Even: “Sir, this is not the same developer and not the same game, is it? It’s what is called a ‘fake game.’” It’s also listed on Lagged, but is “based on the popular mobile game” and by another developer. (For what it’s worth, this collection is a Word Story but not a game.)

Next, Helix Game, developed by Voodoo. No mention of PC on the dev website for Helix game. On Voodoo’s site, Crowd City is also listed as being available only on the App Store and Paper.io 2 is available only on the App Store and Google Play. Happy Glass, another game from the spreadsheet developed by Lion Studios, is listed by the developer as available on the App Store and Google play as is Mr. Bullet. Both are listed as things available on the PC, but the app developer page suggests otherwise. I wonder how many more examples of this we are going to get, because it is tiresome to go through this for every single one of these apps.

Even asks if Hitt double-checked the data to make sure it was the same developer across stores. Hitt says yes, and that there are some missing links. Even asks Hitt if he can tell the court under oath that a certain app is from the same developer. This bit gets really contentious. The point of the testimony is to show that devs multi-home to PC and mobile, Even says. “That’s what you said in your written testimony. I can read it to you.”

“Can you give the court the assurance that your 75 percent is correct?” 

“Can you give the court sworn testimony that you have seen with your own eyes that this game is also available on PC?” Not from the same developer, no. Hitt can’t guarantee all the data shows the same developer is behind the game on the different platforms.

We are now at Figure 8 from Hitt’s testimony, about monetization and portability of FY2019 game apps in the App Store. I am dreading the same exercise here. We go back to the terrible spreadsheet. Crowd City is highlighted. Hitt says he’s identified 8 games that let you buy things on the web and use them in iOS. Even says there are 10 yeses for 8 games. 

Had Hitt personally examined the possibility of going to iOS Safari, buying something, and going back to the app? No, personally he did not. His research team did. 

We are now going to go through the “frictionless” process described in direct testimony. We will use Candy Crush as our example. We scroll to the developer, King. The website says we can install, we press “install” and the link sends us to the iOS store. Among our options for playing is king.com, the only possible way to play on the web. Says it’s available on desktop — and only available on desktop. The Facebook option, too, is only for desktop.

“That’s part of the frictionless process you have envisioned?” Even asks, somewhat sarcastically.

Let’s try a different game, Clash Royale, developed by Supercell. Supercell says in its FAQ that it does not store any credit card information — payment processes are though Apple’s App Store or Google play. “And yet you believe that your team managed to go into a website and buy legitimate Clash Royale money and go back to the app? That’s your testimony?"

The typical user of Clash Royale doesn’t have a research team, Even points out.

Big Fish Casino is another app in question. Even has questions about the other five as well, and hopes this will not take so long for each one.

Based on what you have seen, do you have any reason to disagree with our conclusion this cannot be done. 

Onto developers. My team has found this can be done for three apps — one is Fortnite, one is PubG and one is Roblox. Does Hitt have any basis to dispute this? Hitt says he trusts his team.

REDIRECT. Apple’s Cynthia Richman is back up to bat.

Nothing Hitt said changed Even’s analysis, because emulators exist. Sometimes developers license games, too, he points out. Hitt says that Even’s demonstration isn’t a realistic example of the switching costs — it’s not broadly applicable. “Certainly we also have examples where it’s very, very easy, such as the purchase of V-bucks.” Hitt did purchase V-bucks though a mobile browser and found you could do it.

“It looked pretty difficult given the examples you provided,” YGR says. What’s the explanation for why we couldn’t do these things during the cross-examination?

Well, there were other links in there, and it showed games that were very similar, Hitt says.

It’s still true that most of us don’t have a research team. I sure wish I did.
Hitt is now explaining why the improvements in engineering  (iPhone and otherwise) that lead to better performance isn’t relevant to his analysis of how Apple monetizes its ecosystem. The continued innovation is what makes it possible for better games and so on to be delivered. 

Why didn’t Hitt conduct his monopoly test? One, because other methods were used. Second, in order to do those calculations in two-sided markets, you need parameters and information that aren't available. It’s not clear you can considered two-sided market effects, either, Hitt says. 

Onto the Switch. He says the Switch adoption reflects a large population in a natural experiment. He wants the population that’s “most informative” in terms of switching to the Switch.

RECROSS, EVEN AGAIN.

This is a two-sided market and this is a point about the developers side — so if someone is playing Fortnite on iOS and then goes out to play Fortneat on PC that doesn’t help. So comparable games from a different developer — that’s not something that moves the ball for someone who’s pay 30 percent? They need their own PC store, Even says. 

Re: emulators: Does Microsoft make an Android emulator? Hitt doesn’t know Apple? Dunno. Citrix? Dunno. Adobe? Dunno. Does Google? Dunno Do you know who does make an emulator? Hitt knows they exist, doesn’t know the developers.

“I’m just asking because I still remember Apple’s concern about safety and security.” Downloading emulators on the open web would not help that safety and security, Even suggests.

Now onto Switch analysis. While a lot of people have iPhones not as many have the Switch.

We are now looking at the slide that says the App Store is growing 6x faster over teh same period. It’s a much more digital world. Has Hitt done a similar comparison to the sale of phones, microprocessor tech growth, and other improvements? “This is an evolving industry.”

REDIRECT. RICHMAN AGAIN.

In many cases, the games are available, Hitt says. If a developer licenses a second developer, the first developer benefits from substitution because the game goes on multiple platforms, Hitt says. “That’s a perfectly reasonable strategy.”

Back to the digital game transactions slide. Total growth rate over a 9 year period is 448% — it’s 1/6th of the detail games. It says that there’s nothing to suggest that Apple has engaged in anticompetiive conduct, Hitt says.

Hitt is excused. Counsel from each side is invited to get up and grab their binders.

At 12:10, Michael Cragg, principal and chairman at The Brattle Group, takes the stand for Epic. Yonatan Even will conduct the direct examination.

After Cragg is sworn in, it’s binder time — several lawyers approach the bench and witness stand with binders of Cragg’s written testimony. We go through his resume, which does not include that Gawker and Ozzy Osbourne were among his clients (fun fact!). Cragg was given a broad assignment to review the Apple expert reports. He is, thankfully, quite loud.

His opinions re Apple experts: (1) Market definition: Apple experts’ market definition is both too broad and too narrow at the same time and (2) Apple has significant market power.

Apple experts should have performed a test, the hypothetical monopolist test. They start with a market definition that considers digital game transactions on iOS — but is there a larger market where the hypothetical monopolist comes into play? The starting point is to ask the question if a monopolist were to monopolize the transaction market on games on iOS, could they profitably raise price?

What would that test show us? Were that hypothetical monopolist to raise their distribution price, naturally, the publishers, namely game developers, would seek an alternative store. 

Availability of game apps on each platform: Cragg identified the most popular games that are published, and each of the platforms they’re on. The portion of the table expanded here is specifically for mobile games. Fortnite is highlighted, in a “unique position with respect to the other mobile games” in that it’s available for cross platform play. 

For the static platforms, ie the ones you don’t move around to use, they aren’t generally publishing games on mobile devices. Fortnite is, but it’s an anomaly. The Switch assumption is that it would be on a screen on the household. Switch is not analyzed in the mobile context. 

What does this tell you about the availability and substitutability of these platforms? For mobile games, we see that all games are published on both Android and iOS, because that’s the way a developer accesses those different populations. The developer has to go through these two channels. For the static games, the nature of those games is quite a bit different than on a mobile device — they’re more complex, take advantage of the bigger screen, have different ways of interacting — and as a result, those games provide a different experience, which is differentiated from teh mobile devices. They’re not substitutable, Cragg says. Also, the budget for a console game is “very much like producing a movie,” and it can be upwards of a couple hundred million to produce a game. Mobile games, by contrast, cost hundreds of thousands of dollars or less. The games are simpler, the experience has to be limited because of the size of the screen. The use of a mobile device is also when you’re not looking to be absorbed — it’s a fleeting experience.

Cragg has segmented Fornite players by platform. iOS players played an average of 47 minutes per week — whereas those on consoles are playing several times longer, six or seven hours of play on average. The platforms from a consumer perspective aren’t substitutes. Console players also spend more. The chart also suggests that multi-platform users weren’t playing the same way as those who were on a single device — the multiplatform users can go weeks without it.

We recess for lunch at 12:35.

1:15PM: Yonatan Even resumes direct examination of Michael Cragg, principal and chairman at The Brattle Group


We are looking now at a slide entitled “Within any given month, most Fortnite users are single-platform users.” Cragg says he examined that within each month, how many platforms users see. There’s an eightfold or more difference between the single platform users and others, Cragg says. “The hypothesis of the Apple experts is that multi platform play is a way of creating a disciplining force for the Apple App store, and from a practical perspective, that’s not happening in this marketplace,” Cragg says.

Where do people transact? Does this tell us anything? Cragg says the vast majority of people sign in on a single device each month — so that says the majority are not transacting across platforms. It’s going to be on the platform we’re on

YGR: Doesn’t that also suggest that a Forntite user from a consumer’s perspective, the consumer would use the same platform for some other game if they wanted to?

Cragg: yes, depending on whether they own more than one platform that would be true.

PDX-01118: “Fortnite users’ total play time increases when adding a second platform.” It’s a chart with plus signs

“So for mobile devices, for every single platform type that was introduced as a new place of play, we see an increase in total play,” Cragg says. And if someone was playing on something else and added a mobile device, the total play time increased.

In home console, there’s no increase in total play when another one is introduced. 

Cragg decided to test a substitution effect. “This is a particularly important case to look at, because if there were any games where this held true it would have been Fortnite.” If it’s not true here, which is the best case study, it’s unlikely to hold true for other games where the same type of play opportunity doesn’t exist.

When adding a mobile platform, Fornite users’ total play time increases on the original platform. “There’s a feedback where you’ve enhanced the experience on the original device.” You don't substitute away from the original device, you just play on more of them, Cragg says.

“I think the most important piece is that other platforms don’t act as a substitute for iOS on Fortnite,” Cragg says.

Now we are going to go after the Apple experts. Craggs’ results don’t show the substitutes Apple says should be there. Analyses focused on the growth rates — as we saw earlier — lead to different results, depending on the starting point. It’s possible to draw a false inference with growth rates, Craggs says. (We’re looking at the iOS transaction data from Hitt, Cragg clarifies after YGR is confused.) Here’s his example: imagine the year-over-year change were a dollar. You say there’s no difference across two populations. But the group that didn’t download started at a dollar and the other started at $10, so teh console players were already sending more. So in that case, there’d be a 100 percent increase versus a 10 percent increase. 

Ah yes, binder time. It’s time to talk growth rates. The group that downloaded the app, he used that as a decline in their consumption. The actual dollar numbers show that the group that did download the app bought more than the group that didn’t. He points to the numbers we can’t see as the cause of an incorrect inference by Hitt.

We are now discussing the Switch substitution analysis from this morning. This is Fortnite data, not Apple data. Hitt says people switched to Switch — Cragg calls it the “manipulated data.” We’ve already seen the regression results, which Cragg believes are the correct results. “This is really a fairly rudimentary review of the numbers,” Cragg says. We are now going to have a fight about statistical methods, which as a science journalist I must say feels comforting and familiar. 

Oh now we see two charts. One is Hitt’s analysis. The other is Cragg’s re-analysis with a different statistical method. It pretty much reverses Hitt’s analysis, showing the people who accessed Fortnite on both platforms spent more. There are also fun red circles around the March 2018 data, which show that the starting point is different, “a substantial difference.” Cragg’s analysis is done using Hitt’s data — just different methodology. “A substantial difference in spending between the two groups, and the Switch group spent even more.”

Another slide: it shows that after the Switch was introduced, iOS users increased total and iOS spending. There’s no fall in iOS spending, nor is there evidence that such spending went to the Switch.

We are now turning to another slide. It is titled, punchily, “Apple’s opening slide presented Professor HItt’s misleading commission rate and only for a single time period.” Hitt averaged together app downloads and IAP transactions with those where there’s no commission rate. Blending all of that together is misleading, Cragg suggests.

Cragg’s data, which we cannot see, suggests that Apple’s cut increased over time. “They’re providing the same service but getting more for it.” There are no zero transaction sin this graph.

In Fortnite, you can have purchases if your wallet is full and Apple gets nothing. How did Cragg account for those, YGR asks. “That circumstance is not reflected in this chart.’ Yes, Cragg says. If you have V-bucks you bought somewhere else, you would not be doing a transaction through Apple in that case.

Slide: “Apple’s market power is indisputable.” First, you see increasing prices from Apple, as well as high, sustained margins, Cragg says. There’s an absence of competitive pressure from other app stores because of the lack of substitution of transactions across platforms. “All of that together is, to me, strong evidence that there’s monopoly power,” Cragg says.

CROSS. Daniel Swanson for Apple.

Ah, we are now going to roast Cragg for not holding an academic position or getting tenure.  Cragg is qualified as an expert for antitrust in an administrative court, in a matter that involved opioids, he thinks. (He doesn’t remember) It wasn’t a Sherman Act violation, Cragg says. It seems like Swanson is trying to rip apart Cragg’s antitrust credentials. 

Cragg didn’t ask anyone to remove the resume item in question. YGR suggests he do so.

We are now discussing a Coca-Cola company case, where his opinions were rejected per Swanson. Cragg characterizes this differently, says only one area.. The court had problems with his economic opinions — ”wholly unreliable” per Swanson. US tax court found his methodology led to “absurd” results. Cragg recalls this, says it was about a specific calculation.

App Store is a two-sided platform, Cragg says. “There are transactions of the American Express sort happening in the App Store. In iOS, that’s clearly not the environment,” Cragg says. It’s hard to make a sweeping statement about platforms, Cragg says. The central defining question is substitutability, Cragg agrees, but they don’t have to be perfect substitutes. Cragg says you don’t always need to look at both sides of the market to see about substitutability. 

The network effects are the subject of some dispute. I’m having some difficulty following this portion of this testimony, but it sounds like Cragg is saying that at a certain point, network effects were no longer relevant to pricing. At the margin, this indirect network effect is no longer important, Cragg says. US Airways prevailed at trial on this theory — which was then reversed by the Second Circuit. 

From the perspective of the Apple App Store, the same rules apply to all transactions, Cragg says. It’s not correct, is it, Swanson asks. There are a couple of negotiated outcomes — Apple has negotiated in some instances and in others, they’ve chosen to apply rules in ways that are inconsistent, Cragg says.

We are onto the Reader Rule, which I hope I have spelled correctly. “That particular rule allows apps that fall under it to have content used within an iOS app even though it was purchased elsewhere,” Swanson says. That rule doesn’t apply to all apps, right, Swanson says. We are now onto the mulitplatform rule — there are some rules that are restrictions on how you can steer people, others that allow using currency in cross play, and others that relate to what you can advertise about pricing. The multiplatform rule allows developers not subject to the reader rule to have a virtual currency that is paid for on another platform but used in the iOS app right, Swanson says. We are splitting hairs about whether or not these rules apply to all apps; Swanson seems to think they don’t apply to all apps, Cragg appears to think that they apply to all apps but some apps don’t qualify.

Swanson: Isn’t it true that there’s no consensus among economists about how to apply this in two-sided markets?

Cragg: That’s right.

The hypothetical monopolist test you describe is a thought experiment, right, Swanson says. Apparently Cragg described it that way in his deposition. We are now looking at Cragg’s binder. We are circling around whether you can separate games from the overall app market. Swanson reads Cragg’s testimony aloud. Cragg starts bickering — is there one or two sellers of game transaction in his hypothetical monopolist test, Swanson wants to know. They talk over each other. “Is this a hypothetical duopolist test?” Swanson asks. Can you differentiate a game transaction from other transactions is sort of the central question here.

YGR: “I have no idea what you mean by that.”

Cragg. In the real world, some subsidies allow for the purchase of gas at a lower price than teh retail price for us. That gives incentive for that person to resell to us at a higher price. The way that is constrained is by coloring the gas. You and I can’t buy red gas.

I wish I could tell you specifically how this applies.

Cragg is being asked about a chart I can’t see (presumably this one: https://twitter.com/leah_nylen/status/1392954903715319808). Cragg says these are not submarkets — he says he’s trying to identify play styles. Core, midcore, and casual games are on every platform. “Casual games, such as puzzle games, are the most popular on iOS and mobile devices.” There is an ongoing theme of Swanson and Cragg miscommunicating; Cragg has to occasionally backtrack and correct himself. He also apparently can’t read the font on the exhibit he’s been given.

We move onto the slides from the direct analysis. The consumer is identified as having a second device when the consumer starts playing on that device; we don’t know for how long the user has owned the device before playing on it. “The next best thing is to look at how play changed,” Cragg says. “You made an assumption, right?” Swanson says. “I didn’t make the assumption, I understand the point you’re making that we can’t observe that specific event. To test the assumption of what's this correlated with the purchase of the platform, there’s not a way to test it.” Swanson points out you don’t know why the user went to a second device.

There’s no payment necessarily associated with play. In Cragg’s rebuttal report, he’d analyzed consumer transactions as well as play time — that was the original report. But it was corrected. Seems like Swanson is trying to make Cragg seem unreliable.

When two products are complements, when the price of the first product goes up, the demand for the second product goes down. “If the price of hot dogs goes up, the demand for hot dog buns goes down, right?” Swanson says. Cragg says he’d have to do the analysis but he understand the point being made. Swanson asks if mobile device transactions are complements for those on PCs. Cragg says he doesn’t remember. Okay, so but hypothetically if they were complements, and the price on one platform goes up, then the consumption on both platforms would go down, Cragg says. 

When Fortnite releases a new season, it attracts old players back and drives a surge in revenue, Swanson says. It’s not a perfect test but looking at expenditure more directly, it’s closer to the definition of what economic substitute and complement are, Cragg says. The month before Fortnite was released on the Switch was May — so looking at that line and looking at September, it’s almost the same bar as in May. It includes Switch revenue. So it’s a smidge below the bar in may, that implies that revenues on all other platforms declined, right, Swanson says. Cragg agrees. The bar chart implies that Switch has taken share from other devices. Swanson wants Cragg to say this is substitution — but Cragg says you need to do a regression analysis. 

We go through a number of platforms and whether they regard their own online stores as competitors to the App Store (Nintendo, Sony, Google). Cragg says he doesn’t know how they view each other. We then establish that Cragg has an ongoing relationship with Microsoft. He says his confidentiality agreement wouldn’t allow him to answer with specificity what he’s analyzing. The binders come out for the deposition. Deposition says he’s looking at entire portfolio, including xBox. His work includes the competitive properties of Microsoft’s work. He wouldn’t answer questions about pricing, competitive advantages and so on in the deposition.  Cragg doesn’t know whether the xBox is viewed as a competitor to the app store by Microsoft, he says.

Epic Game Store charges a 12 percent commission and EGS’ commission is below its current average cost, Cragg says. He also says Apple’s prices have been increasing. Cragg heard the oral testimony for Evans, but didn’t read his written testimony carefully. Evans spoke to a slide about reasons why Apple had monopoly power — Cragg doesn’t remember the specific slide. The commission rates have been stable, but Apple’s average commission per download in dollar terms has increased, Cragg says in his deposition. Developers set the price for IAP — with some limitations, like that the price has to end in 99. Cragg says he heard much of Hitt’s testimony but missed the redirect. Developers on average increased the amount of purchases by 400 to 500 percent in that testimony. “That increase in prices by developers is why you say Apple’s dollar value on IAP has increased dramatically,” Swanson says.

“Isn’t it true that the average price of a game downloaded on EGS is about $25.” Cragg hasn’t looked at the price of app downloads in the store. But if that’s the average, then Epic gets an average of $5 on the sale. The average paid on iOS game download that Apple gets is 16 cents.

REDIRECT: Yonatan Even

If the price of Fortnite on iOS goes up, it would lead to a reduction in iOS purchases, Cragg says. So for the people who play on PC whose best friends play on iOS, they’ll play less too because that’s how complementarity works.

We return to the resume. Cragg says he assured YGR he’d make sure what was on the website was accurate.

With respect to the other issue, we can move into a sealed session for the next 15 minutes, YGR says.  We go into closed session at 3:05 and I am very politely told to get out.

 

Elizabeth Lopatto

Deputy editor, The Verge

510-612-2139

@mslopatto


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: 


Epic:

Yonatan Evans

Gary Bornstein  

Tim Sweeney 

Katherine Forrest

Lauren Moskovitz


Apple: 

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:

 

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
REPORTER  
The Wall Street Journal
415-765-6175
@SebasAHerrera


Epic v Apple Day 7 - Daily Pool Report

Leah Nylen
 

 

From: 'Dorothy Atkins
Sent: Tuesday, May 11, 2021 6:21 PM

 

EXTERNAL SENDER: Use caution with links and attachments.

 

Hi everybody,

 

Here's my summary of the day's notes in chronological order. Athey's cross will continue tomorrow morning at 8:15. Tomorrow's pool reporter is  Sebastian Herrera of the WSJ who'll be sitting alongside somebody from NYTimes. Let me know if you have any questions! 

 

 

Good morning from Oakland federal courthouse! It's Dorothy Atkins again from Law360, and I'll be your pool reporter today. Bobby Allyn should be here as well from NPR, but he hasn't arrived yet. As always, if you have specific q's for me feel free to email

 

Today, the parties plan to continue examining economics professor David Evans of Global Economics Group today, followed by Dr. Susan Athey, Economics of Technology Professor, Stanford University Graduate School of Business.

Epic's counsel Gary Bornstein of Cravath Swaine & Moore LLP will continue Evans' examination and Yonatan Even, also from Cravath, will examine Athey. TBD on the names of Apple's counsel doing cross.

 

Judge Gonzalez Rogers is on the bench wearing a maroon mask. At counsel table are the usual suspects:

 

Epic

 

Katherine Forrest, Cravath

Gary Bornstein, Cravath  

Tim Sweeney, Epic

Lauren Clause

Jill Greenfield

Jason Run (operating exhibits)

 

Apple

 

Richard Doren, Gibson Dunn

Dan Swanson,

Cynthia Richman, 

Julian Kleinbrodt

Lauren Dansy, 

Scott Murray 

Tim Schiller

 

Housekeeping matters:

 

The judge tells counsel: "We are collecting a huge number of binders over here if somebody would please send somebody to [take them].  There’s a whole stack... Maybe two of you can come up and grab [them?]

 

Epic's counsel Katherine Forrest walked up to get the binders, the judge told her "You don’t have to ms. forrest."

 

Forrest replied: "I’m as good as anyone."

 

The judge asked if the parties are on track with witnesses and when Apple CEO Tim Cook plans to take the stand (because press is asking). Epic agreed that they are on track with their experts, who'll wrap this week. 

 

In regards to Cook testifying, Apple's attorney, Richard Doren, said "let us do some math and get back to you." "It'll be the last day of our case, we believe," he said.

 

  Evans is back on the stand being examined by Epic's Gary Bornstein. Just wrapped direct, moving on to cross now by Apple's Daniel G. Swanson of Gibson Dunn.

 

On direct:

 

Evans begins by walking the court through opinions he's formed on in-app solutions. He says there are two products: ios app distribution and ios in-app payment solutions and the relevant market ios in-app payment solutions for digital content.

 

He said "Apple has monopoly in the market. I've determined there are anticompetitive effects in that market and there is a tie."


He says there are dramatic functional differences between the two products, and compared them to shoes and socks which have different demands. "Consumers usually buy them separately and often do."

 

He says until recently Google did not require to use google play billing for

Tinder, Hulu, Netflix and Spotify and "In each of these cases [the companies] chose to use their own payment solutions instead of Google Play billing."

 

Evans says developers like Facebook, Microsoft Epic, Spotify, “and so forth” which are subject to Apple's IAP requirement, have asked Apple to use their own payment solution. 

 

Evans says "I reached this market definition by thinking about a hypothetical monopolist," who "says to digital content developers that 'you must use my payment solutions.'" he says "In this case, the hypothetical monopolist is Apple, and i’ve gone further [and made] the determination that apple as a monopolist has been able to increase price of payment solutions by a significant amount."

 

Evans "Saying that you 'could have done another thing,' isn’t a realistic thing to say to a developer."

 

As Evans was talking about Apple controlling digital content app payment, the judge stopped him and said, "well not all digital content apps," digital content apps for Apple's own products

Evans replied "Correct."

 

On alleged anti-competitive effects

 

-Evans says he conducted a "conservative" counterfactual scenario in which 20% of app developers chose to use their own payment solutions and the remaining 80% use apple’s IAP to inform his opinion.

 

-Evans: "My conclusion is that it has harmed consumers by raising prices for developers, developers pass on typically some portion of their fees… consumers end up paying higher prices as a result of that even though it may not be visible."

 

Apple's Daniel G. Swanson of Gibson Dunn cross examined Evans. Taking a 20 minute break now and cross will continue when we get back...

 

On cross

 

Apple's attorney begins by asking Evans if he's been retained in the Google Play litigation


Evans replies: "I don’t know if we've been retained. We haven’t done any substantive work on that. I guess we’ve been retained.


Atty: So the answer is you’ve been retained.

 

Evans: Yes we’ve been retained.


Attorney says Evans has never testified as an antitrust expert in state or federal court. He agrees.

 

Swanson pressed Evans on whether he considers in-app purchase transactions in his relevant market. When Evans didn't reply 'yes' or 'no,' the attorney pushed him on the point, Evans explained that he didn't understand the term "transactions" as he was using it, since payment services could be a transaction. There was some back and forth, and the judge asked him repeatedly if the transactions were considered in his proposed markets, but she then stopped herself saying "I’ll stop talking," so as not to eat into Apple's time.

 

Swanson asked Evans if he recalls that Apple had to subpoena and move to compel him to hand over a presentation that he prepared in 2016 on Apple's alleged monopoly power to the FTC. He agrees that he does, but explained that the subpoena "implicated a set of documents that were ultimately given over."

 

Swanson got Evans to concede that Samsung smartphone devices are not in his market definitions, and "You don’t deny that almost all game consoles own smartphones." Evans replied, "No not at all, they do."


Evans also conceded that he's not claiming that game console owners only play on game consoles.

 

Apple's counsel asked if Evans 'agrees' that all apps are substitutable. Evans replies "no," just like a restaurant payment card transaction wouldn't be substitutable for a clothing store transaction. "There’s no assumption that they’re substitutes." He also said game apps and other apps aren't substitutable and an app bought on an iPhone versus an iPad aren't substitutable. "When we talk about substitution in the antitrust context we’re talking about significant substitution in market definition so my opinion is no."
 

Swanson points out that Uber, Lyft, Amazon and eBay use their own payment systems and gets Evans to acknowledge they're 'two-sided platforms'


Swanson asks if Evans would characterize it is a tie when Apple charges for an initial download. Evans says that mixes "apples and oranges," "Those are just very different. The payment solution for apple as a distributor... That payment solution is standing in a different way, when Apple is using it as an app distributor than when apple is telling developers that they need to use it for transactions with their customers. Those are different things."


Evans goes on to say "It’s no different than walmart having its own payment method" charging for transactions in a walmart store.

 

Some colorful observations:

 

Apple's attorney is talland has to hunch/lean over a podium as he asks Evans questions. The atty is relatively soft spoken, but at times seems to be getting frustrated by Evans' long-winded, academic responses to his qs.

 

Evans also keeps asking to pause his examination so he can have a drink of water, which involves removing his face shield. The judge allows for it, but the task eats into Apple's time (each side has 45 hrs to present its case) and I'm sure the attys are aware of that.

 

  We're back from the break! Apple's Daniel G. Swanson of Gibson Dunn is continuing cross-examining Evans.  

 

The courtroom is sealed for q's on Apple's profitability, but after this Evans should be done testifying. Next up will be Dr. Susan Athey, Economics of Technology Professor, Stanford University Graduate School of Business, but it's unclear if a lunch break will happen before she's sworn in. I'll send an email when the court's unsealed.

 

Daniel G. Swanson of Gibson Dunn continues cross-examining Evans:

 

Samson asks Evans if he thinks apple's App Store's fees were "benign" when first adopted by Apple.


Evans: They were benign in an anticompetitive sense.

 

Atty: In an antitrust sense?

Evans: Correct.

Atty: You agree Apple wasn’t a monopoly in 2009 when it adopted 30% commission?

Evans: That’s correct.

 

Apple's counsel got Evans to acknowledge that developers must use Apple’s IP to develop in the 'ecosystem' and that compulsory licensing occurs when a license holder is forced to license its IP. 

 

Atty: Do you agree with the principle that the owner of intellectual property should not be required to create competition within its own IP? Evans replied that he does. 

 

(This line of q goes to Apple's defense argument that it has no duty to license its intellectual property to Epic, if Epic won't pay its fees or accept its terms.)

 

Apple's counsel asks Evans if he agrees with "the principle that the owner of intellectual property should not be required to create competition within its own IP." 

 

Evans agrees and he acknowledges that Apple is a "very valuable brand," that has a 'high-quality' app ecosystem and that profit margin alone isn't sufficient to establish market power.

 

They sealed the courtroom for questions on profitability.

 

On recross, Apple's counsel asked Evans why Epic didn't "convey the message" that Epic users could buy v-bucks through PCs/game consoles in newspapers or online. Evans acknowledges Epic could have taken out those ads, but doesn't know why it hasn't. Epic objects to the q's for being speculative, but the judge didn't acknowledge the objections.

 

On redirect by Gary Bornstein/judge's comments:

 

Evans says whether apps are substitutable is "completely irrelevant, because ... the product that is the central focus is not the apps. The product being supplied is app store distribution services to any app that’s interested in using those distribution services and on the other side consumers looking to use the app."

 

Judge:  "I’m trying to envision this. you have all of these developers developing the apps and on the other side billions of customers,  so what we really have is a distribution channel that connects these two groups.  What you’re saying is it should have many distribution channels and not just one... and in this platform apple has put a ‘toll booth.'... " But she says the only channel and platform developed is by Apple and Apple is the owner of the technology, which is proprietary. 


Judge: "When we look at all these various channels.. The objection is that on one of these many channels is the toll boto, which doesn’t exist on all of them, but exists on some of them, you’re saying either we want it to be free or we want to build our own channel on your platform." The judge also noted that Apple invested in its software, so "what so bad about that?"

 

Evans replies that the "problem" is that Apple's anti-steering provisions make it difficult for users to know that there are alternatives, and those alternatives like PCs and game consoles aren't "really realistic" substitutions in light of the accessibility and portability of smartphones.

 

  And the judge let us back in and said she asked Evans some questions when the court was sealed that should be public, and the transcripts will reflect that. Now we're going to take a 40 minute lunch break until 1:15 p.m. PST. I'll send out an email when we're back. 

 

We're back! Epic's expert Susan Athey, Economics of Technology Professor, Stanford University Graduate School of Business, is being sworn in and will be examined by Epic's counsel Yonatan Even of Cravath.

 

  Epic's expert Susan Athey, Economics of Technology Professor, Stanford University Graduate School of Business, is examined by Epic's counsel Yonatan Even of Cravath. Switching to cross now by Apple's Karen Leah Dunn  of Paul Weiss Rifkind Wharton & Garrison LLP.. 

 

On direct:

 

She says high switching costs lock consumers into using Apple iOS and Apple blocks consumers and developers from using "middleware," which could reduce those costs.

 

She says to switch devices, users have to purchase apps again even though they already bought it on iOS.


Judge: I thought you could just go to -- i guess, i don’t know android?

 

Athey says it depends on the app, and for some app subscriptions like for the New York Times app, users need to cancel their Apple subscription if they purchased through Apple and then buy it on Android. 

Athey says transferring data on iPhones data from all installed apps "passed over in almost every case," but that's not the case for Android. She says it's common for families to accumulate set of games or apps that they use on multiple devices. 


"Developers have strong incentive to solve this problem for consumers. The more the users can consume their services, the more value they can get."

She said there's a "chicken and egg problem" in which a developer doesn’t want to "port" its app to a new platform, but users doesn’t want to go to new platform without apps.


"That app barrier entry supports the high profits that we would otherwise expect invite entry," she said. 

 

Judge asks if she thinks "we’re in a chicken and egg environment." She replies "between iphone and android absolutely not," but the concern is regarding a third firm, "the third firm would have to overcome chicken and egg problem"

 

"In my opinion they stifle competition for ios and android. We’re talking about a scenario where we have a stable duopoly where most users are already locked in and even the few new arriving users are already going to be influenced by the platform purchase of their parents."

 

On Apple's objection

 

Apple's counsel Dunn objects to testimony on consumer opinions. "There’s no basis for what consumers do or think."

 

The judge initially sustains the objection and strikes her testimony on consumers except "to the extent that it’s in the report." The judge adds that "I had lots of questions for the factual basis for [Athey's] opinions... If there’s not a factual basis i will not consider it and it will ultimately be stricken."

 

2013 email discussed: 

 

Epic's counsel points to a 2013 Email from Eddy Cue, Apple's senior vp internet software and services, to Philip Schiller and Tim cook. Athey says it talks about switching costs and "it articulates the precise logic i was discussing, and it articulates the choices were important both quantitatively and qualitatively."


Email from 2013 says “Getting customers using our stores (iTUnes,App and iBookstore) is one of the best things we can do to get people hooked to the ecosystem. The more people use our stores the more likely they are to buy additional apple products and upgrade to the latest versions. Who’s going to buy a samsung phone if they have apps, movies, etc already purchased? They now need to spend hundreds more to get to where they are today."

 

Apple's Karen Leah Dunn of Paul Weiss Rifkind Wharton & Garrison LLP cross examined professor Athey.

 

On cross

 

Dunn gets Athey to acknowledge that she's never testified in antitrust litigation and she hasn't reviewed Apple's confidential documents because since 2007, she worked for Microsoft or done consulting work "on and off" and was at one point "consulting chief economist" at Microsoft. 

 

She says her CV was "a bit generous" on her relationship with Microsoft. 

 

Judge overruled Epic’s potential objection to the line of questioning (the attorney was about to stand up but didn’t actually state the objection). The judge said the questions: “it goes to bias.”

 

Dunn asks if Athey has read the injective relief requested in the case, Athey didn't answer the question directly. 

 

Atty: Surely this is a yes or no question, read is read.

 

Athey she's "read parts of it."

 

Atty: You're imagining a world in which Apple can license its world to third parties. What’s the plan? They should just sue everyone who comes on to the platform for patent infringement?


Athey:  I’m fairly certain I didn’t say Apple [should] sue everyone on the platform system.

 

Dunn points out the word "security" doesn't appear in her written testimony and even though she's written about privacy is that it doesn't appear. Dunn says Athey "focused on certain things but not others" even though security and privacy are important.

 

Athey "I don't believe that's a completely fair characterization because the reason we're here, the reason competition is important is because we need competition to ensure that companies.. continue to innovate."

 

Athey's cross will continue tomorrow morning at 8:15.

 

 

 

 

--

Dorothy M. Atkins

Senior Courts Reporter

Legal News & Data


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Epic v Apple Day 6 - Daily Pool Report

Leah Nylen
 


Subject: Summary of pool reports for Monday, May 10.

 

EXTERNAL SENDER: Use caution with links and attachments.

 

 

Good morning from Oakland, where we're starting week two of the trial! This is Amy Miller with MLex, and I'm your pool reporter today. I'm sitting next to Dorothy Adkins, who is here with Law 360. I’m reachable at miller@...

 

Epic

 

Kathryn Forrest

Lauren Moskowitz

Gary Borenstein

Tim Sweeny

Jin Niu

Mr. Rud

 

Apple:

 

Richard Doren

Richard Doren

Karen Dunn

Rachel Brass

Arpine Lawyer,

Julian Kleinbrodt

 

The day began at 8 am with discussions over admitting exhibits and whether Epic will be allowed to present a brief closing arguments

 

Matthew Weissinger, vice president of marketing at Epic Games, returned to the stand for Epic.

 

Matthew Weissinger, vice president of marketing at Epic Games, returned to the stand for Epic.

 

Testified about the much stronger, better relationship Epic had with console makers like Sony, Nintendo and Microsoft, which hosted several events to promote Fortnite. Promotional collaborations with Apple were less successful and less targeted to gamers, he said.

 

Apple’s promotions were self serving and opportunistic, he said. “I felt like it was transactional, impersonal”

 

Judge Gonzalez Roger asked if Xbox and Sony weren’t promoting their products as well. “How it is different? They were promoting their products, weren’t they?”

Is it only one-sided when you do collaborations w/ Microsoft and Sony, does it benfit both?

“Yes it benefits both,” he said.

 

But he said Apple focuses more on promoting its own content. Apple also spoiled promotions by leaking parts upcoming promotional events beforehand.

 

Epic showed an email Oct. 2, 2019, from Mike Schmid at Apple

Saying he would “take personal responsibility” for leaks before an event launch.  

“I’ve know we’ve had issues in the past with a significant art leak,” Schmid wrote.

 

Fortnight was cultural phenomenon before Apple kicked it off the app store, he said. Fortnight had about 2.5 million daily active users on iOS, about 10% of the users, he said.

 

Weissinger said Epic has “absolutely” been harmed by not being on iOS “in a number of ways”. Everyone has a phone but a not a console, and so the biggest area of growth is mobile, and Epic has been shut out.  And players who were already playing on iOS lost their platform.

 

Unlike consoles, Apple also makes money from its hardware, and none of that is shared with developers.

 

“It’s just seems like a gross imbalance. It seems unfair, it seems unethical,” Weissinger said.

 

After the morning break, cross exam of Matthew Weissinger by Richard Doren continues. 

 

Doren began by walking Weissinger through a demonstration of how to play games on Fortnite and how to build characters and how to get into various games within Fornite.

 

Along the way, Doren also referenced how the games focus on combat repeatedly and pointed out that the avator of a banana-type character he chose could have been naked, but due to court decorum, he’s clothed. Highlighted Fortnite events such as the  “creative mayhem regional qualifier.”

 

“If someone were to say creative mode had no competitive game play that would be inaccurate right?” Doren said. “That would be inaccurate, there is competitive play,” Weissinger said.  

 

Doren walked Weissinger through the process of purchasing V bucks.

 

Doren presented Epic internal documents showing that the majority of players on Fortnite are males between the ages of 13 and 24, and internal documents showing how important gaming is to this demographic, that they actively follow gamers more than older folks.

 

Doren asked Weissinger if had ever had a conversation at Epic that if not for Apple’s 30% Epic could have captured more users. "Not that I can recall," he said.

 

“As the VP of marketing, you have never discussed whether your marketing efforts would have been more effective if Epic could distribute apps outside the app store correct?”

“Yes, not that I’m aware of”

 

Weissinger also conceded under cross that Apple has promoted Epic’s seasonal launches. Doren presented internal emails from Sept. 17, 2019 showing that Epic had been given permission to take over the App Store as part of a promotion.  Apple promoted the Marshmello, for example and the Travis Scott concert. 

 

But players were also battling it out to kill each other right before the concerts, Doren pointed out.

 

Doren showed internal documents that said Epic had also leaked promotional materials for launches beforehand. An Jan 30, 2019 email from Tim Sweeney said: “Christ. What happened to our play to encrypt content?”

 

Weissinger also conceded that Microsoft and Nintendo had also leaked content before a launch.

 

Doren also pressed Weissinger on his role in creating Project Liberty and efforts to make Epic appear more sympathetic to the press and gamers, despite being a successful company making millions. “I was involved in the early discussions for it. I did not myself form it.”

 

The reason for the coalition was wholly manufactured, wasn’t it? Doren said. 

 

“No, the principles have always existed,” Weissinger said. 

 

Cross exam of Weissinger continued after lunch, with Doren pressing him about price reductions on V bucks and how they sold other digital gaming packages to make up the difference.

 

On redirect Lauren Moskowitz pointed out that players on Battle Royale aren’t necessarily playing games to compete.

 

“Overall do you view Party Royale in creative mode as games?” 

"No it’s not a game," he said. 

 

He said that Fortnite users are dancing and emoting before concerts. And Moskowitz showed “Mr. Peelie” without clothes. “It’s just a bananana,” Weissinger said.

 

Expert David Evans now up for direct by Epic counsel Gary Bornstein

 

Direct questioning of Epic expert witness David Evans, a University of Chicago economist, began with laying out his market definitions in the case.

 

iOS is a two-sided market with customers on one side who want apps, and developers on the other who supply the apps, Evans said. He compared iOS to American Express, which is also a two-sided market with businesses on one side and consumers on the other. (It was clear reference to the key 2018 Supreme Court ruling involving AmEx on two-sided markets but he didn’t say so directly.)

 

Game consoles are not a substitution for several reasons, he said. People who own game consoles also own smarthphones, because they don’t have the same features consumers need to pay games any time they want. Smartphones fits in your pockets and are easy to carry aroudn all the time, they have cellular capability and can be connected to the internet all the time. You need a Wifi or hot spot to play on consoles.

 

Of the top 50 revenue generating iOS games, only 7 are also available on consoles, and of the 50 top downloaded iOS games, only 4 are on consoles, he said. He looked at standard industry sources to reach his conclusion, he said, such as Nielsen data, Pew Foundation, the FCC, census data, and some trade groups.

 

83% of adults worldwide have smartphones, and The average US adult spend 3 hours a day using apps or the web on a smartphone n 2019.

 

“There’s been a massive expansion of the portions of the day where people l can be participating in the digital economy,” Evans said.

 

Today, there’s a duopoly with Android and iOS that emerged sometime around 2010, he said, as developers increasingly focused their attention on those two platforms, because that’s where the customers were located and it was clear by 2010 that they would become dominant.

 

“There has been a dramatic change in the digital economy, now there are two gatekeepers, in effect,” he said.

 

Another difference with iOS and gaming consoles is that consoles are often sold at a loss, he said.

 

“If game consoles were good subtitutes for smartphones, people wouldn’t use smartphone,” he said.

 

 

Judge Gonzalez Rogers questioned him closely about that conclusion, asking for the basis. Evans said it was primarily from information provided by Microsoft for this trial.

 

Gonzalez Rogers aid she’s heard this argument many times at trial and “I don’t know whether this is based on your understanding like man other people’s or if I can actually verify this theory I’ve heard now multiple times.”

 

She requested the specific document from Microsoft at issue.

 

Evans also clarified comments he made in praise of Apple’s iOS, that has been used by Apple in its defense. While it’s true that he wrote “There isn’t much controversy that Apple’s rules have enabled it to create a high-quality app ecosystem fro the iPhone,” Apple left off a follow-on sentence: “That doesn’t mean however that Apple couldn’t abuse these rules”

 

For consumers, the foremarket in the case is the smartphone, and the aftermarket is the iOS app distribution, he said. For developers, the foremarket is the apps they create, and the aftermarket is the developers supply of apps to OS users.

 

He concluded Apple has “substantial” market share, thanks to barrier to entry and high switching costs.

 

Evans laid out the switching costs:

 

Buying a new smartphone

Losing access to iOS specific apps such as iMessage

Transferring data and apps

Learning different users interface and controls

Losing access to data in apps.

Repurchasing of paid apps and pain in-app content

Replacing iOS specific accessories and periferals

Losing access to services shared among family/group

Losing access to integration w/ other Apple devices.

 

Gonzalez Roger had several questions about duopoly markets before breaking for lunch.and when Apple and Google became the dominant players.

 

It goes back in 08, when market dynamics and expectations changed. Developers started developing exclusively for Android and iOS because “there was a dramatic movement of people over to these new devices,” At the same time, cell networks are improving, and using the devices everywhere got easier.

 

There are possible constraint on iOS App distributions, he said, such as app distribution on non-smartphone OSs, app distribution on Android, and alternative distribution on iOS.

 

But these potential factors are not restraining iOS market power, Evans said.

 

“I concluded in the absence of restriction there would be multiple alternative apps stores, as we see in other environments, and that developers would use direct distribution to get apps into the hands of consumers.”

 

Even concluded that apps on personal computers and gaming consoles were not a meaningful substitutes after Fornite was pulled from iOS. Before Fortnite was removed, 60.7 % of iOS time taken up by iOS only players. But after removal, only a small portion of users moved over, which means there wasn’t very much substitution.

 

Evans put together a chart on the replacement rate after the ousting of Fortnite:

 

Decrease in iOS minutes: 56.3 minutes/week

Increase in non-iOS minutes: 9.4 minutes/ week

Replacement rate: 9.4/56.3=16.7%

 

The chart shows that if Fornite weren’t pulled, people would have spent 56.3 minutes using the iOS app. After it was pulled, they actually do substitute game consoles and PCs, but not much, Evans said.

 

Evans says that only 16.7% of the time that would have been spent on iOS Fortnite app ended up moving over to game consoles and PC.  

 

“That shows a very low level of substitution, more than 80% of the time was completely lost," Evans sad.

 

Gonzalez Rogers asked if he done any analysis to determine if users just switched to a competitive game. It’s possible, but he wasn’t addressing that question here, Evans said.

 

As to developer, he looked at whether Epic could simply exit the app store and rely on revenue from PC and gaming consoles,

 

“I found that in theory that would be possible if enough of that revenue moved to game consoles and PCs, but in fact not nearly enough revenue did in fact move over to game consoles and PCs, to make a decision to say to Apple, no, we’re going to just jump,” he said.

 

Based on that data, Evans said he concluded that Apple has monopoly power in the iOS app distribution market, he said.

 

Nearly 100% market share

Barriers to entry

High and persistent profit margins

Stable pricing

 

Evans pointed to Steve Jobs’ past statements: “We don’t intend to make money of the app stores,” and apple would give $ to the developers and that 30% commission pays for running the store, “well that will be great.”

 

“Was it your understanding that Mr. Jobs was running a charitable enterprise here?”

 

No, Evans said, this is the standard users pay model, and that Apple made a profit between 2013 and 2020, looking at data provided by Apple’s own statements. The actual P&L numbers are under seal.

 

But he said they were high compared to other similar platforms, such as Alibaba, Etsy, eBay, and Rakuten. Apple’s profit margin was “vastly higher than this benchmark group of companies” including the most successful, Evans said.

 

Evans concluded that Apple’s restrictions harm competition and it affects two main groups: developers and app users.

 

Higher commission rates, worse distribution services, and less innovation are the result, Evans said.

 

There is evidence of efforts to enter the iOS distribution market that were blocked, Evans said.

 

In the last 3 years several large companies have tried to start what are essentially gaming app stores on iOS: FB, Google, Amazon, Nvidia and MS, he said.

 

A 2017 survey of developers conducted by Apple found that 39% were either very dissatisfied or somewhat dissatisfied with the discoverability of apps, for example.  

 

“The store isn’t getting better over time, there isn’t investment taking place to deal with issues related to core technologies,” Evans said.

 

“It was surprising to see the App Store kind of languishing,” Evan said.

 

There is evidence that payment processor compete for business from developers? Yes, Evans said, Epic has a payment solution and as part of that they’ve gone out and solicited bids from payment processors.

 

Apps are treated differently, he said. For example, Tinder can’t set prices of products, or select payment processing services or provide payment related customer service. But Starbucks can do all of those things, Evans said.

 

Roughly speaking apps that are providing digital content are required to use IAP for a transaction, he said.

 

Direct questioning of Evans to continue Tuesday. 

 

 

Amy Miller
Senior Reporter, Privacy and Data Security
Twitter: @siliconlaw

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Epic v Apple Day 5 - Daily Pool Report

Kellen Browning
 

Good morning from Oakland, where we're wrapping up week one of the trial! This is Kellen Browning with The New York Times, and I'm your pool reporter today. I'm sitting next to Elizabeth Lopatto, who is here with The Verge. I'm reachable at 530-312-5216.

Here's the rundown of today's legal teams, with some now-familiar names:

Epic:
Gary Bornstein
Lauren Ann Moskowitz
Lauren Clause
Samantha Bui
Tim Sweeney
(I think I may have missed someone here who was only greeted by the judge as Mr. Run - possibly Jason Run)

Apple:
Richard Doren
Karen Dunn
Veronica Moye 
Lauren Dansy
Kate Adams
Tim Schiller

A class counsel attorney, who helpfully showed Elizabeth and me where to sit, is sitting behind us.

After some housekeeping -- discussions about confusion regarding the numbering of documents and reviewing which documents have been admitted so far and on which day -- Judge Gonzalez Rogers, wearing what appears to be a maroon-colored face mask, seems to be in a chatty mood this morning. 

Before starting, the judge commended both sides for the diversity on their teams:
"We’re now at the end of a week and I wanted to thank and congratulate both your clients and team leadership for the amount of what I would call diversity on your trial teams. This is something that judges here at least in the Northern District, we talk a lot about and try to encourage. I've tried a lot of places and have never seen so much diversity on trial teams. I just thought that you must have thought about it and I wanted to congratulate you and thank the clients as well for really focusing on those issues as important, these are important issues, they affect lots of people, and it's really terrific to see so much diversity in the courtroom, so I thank you."

She also made a joke about the number of Laurens in the courtroom:
"There are a lot of Laurens … it’s really interesting because names do come in waves ... I guess there were a few Laurens when I was going to college but I do know my oldest son has a lot of friends whose names are Laurens."

 Trystan Kosmynka, Apple's senior director of marketing

Apple's Veronica Smith Moye of Gibson Dunn Crutcher is resuming her cross-examination of Kosmynka at about 8:25 a.m. Both are wearing face shields. 

Moye refers to questions from Epic's counsel about Roblox, directing him to PX-305. Moye refers specifically to a note at the bottom of the document, which appears to relate to Roblox being approved for the App Store. The note describes Roblox as a "catalog of free block-style games." Kosmynka wrote "I am surprised this was approved by ERB." (executive review board)

Moye: Did the ERB determine whether Roblox was a store within a store?


Kosmynka: We determined it was not


M: And why was that determination made?


K: As I said yesterday, there’s experiences within Roblox that from our point of review we would not look at as a game, these are configurations that enable a particular experience.


Judge GR breaks in: But isn’t Minecraft a game? 


K: Minecraft itself is a game


GR: I don't understand the distinction you’re making


K: Your honor, in the case of Minecraft, you join the server … there may be a castle already prebuilt … the features and functionality of the overall game itself is not changing, in the same way they could have the world be a castle they could also have the world be a farm, but the mechanics …remain the same … capabilities from security and privacy implications remain the same … these experiences are not capable of doing dynamic things beyond what the creator has already programmed … It's similar to lenses on Snapchat, where you put bunny ears on your face, that’s also an experience, a configuration file as opposed to software that’s downloaded that changes the entire construct of the app.


GR: Alright, go ahead.


M: Mr kosmynka, did the ERB determine that Roblox itself is not a game?


K: Yes, I believe we looked at roblox itself as an app.


M: Is it listed on App Store as a game?


K: I'm not sure


M: Who makes that distinction?


K: The developer


M: In the case of Fortnite, when Fortnite was available on the App Store, was it listed as a game?


K: I believe so


M: Is that because Epic decided to list Fornite as a game


K: Yes


M: You were describing to the court in Roblox context, different features and functionalities. Were you referring to different experiences within roblox?


K: No, referring to features of roblox itself.


A few questions later:


M: What was your conclusion with respect to whether Roblox enabled users to download additional features and functionalities?


K: It’s compliant - it does not introduce new features and functionalities


M: Do you believe allowing a store within a store on the App Store would create safety issues?


K: Absolutely


M: Why?


K: Users when they buy an iPhone, an iPad, they expect to go to the App Store and get safe and trusted apps. There are absolutely cases where whether it be through advertising or other ways, to get in touch with a user so that they can be manipulated into an experience that they think is safe and trusted on the surface and then realize that actually none of the content is reviewed, none of the software is reviewed, and that has severe ramifications for consumer privacy, trust and safety.


Moye next asks Kosmynka a series of questions about TestFlight, including when it was founded (2010) and bought by Apple (2013). She goes into detail asking about Apple's App Review team, and Kosmynka explains various facets of the App Review team, which reviews apps in 81 different languages. He says there are 100,000 average App Store submissions, and about 500 human experts within the app review.

He says app reviewers work 8-10 hours a day, and sometimes get overtime when there is a surge of apps. 

Moye introduces PX-2790, the list of App Store review guidelines. She has Kosmynka give examples of apps that are rejected for various reasons: an app depicting women in "compromised positions" or rape scenes, apps that marketed plastic surgery games to children, copycat apps, and a "challenge" app that gave money for people to complete dangerous dares.

For that last app, Moye asks the name of the developer. He believes it is called Aristika, and says he believes it is part of a member of the Coalition for App Fairness. 

She asks if he believes computer analysis alone can address these issues, and he says no. 

At this point, the judge appears to be the only person not wearing a mask or face shield - she's sipping coffee from what looks to maybe be a Peets cup.

Moye introduces PX-0300, which shows the top 10 reasons apps were rejected in the week of May 6, 2017. The top three reasons were "app completeness" (8,321 removed), "info needed" (4,788) and "spam" (3,623). "In-app purchases" is the 8th most common reason.

There is then a very detailed, technical explanation of the steps for the app review process, both automated and manual. There is discussion of private APIs, static and dynamic tools and methods Apple uses to evaluate apps. At one point, Kosmynka describes a sample photo of an app reviewer's desk with various devices on it, and a half-eaten green apple.

GR: And you provide apples at the front door for everybody to provide for our staff?

K: No, I think that picture is too cute.

Kosmynka testifies that the goal is to review 50% of apps within 24 hours and 90% within 48 hours. One document, DX-4374, shows that Apple was easily meeting these goals during a week in Nov. 2019. Another document, PX-0335, shows a PowerPoint presentation Kosmynka made in 2015, proposing additional support for app reviews. He says he got it and the program has continued to improve. 

More data: 
In 2020, Apple rejected 40% of app submissions, including 215,000 for violating privacy guidelines. He says Apple has rejected a greater percentage over the years because "our system has improved." Overall, 1 million submissions were rejected in 2020, but many later found their way to the App Store after improvements, he says.

Moye: Do you believe Apple is unique in its ability to review iOS apps?


K: Yes


M: Why?


K: From a competitive standpoint, the App Store is regarded as the safest and trusted App Store. The review process itself is regarded as rigorous … I’m not sure how we would do this without apple employees, apple investment and infrastructure. 


M: Is the app review process intended to benefit consumers?


K: Yes, our mission nis to make sure it is a great place for customers to get great apps 


M: Intended to benefit developers?


K: Yes


M: Epic has said the app review process is a sham , a pretext, doesn’t provide security…only for protecting monopoly.


K: I definitely take offense to it being a sham.


Moye concludes at 9:47 a.m. Epic's Lauren Moskowitz is now on redirect. 


Epic's Lauren Moskowitz begins her redirect with Kosmynka, asking him if he thinks Snapchat's bunny ear filters, or TikTok's viral challenges, are games. He does not. 

Then she circles back to Roblox, asking him to define his understanding of a metaverse

K: My own understanding of a metaverse is a a virtual world where you go with your particular character and are with players that you know, players you do not know, and you navigate around that which could include additional worlds and various experiences.


Moskowitz begins a series of rapid-fire questions about Fortnite and there's definitely noticeable tension building in the courtroom. Everyone from Apple's counsel, in particular, is watching very intently.

M: Are you familiar with Fortnite?

K: Yes


M: Have you participated in a Fortnite experience?

K I have.


M: Have you attended Fornite concerts? 

K: no


M: Fortnite is a virtual world where you build a character, correct?

K: I wouldn't refer to Fortnite as a world. I’ve always looked at Fortnite as a game, I don't think of it as a world


M: Are you familiar with/referring to Battle Royale?

K: Yes


M: Have you ever gone to Party Royale? Are you familiar with creative mode or Party Royale?

K: No


M: You're aware that Fortnite holds concerts ?

K: Yes


M: Aware that it streams movies?

K: No


M: Are you aware that users can go to a separate aspect of Fortnite separate from Battle Royale and hang out with their friends?

K: No


Moskowitz switches gears, asking about Uber and Lyft, and about why they were not required to use in-app purchases for their membership subscriptions. She introduces PX-2235, an email related to these discussions. 


M: Why did Apple decide not to require IAP?

K: The majority of those membership are physical services


M: Are you aware that there are other aspects to subscriptions for those memberships that do not involve physical goods being transferred?

K: No


There is then an extended debate over some of the math regarding how many App Store submissions were rejected in 2020. Kosmynka says 215,000 of 7 million apps were rejected for privacy violations. The court then takes a 20 minute recess.


...Moskowitz continues her redirect with Kosmynka, who is certainly more curt with his answers here than he was earlier when he was detailing how App Store security and review processes work.


She introduces PX442 and 446, emails that show that Fortnite's biggest concern about being on the app store was being stuck in review. They are no longer displaying the documents on a large screen for us like they were earlier this morning, but in one of the emails, someone at Apple says "the reality of the situation is we sometimes are that bottleneck" for developers.

Then follows a series of emails introduced by Moskowitz showing examples of times when App Store reviewers missed fraudulent or otherwise dangerous apps, allowing them to make it onto the App Store. In the PowerPoint presentation from earlier (PX335), she points out that there are notes saying "ton of scam apps in store."

In PX2084 (?), a security firm emails to say it has found 17 apps that carry a malicious type of ad-fraud tasks in the background, like continuously opening web pages or clicking links. In an email, Kosmynka concluded "we are making critical errors."

In PX364, the CEO of the Headspace app complained about a litany of copycat apps.

In PX131, a 14-year-old app developer emailed to report a "school shooting game" on the App Store getting reviews like, "The best school shooting game on the App Store #killkids." In the email, Kosmynka said he was "dumbfounded at how this could be missed." 

Around this time, Apple's team is passing text messages around their table for some reason. 

In PX2371, in a June 2020 email chain, there was an app that involved shooting cannons at protesters. Phil Schiller forwarded this email to Kosmynka, saying "WTF."

In PX315, a series of seemingly inappropriate apps still on the App Store are mentioned, including "Waffle - Offensive, NFSW," "Ashley Madison," "Ganja Farm - Weed Empire" and others.

Apple's Moye comes back for re-examination at 11:25 a.m., cleaning up a few things. She and Kosmynka note that the school shooting app didn't actually have players shooting children, but defending the school and other city locations. 

Moye: Do those mistakes cause you to believe that app review is unnecessary?


K: No, it makes me believe that we’ve got to continuously do better. Our customers expect that our store is a safe and trusted place to get apps


Moye asks how the number of problematic apps would change if Apple allowed stores within stores, but Epic objects to this and is sustained. Kosmynka does eventually get to say that without the current system, "I think it would be incredibly dangerous for customers."

Moskowitz comes back at 11:31, pointing out that users can download apps outside the App Store on their Mac computers. Kosmynka says he thinks that carries risk. "I can't say that any customer outside of the Mac App Store has a safe and trusted experience," he says.

The judge has a few questions for Kosmynka. She wonders if other security companies are doing better at monitoring apps than Apple.

"One of the problems with limiting competition, she says, "is that you don't get innovation, or at least it's a possible outcome. So one of the concerns, at least my sense with this lawsuit, is that you're not allowing parties to compete on these topics, then things won't improve."

She asks which competitors or other stores Apple looks at to evaluate security policies (Android is one) and whether it uses third parties to review apps (it does not).

The judge says she is still having a hard time with the distinction between Roblox and Minecraft, and why Kosmynka considers Minecraft a game but Roblox not.

"Logically, if your kid showed you this app and said, 'My friend is playing this, I want to play -- it would seem to me that they want to play a game,'" the judge says.

He's excused at 11:44 a.m., and Epic vice president and general manager of Epic Games store is now on the stand.

Steve Allison 

Steve Allison, the vice president and general manager of the Epic Games store, takes the stand. He is sworn in, wearing a face shield and what I would describe as a military-style (though slightly longer) haircut. The judge interrupts several times throughout his testimony to urge him to slow down so the court reporter can transcribe.

He is examined by Epic counsel, Justin Clarke. (It's possible that not mentioning Clarke may have been an oversight earlier, but I actually believe that he subbed in for a different Epic member who left the room partway through the morning.)

After running through his qualifications, Allison explains the economics of digital game stores. Essentially, Steam had long been the dominant store, and it took a 30% cut of revenue from most developers, he said. But publishers started to become interested in the idea of self-publishing their titles and keeping more of the revenue for themselves.

"The sentiment by 2018 was, fairly broadly, that the 30% could be considered unreasonable," Allison said.

In 2018, Epic launched the Epic Games Store, which takes a 12% cut, in an attempt "to provide as close as possible those self-publishing economics as we could."

Allison said developers were hesitant to leave Steam and become Epic-exclusive, but Epic promised them a safe bet through a deal called a "recoupable minimum guarantee," essentially promising developers that Epic would pay them some amount of money.

The store is not profitable, he said, and operates like a startup, investing and aiming for long-term growth. There are about 500 apps currently available, about 100 developers, 180 million registered PC/Mac accounts and more than 50 million monthly active users. 

Developers do not have to use the Epic payment system to facilitate in-game transactions; "it's a belief system we have," Allison said.

Clarke walked Allison through security measures that the Epic store has, which includes 2-factor authentication and a malicious software virus scan. Allison said there are no known instances of malware or digitally pirated content, and one case of fraud, so far on the Epic Games store.

The judge called a lunch recess that lasts until 1:15 p.m.

Back from lunch, Justin Clarke finishes his direct testimony quickly, pointing to documents that Allison says suggest the Epic Games Store will be profitable in 2024. Allison says EGS is "about 15% ahead" of where it expects to be financially. 

C: How does not being on iOS affect the Epic Games Store? 
A: We are not able to go after that market (mobile games players).

Apple's counsel takes over for cross-examination around 1:20 p.m. I *believe* it is Karen Dunn, though she did not introduce herself. Short, curly brown hair and a face shield.

She takes Allison through the EpicGames.com website, as it is broadcast on screen. She repeatedly -- and at length -- makes the point that there only appear to be games on the store, not other apps. 

Dunn: You testified that nothing different would be required to put a non-game app (on EGS). And yet the first non-game app didn't come to EGS until December of 2020?
A: Yes

That app, Spotify, is part of the Coalition of App Fariness, Dunn notices.

She takes Allison through a description of Fortnite, as detailed on a Epic document (DX5536). She points out that Party Royale and other modes are described in game-like terms.

Much time is spent on the question of whether EGS' 88-12 split is industry standard or not. Allison testifies that it is, but Dunn refers him to his deposition from several months ago, where he agreed that it was "way outside" the industry standard. (On redirect, Allison says Microsoft changing to an 88-12 split on its PC store recently was a big shift.)

On a different topic (Dunn switched topics pretty frequently): "One of the reasons that Epic started EGS was to have cross-pollination between Epic's different businesses, correct?"
A: At a high level, yes.

Dunn then gets into whether the exclusivity agreements were disliked by developers. She notes that one developer in an email (DX4638) talked about the idea that it's anti-consumer to have exclusives. (In redirect, Allison clarifies that the developer was being sarcastic.) Either way, the backlash to this developer led to the developer shutting down their Reddit forum because of angry people. Allison describes those people as "trolls."

Dunn talks about itch.io, a publisher that has its own app store. Epic added itch.io to its store on April 22.

D: Are you aware that itch.io includes so-called adult games such as a game called "Sisterly Lust?"
A: No
She says there are other offensive and sexualized games in the itch.io app store. Essentially, it sounds like Epic allows you to download itch.io, which has its own app store including some of these questionable games.

The judge is a bit confused about the distinction, and asks Allison several questions about whether Epic is sponsoring or allowing this content itself. Allison tries to make a distinction, but this argument from Apple -- about the danger of app stores within app stores -- seems to resonate with GR.

Dunn points to documents (DX3993 and DX3795) that seem to show that Epic revised down how much money revenue the EGS was expected to make in 2024, from a 2019 projection of $1.1bn to a 2020 projection of $836 million. (On redirect, Allison says those slides may have been misleading, inaccurate or not up to date.)

In DX3681, a series of Slack messages, Dunn points to how Allison questioned whether the EGS would be able to handle traffic on August 13th, when it was expecting high volume. That is the day of Project Liberty. (On redirect, Allison says EGS was also offering two free games on that date.)

Other than the aforementioned, nothing super notable from redirect or re-cross.

GR: Did you ever ask anyone who you consider to be more senior to you why you were not advised about Project Liberty?
A: I have not.
GR: Hmm.

Allison is excused at 2:24 p.m., and offers a tiny salute to Epic's next witness, Matthew Weissinger, on his way out the door. 

Matthew Weissinger

Matthew Weissinger, VP of marketing at Epic Games, is sworn in. Another face shield wearer, he has glasses and reddish brown hair. Lauren Moskowitz returns from Epic to question him.

She has Weissinger explain Fortnite, including the various modes. They show a video (PX0067) and he explains all the different content and modes that are available, as well as non-gaming experiences like TV, movies, concerts, and social interactions. 

GR wonders why there aren't four separate apps for the four different Fortnite modes, and Weissinger says that would be a worse experience for users and confusing.

They talk about some notable concerts, like Travis Scott. (12.3 concurrent players live to watch it at peak)

Weissinger on the metaverse:

"It's one of the remarkable things about Fortnite, we're building this thing called the metaverse - a social place. One of the ways I’ve tried to explain it is, think about all of us in lockdown, and how we try to stay socially connected. Some of the most meaningful experiences I've had were logging into Zoom and we had our friends and parents and we celebrate grandpa’s birthday -we have a shared moment together - we connect for a cooking class or a happy hour - we come together in these ways even though we're hundreds or thousands of miles apart."


M: Does Roblox have a Battle Royale equivalent?

W: Yes, Roblox has concerts also and a "creator mode" equivalent.

M: Does Fortnite view Roblox as one of its competitors in all these categories?

W: Absolutely.


They discuss how Fortnite makes money. Fortnite sells V-bucks, a digital currency, so people can buy cosmetics. It also sells subscriptions. Weissinger says that real-money transactions were not available within Fortnite when it was on iOS.


He says users seeking refunds from purchases on iOS had to go to Apple for help, which was a "poor experience."


M: What impact would it have on Epic if it could not offer in-app purchases within Fortnite?

W: It would be devastating, it would completely sink the business in its current form.


M: Can't Epic just offer ads?

W: Philosophically we would never do that -- ads are a terrible experience.


Weissinger says Epic spends $300 million a year marketing Fortnite, and has spent over $1 billion total. He says that effort has been successful. 


Judge GR calls things off at 3:15 p.m., asking what Fortnite is doing for Mother's Day. 

Weissinger doesn't have an answer, but "we're doing something now!" Sweeney says.


GR closes by commending the lawyers, providing instructions about when to deliver sealed documents to her, and wishes mothers in the courtroom and listening from home a happy Mother's Day. 


The trial will resume Monday morning with Weissinger, then move onto expert witnesses.


That's all for me, for now! Amy Miller from MLex and Dorothy Atkins from Law360 will pick things up Monday, May 10. 


--

Kellen Browning

Tech Reporter


The New York Times

620 Eighth Avenue

New York, NY 10018

kellen.browning@...

@kellen_browning


FW: Epic v Apple Day 4 - Daily Pool Report

Leah Nylen
 

 

From: 'Dorothy Atkins' via Epic-apple-pool
Sent: Thursday, May 6, 2021 4:17 PM

 

EXTERNAL SENDER: Use caution with links and attachments.

 

I forgot that I was supposed to also send a daily report, so here it is. It's just all of my reports from earlier today compiled chronologically. I hope someone somewhere finds this helpful!  

 

Good morning from Oakland federal courthouse! I'm Dorothy Atkins from Law360 and I'll be your pool reporter. Leah Nulen is here as well (hopefully to let me know if I screw something up). If you have specific q's for me feel free to email me or text: 347-237-3753

 

Judge Gonzalez Rogers is on the bench wearing a purple mask and purple collared shirt under her robe. At counsel table:

 

Epic

 

Katherine Forrest, Cravath
Justin C Clarke, Cravath

Brent Byars, Cravath
Lauren Ann Moskowitz, Cravath
Tim Sweeney, Epic

Lauren Clause, (I believe from Epic, will confirm)

Jason Run? (operating exhibits - he joked to the judge "I don't talk a lot," she replied "well there are a lot of people who aren’t talking in these groups."

 

Apple

 

Karen Dunn, Paul Weiss

Richard Doren, Gibson Dunn

Lauren Dansy, Gibson Dunn

Jason C Lo Gibson Dunn

Heather Grenier, Apple’s director of commercial litigation

 

A class counsel attorney is in the gallery sitting here alongside Leah and I. 

 

Housekeeping Doc production issue

 

Before trial "housekeeping" issue, Epic's Forrest raised an issue about 20 documents Epic wants admitted. Forrest says the documents should be admitted and Apple is trying to exclude docs unfairly which have been produced in the regular course of business. Apple's Richard Doren argues it's a belated "document dump" and 

 

The judge: "What i’m not interested in is document dumps for the sake of document dumps... We aren’t just going to put something out there on the internet which is what you gus are doing at the end of trial. It sounds to me like your just trying to add docs to the box."  The judge noted that the parties have 45 hours each and "yesterday i was wondering if I gave you too much time. I’m not going to allow you to just dump things into the record without actually presenting evidence in trial."

 

Forrest replied that "My concern is that there's been an attempt to keep records out of this case" and this is another example of it. 

The judge said "I have been quite generous. i have not sealed very much but i’m not going to enter evidence in an improper way." Forrsest offered to brief the issue. 

 

 Epic's head of business strategy Thomas Ko is called as the first witness.

 

Epic's head of business strategy Thomas Ko called as the first witness. 

 

 Epic's Brent Byars, Cravath examined on direct.

 

Ko said he joined Epic in October 2019 after working at Samsung on Samsung Pay to work on payment issues at Epic.  He says Epic has grown from accepting 10 currencies to 42 since 2019 and it doesn't do its own payment processing but he says it's secure.

 

"I believe we have made lots of improvement but still there is more room to improve"

 

He said Epic doesn't process payment transactions and he began working on Project liberty, which he said is an attempt to "give customers choices where options aren’t available." Epic solicited RFPs from different payment processors to see where they can improve and as a result Epic's payment processors reduced their fees. 

 

He explained that Epic doesn't store credit card info and global payment processor costs to Epic in 2020 were 4.2 percent on average and 3.5 percent in the US.

 

Note from Leah: "Epic's payment solutions are partnered with several financial companies. Chase's payment tech is used in the US and for global credit card processing. Paypal is also used globally, along with Xsolla and Adyen."

 

Cross by Apple's Jay P. Srinivasan of Gibson Dunn & Crutcher LLP,

 

Srinivasan asked Ko: "Did you know project liberty would involve deceiving apple?" 

Ko replied that "I don’t know what description of deceiving what that means," but he said project liberty provided solutions. Srinivasan pressed Ko on whether he knew that Epic didn't tell Apple about Project Liberty. He said he knew project liberty involved Apple but he didn't know how Epic communicated with Apple about it because that was beyond his role. 

 

"I wasn’t aware of it,"

 

Srinivasan  pointed to an email exchange from December 25 2019 involving tim sweeney about Xsolla payment processor

In his email, Ko said when it comes to payments within a game "outside App Store and google play there is really no truly comprehensive payment solution that does everything needed for a game company"

Ko testified that others could do payments at the time and saying Google and Apple were the only ones is "too much of a statement," but Apple and google had "such dominance" they had more

 

Srinivasan asked Ko "Did you have any personal info in the past ‘issues with improperly using collecting personal info about children under the age of 13’

Ko: "I don’t recall. I was part of the atty privileged team handling request from the FTC."

 

The courtroom was sealed for questioning for about 10 minutes and no other redirect/cross. App Store VP Matt Fischer is next up.

 

Apple App Store VP Matt Fischer testifying on the stand with a face shield, no mask. Navy blue suit with a light blue shirt and a mustard-ish colored tie. They're taking a 20 minute break now.  I'll email when we're back. Should be 10:35 a.m. PST

 

Direct by Katherine B. Forrest, Cravath

 

Epic's counsel began Fischer's examination by pointing to a series of emails and docs. One email reads "there is an epidemic of fraudulent apps in the app store" that attempt to defraud people out of money. Another says "seemingly benign general app then becomes evil."

 

Many of the documents and emails are subject to confidentiality provisions and are not being admitted into the record for the truth of the matter. 

 

Forrest asks Fischer if he was involved in the App Store's creation. He says no, because it was launched in 2008 before he was at Apple, but he's been involved in the ongoing development of App Store App. Forrest then pointed to document that he sent to the "broader organization" that included a Steve Jobs transcript.

 

He said he isn't involved in managing the ad side of apps and doesn't know how the algorithms work in determining which apps come up first in a search for an app on the App Store. "Sometimes there is no advertising, there sometimes there is," he said.

 

Forrest asked Fischer a series of q's about whether he knows of studies that look at whether consumers switch from using iOS to Android due to rising prices or costs of apps. He replied that he's not aware of any of those studies. He also said he isn't aware of the average amount of money a consumer spends on apps bought on the App Store in the life of iphone. "No and i wouldn’t know how to go about that type of analysis or study," he said

 

Forrest pointed to a presentation attached to a July 28 2016 email that said “Developers don’t believe that the app store enables profitability of their apps, enables app discovery or provides tools to successfully market their apps.” She then began asking Fischer on Apple's Executive Review Board, which he sits on. More on that after the break.


Note from Leah on ERB members' names: Phil Schiller, Eddy Cue, Ron Okamoto, Trystan Kosmynka, CK Haun, Ann Thai, Josh Schaffer and Sean Cameron. 

 

More drama over docs

 

Before taking a break, the judge noted that she's admitted certain business records into the record, and if they're not, she wants to be clear on why she's admitting them. "All these things are being published, they're all out there, and non lawyers don’t understand the difference between being admitted from the truth versus being admitted for some other purpose like notice. So i want to nail that down." She said she wants Epic's briefs on the 20 docs that it seeks to admit on what legal purpose they're being admitted.

 

Judge: "I'm asking not to release it before i make a [ruling]

 

Forrest: "And I'm asking for parity"

 

Judge: "I try to be fair to both sides and if you're suggesting that I'm not..."

 

Forrest replied that she's not suggesting the judge has been unfair, she just wants the court to apply the same rulings to similar docs admissions requests made by the other side.

 

We're back from the break. Hopefully this testimony gets a little livelier. I'll send another update at the end of direct.

 

Moving on to cross now by Jay Srinivasan...

 

More direct of Matt Fischer, which just wrapped. 

 

Forrest points to comments that his team received at Apple from App Store app developers surveyed. 

 

The comments include: "search in the app store is still really rough around the edges," App Store is "plagued with outdated low quality apps," "Stop playing favorites, start applying the same rules to all apps and start eliminating junk apps from the app store," "You tend to focus apps that spend a lot of money… don’t focus our on great apps and not on sales or marketing," "For a developer it’s a nightmare," "‘We release every week, when our app is rejected for review entirely unrelated to the changes we made its disruptive and throws off our cadence," "App reviewers are arbitrary and unpredictable and are not consistent among competing apps,"  "Allow developers to issue refunds this is beyond frustrating to us."

 

Forrest points Fisher to an Oct. 2018 email he sent a subordinate titled "App Store Risk/Fraud." He wrote “I need you to take leadership regarding what’s going on with all forms of fraud on the App Store." Fisher acknowledged Apple has been fighting financial fraud in the App Store. "I don't know about since the beginning, but we've been combating and fighting fraud for a long time, yes." Forrest then points Fischer to another email he sent February 10 2012, titled ‘AppStore Fraud gets unbearable” (he didn't read the email content aloud)

 

Fischer acknowledges that Apple identifies "rip off" apps and removes them from the App Store. "we certainly wouldn’t approve them knowing that they were rip offs" He also acknowledged that some apps have money laundering schemes, there are fake apps and fraudulent refunds.

 

Forrest points to an internal email chain he was on from October 2018 that said "Hulu is part of the set of whitelisted developers with access to subscription cancel/refund API" The atty said ‘Whitelisted developers get to do things others don’t correct?" he said yes, but "I certainly don't use that particular word. I find that word offensive."

 

Forrest asks Fischer if he's aware Google Stadia, the cloud gaming service, is shutting down. He said he's not aware and "I know they had some struggles, i’m not sure of the status of it now." He said "I haven’t memorized every app store guidelines," but he said he's aware apps have been rejected for having an alternative payment processing system.

 

In a series of q's, Forrest gets Fischer to concede he's not aware of any studies that look at whether credit cards, or other payment processing systems that have security issues or privacy issues. 

 

Fischer's cross wrapped. Redirect will continue after a 40 minute lunch break. Trial will be back in session at 1:15 p.m.

 

Jay Srinivasan cross of App Store VP Matt Fischer:

 

-He says he's not responsible for security, app review, fraud or privacy at the App Store and he isn't aware of a "plan" at Apple to lock in developers into Apple's payment system. Atty: "Would you be aware of a plan if one existed.

Fischer: Yes"

 

-Fischer says since Apple launched the App Store in 2008 it's grown from 500 apps to more than 200 million apps in 175 countries and the user interface has evolved "substantially" and Apple has redesigned app store multiple times.

 

-Fischer explains Apple's "Today" tab in the App Store, which highlights smaller developers that don't have the marketing or PR teams to help them grow their business. 

 

-Fischer: "What we have done with this redesign has provided a huge boost of support especially for smaller developers." "I might be biased but I certainly think what we do is unique," because he said he hasn't seen other companies provide marketing and support to developers. " We work hard to make the app store attractive for both developers and customers." 

 

-Fischer said Apple started working closely with Fortnite in March 2018 and decided to "revisit" an Apple guideline prohibiting in-app gifting after he met with a Fortnite executive Mark Rein about it. He said in early 2019, Fortnite began organizing an "in game concert" with the DJ Marshmello. He said Apple agreed to promote the Marshmallo concert in its App Store in early feb 2019 and also outside the app store. Last year, Apple and Fortnite did a similar promotional partnership for a Travis Scott concert that was "quite last minute," and then "The teams were working closely together throughout the year on a wide variety of promotions." He said his last meeting with Fortnite was in June 2020 when they talked about growing their business together in light of Epic's acquisition of Houseparty video conferencing app.

 

-When asked his response to Epic Games' CEO Tim Sweeney's email to Apple last summer announcing Epic's plan to cut Apple out of payments in Fortnite, Fischer says: “I was blindsided." 

 

-Fischer said Apple will change its developer guidelines "if it makes sense for all developers, makes sense for customers, makes sense for apple then we update the guidelines."  "Developers are not a shy bunch and yes they give feedback all the time and yes we take the feedback very seriously. And it helps us prioritize features.We welcome all feedback from developers whether it’s positive or negative."

 

-Srinivasan points to a 2016 email Epic's counsel cited during direct. The email was written by an Apple employee who says "Matt feels extremely strong about not featuring our competitors on the App Store." Fischer says that the worker was "very wrong," and the App Store promotes its competitors "all the time." For example, he said Apple promoted video-streaming apps like Peacock, Hulu and Hulu Plus that compete with Apple TV.

 

-Fischer explaining an email of his: "If a developer has an option of sharing a commission or not, why would a reasonable person share a commission?"  On 30% commissions: "We feel justified that we earn our commission for those types of transactions."

 

And we're back. Redirect/recross of Fischer to come.

 

Katherine B. Forrest, Cravath on redirect

 

-Forrest points out that Apple leaked Marshmello's set list before the in-game Fortnite concert, which is why Epic gave Apple short notice about the Travis Scott show. Fischer says he doesn't recall hearing about Apple's alleged Marshmello playlist "leak." "I don’t recall ever hearing that no."

 

-Epic's atty clarified that Marshmello is a DJ not a band. (He had previously referred to the DJ as a band.) Fischer: "That’s my understanding of what he does."

 

-Forrest asks if he knew that the virtual in-game Marshmello concert drew 10 million attendees, which was the largest event ever. He replied he didn't recall that. "I don't think that the people who worked at epic at the time mentioned that to me."

 

-Epic's counsel wants to go through app developer surveys. Apple's counsel Jay S. interrupts saying "we think this whole line of questioning is objectionable." The judge overruled the objection. Fischer said he doesn't remember reviewing most of the surveys Forrest showed him.

 

-Forrest brings up the email from the Apple worker who wrote that he "feels extremely strong about not featuring" Apple competitors in the App Store. Forrest asks if he is aware that Apple is under investigation by EU regulators about self preferencing apps on the app store?

 

-Fischer replies "I have heard of some of those regulatory efforts but i’m not entirely up to speed on it."

 

-No re-cross from Apple

 

Apple's bearded Trystan Kosmynka is on the stand with a face shield, white collared shirt, dark suit and tie.  Epic's Lauren Moskowitz of Cravath Swaine & Moore LLP on direct just wrapped. Cross by Apple's Veronica Smith Moye of Gibson Dunn Crutcher LLP is about to start.

 

On direct

 

-Kosmynka said he became senior director of app review at Apple in 2017 and he's been a member of Apple's Executive Review Board.  He said "I think we love third party apps as customers on the app store" 

 

-He said Apple has hourly and salaried employees who review 50 to 100 apps a day. Epic's counsel asked him if a standard day for a worker is 10 hours, he says some workers in Ireland have an 8 hour day shift. She impeached him, and eventually he conceded a standard day is 10 hours, 5 days a week.

 

-Epic's counsel said "there is always a backlog and submissions of apps to review" and she asked him if the time it takes to review the app is a frequent complaint Apple gets from developers. He replied "No I don’t believe it is." He also said the last time he reviewed an app it took him 5 minutes.

 

-Epic's counsel gets Kosmynka to concede that Apple called complaints by third parties about apps violating Apple guidelines, a "UTB" for "under the bus," as in the press or rival app is "throwing the app under the bus." But Kosmynka says Apple later changed the term from UTB to ARC. 

 

-The UTB issue came up as Moskowitz pointed to an email exchange in July 2017, in which Kosmynka raised concerns about whether Roblox violates the App Store Guidline 3.2.2 which prohibits stores within a store. One of his direct reports tells him it was approved by the ERB. Kosmynka replies "“I am surprised this was approved by ERB” 

 

-Kosmynka concedes that he's not aware of any studies Apple has performed on security issues or commissions on Google Play Store, Huawei store, or 10 cent store, among others. 

 

-Moskowitz repeatedly asks Kosmynka if Apple has "aggressively rejected apps that use third payments to bypass IAP." He replied "I don’t see it that way," she then impeached him with his deposition and he conceded the point. She asked if Apple terminated thousands of developers who have been terminated specifically for using third party payments. "I would disagree with the term 'specifically,'" he replied.

 

-Moskowitz points to an Apple guideline that prohibits apps that are "confusingly similar" to an apple product, and asks if he's aware if anyone at apple was tasked with assessing whether the apps were functionally better than the apple product. He said no, but "We hope they’re better than the apple app."

 

 

  Apple's Veronica Smith Moye of Gibson Dunn Crutcher LLP cross examined Kosmynka

 

Notes on Cross

 

-Kosmynka says Apple's "process when we find hidden features is we try to work with developers to get it corrected." He said many cases an app introduces a third-party payment without knowing, but the "simple presence of a third party payment" wouldn't have resulted in termination of third party accounts.


-Apple's counsel showed a document from Nov. 2017 that showed a week's worth of data on the number of iPad and iPhone apps rejected/accepted. There were a lot of exact numbers but here's a rough breakdown. Total submissions for this particular week 112,501 submissions. Iphone submissions that week: approved 5k new apps/30k app updates and rejected 11k new apps/ 10k updates. Ipad app submissions: approved 4,600 new apps/ 36,500 updates and rejected 7k new apps and 9k updates

 

-The attorney showed a graph on Apple's App review rejection rate: 

Year / Number of app submissions / number of rejections / rejection rate
2017 / 5.177 million / 1.69 million rejections / 33%
2018 / 4.79 million / 1.7 million / 35%
2019 / 4.8 million / 1.74 million / 36%

 

-Kosmynka says "I take all mistakes seriously" but less than 1% of app rejections are appealed by developers and "usually the appeals are upheld."
"i think the number of mistakes are a small fraction of the effectiveness of the overall review process." 

 

-Kosmynka explains how he founded Test Flight, which was later acquired by Apple and he joined Apple as an engineering manager.

 

Moye of Gibson Dunn Crutcher LLP cross examined Kosmynka and has more to go, but trial wrapped for the day and Moye will continue Kosmynka's cross examination tomorrow morning. 

 

Before wrapping the day, Judge Gonzalez Rogers reminds the parties not to show depositions in the courtroom until after she rules on whether the witness who is testifying can be impeached (this is sort of law 101 stuff): "You can’t show them for impeachment until i decide if request for impeachment is proper." The judge also noted that certain emails don't come in without her say so: "I know lawyers think all emails come in, but they don't. at least not in my court."

 

That's all from me for the day folks! Let me know if you need me to clarify something in these notes. And safe travels to the hard-working Leah who will be heading back to D.C. Tomorrow your pool reporter Kellen Browning of the NYTimes who will sit in court alongside Elizabeth Lopatto, Verge. They'll be back here at 8 a.m. I'll be back next week.

 

 

 

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Dorothy M. Atkins

Senior Courts Reporter

Legal News & Data

+1 (347) 237-3753

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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

 


Epic v Apple Day 2 - Daily Pool Report

Nellis, Stephen (Reuters)
 

Greetings from the courtroom in Oakland, California from Stephen Nellis at Reuters and Mike Acton at MLex. As a reminder, Judge Yvonne Gonzalez Rogers  said tomorrow's proceedings will likely start off with some arguments from the attorneys over redacting expert testimony, so live testimony may not begin right on the dot at 8:15 a.m. PT. Your pilots tomorrow will be Leah Nylen of Politico again and Josh Sisco of The Information. Meantime, here's how day two went. 

Court is now in session at 8:15 a.m. PT.

Epic's Tim Sweeney, who is set to resume testifying today on cross examination by Apple, arrived in a blue plaid suit with striped shirt and blue-and-gold striped tie and milled about the lobby area outside the courtroom browsing historical pictures of the Bay Area. Apple's Phil Schiller arrived in a dark blue suit and dark blue tie and plain white dress shirt. Most of the legal teams are wearing black cloth masks or blue surgical masks, but Karen Dunn of Paul Weiss has arrived in a burgundy face mask. 

Richard Doren for Apple has donned a face shield as has Epic's Sweeney, as they will be up first. 

Judge Yvonne Gonzalez Rogers (YGR) opens up by thanking young lawyers for both sides “because even though they are not doing the questioning I know they are working hard.”  


Judge YGR asks for introductions of new folks. Here’s who is present for both sides: 


EPIC: 

Katherine Forrest, Cravath

Gary Bornstein, Cravath

Wes Earnhardt of Cravath 

Brendan Blake of Cravath 

Jin Niu of Cravath 

Tim Sweeney, Epic CEO  

Jason Rudd - Epic’s computer guy 
 

Apple:  

Richard Doren, Gibson Dunn 

Rachel Brass, Gibson DUnn

Karen Dunn, Paul Weiss 

Betty Yang, Gibson Dunn

Veronica Moye, Gibson Dunn

Phil Schiller, Apple 


In the gallery:  

Mike Acton and Stephen Nellis from the press pool   

Marc David Peters, who will represent Nvidia and Aashish Patel 

 

Next, Judge YGR then thanks the court staff for their efforts to give public access. She then dives into questions over materials that should have been sealed but my have been released over the weekend, saying that she is unlikely to seal things that have been accidentally released.  


I don’t at this point, with the genie out of the bottle, think that there’s a point in sealing them. If they are already released because of an error that was not the court’s error, the information is out there,” she said.  


Of documents over the weekend, she said, “I went home and I learned there were numbers I knew I had sealed, and now the public knew about them.”  


EPIC'S TIM SWEENEY RESUMES HIS TESTIMONY


Apple’s Richard Doren (RD) resumes questions of Tim Sweeney (TS). Because of difficulties in hearing Sweeney on the public audio, we have included a more stenographic representation of the exchanges than another witnesses.


RD: Would it surprises you to learn the vast majority of people who have downloaded Fortnite on iOS has never made a purchase in Fortnite on any platform?  


TS: We don’t sell features, we only sell items. This means players can’t buy better performance.  


RD: Do you know what percentage of people who download Fortnite on iOS only buy things on iOS? 


Sweeney: No.  


RD: Would it surprise you that it’s as low as 5%?  


Sweeney: Yes.  


RD: Are you blocking 95% of the players because of the 5% that make purchases? 


K Forrest objects.  


Sweeney: Epic did consider the impact on consumers.  


RD asks if Sweeney runs the company as one P&L, and Sweeney says he does.  


RD asks if Fortnite was first released on iOS, before Android and Switch. Sweeney says yes.  


RD engages in a line of questioning about whether Apple supported cross-platform progression and cross-wallet play. “If you could buy it elsewhere, as long as you can also buy it on the App Store, Apple is fine if people buy it elsewhere?”  


TS responds that this is correct.  


RD: “When a player did that, Apple would not receive any commission, correct?”  


TS: Yes.  


RD asks if cross platform and cross wallet play were allowed. He asks if Sony disallowed for up to a year after the launch of Fortnite on Sony. RD asks if TS got aggressive with Sony about the issues of cross platform play and cross wallet.  


TS: “Yes, we had significant negotiations throughout 2018.”  


RD discusses exhibit 3125 with TS.  


“Friendships are being torn apart by Sony’s segregation of players on competing platforms,” the email from Sweeney to a Sony executive, Phil Rosenberg, on June 1, 2018 reads.  


RD: Apple permitted cross platform play, correct? Sweeney replies yes.  

RD asks if Epic reached an agreement with Sony on cross platform play by September 2018. 


TS replies that yes, Epic did. 


RD asks about cross wallet transactions, which still remain barred on PlayStation.  


TS says that Sony still does not allow V bucks bought outside Sony on Playstation 


RD asks similar series of questions about Nintendo Switch. 


TS says Epic does not support use of V bucks bought out side Switch being used on Switch.  


RD asks if console players have a monopoly on game distribution on their platform.  


TS says he’s aware of one exception. He understands that Nintendo allows Switch games to be sold by one third-party retailer.  


RD: But other than that, do you agree console makers have monopoly on game distribution?  


TS agrees.  


SWEENEY'S CROSS EXAMINATION CONTINUES, JUDGE YGR BREAKS IN WITH QUESTIONS


Doren asks TS about a gaming conference - the D.I.C.E. summit in 2012 hosted by the Academy of Interactive Arts & Sciences at which Sweeney was named to the academy’s hall of fame and gave a speech about platforms. RD asks if TS recalls being named to the hall of fame, and TS replies that he does not recall. “A belated congratulations,” Doren said.  

RD later begins to question TS about Apple’s “Metal” API and a collaboration between the two companies at Apple’s Worldwide Developer Conference, or WWDC, where Sweeney gave a quote to Apple to use in Apple’s presentation.

RD introduces an email from January 2018 between TS and Microsoft’s Phil Spencer, chief of Microsoft’s gaming business. Email exhibit is DX-4036.

In the email to Spencer, Sweeney wanted Microsoft to commit to cross platform play.  

TS says: “Microsoft did not have a very clear position. They often spoke publicly in support of cross-platform. Epic wanted to eliminate the ambiguity with Microsoft.”  

RD asks if TS tried to use Apple’s forthcoming allowance of cross platform play in the game’s upcoming iOS launch to pressure Microsoft to also commit to cross platform play.  

RD returns again to Sweeney’s email from June 2018 in which Sweeney said he does not believe Sony’s ban on cross platform play is not legal and in which TS says that Apple, Google, Microsoft and Nintendo would support cross platform play.  

RD then introduces a March 21, 2019 interview from the magazine Eurogamer of Sweeney. The first question in the interview is about Google’s Stadia streaming service. RD points to part of Sweeney’s response saying Unreal Engine will support Google Stadia. (Exhibit 3199)  

RD asks if a streaming service can give even a small device good game play. TS says yes.  

TS says that “Unreal Engine is currently supporting Stadia.”  

RD: Digital gaming is a very dynamic world, isn’t it?  

TS: “It changes over time.”  

RD: Do you agree a great game will succeed wherever it’s sold?  

TS: I was referring to competing PC game stores.  

JUDGE YGR ASKS: “Are you saying that great games in some other context will not succeed?”

TS: “The competition I was referring to was game customers across PC game store.s”  

JUDGE YGR asks: “Does that mean the oppose is true in other contexts?  

TS: “It varies by platform, your honor.”  

JUDGE YGR: But does that your statement doesn’t apply in other platforms? “Are you saying your statement is not applicable in the other contexts that you’ve not identified?”  

TS is not clear precisely what statement she means.  

RD comes back to read it again from the Eurogamer interview. He reads “A great game will succeed wherever it’s sold” it reads in part.  

TS: “The question I was answering was” about PC games on PC stores, he says. He says those game store must be able to “freely compete” among each other.  


COURT GOES INTO FIRST RECESS, JUDGE YGR HAS MORE QUESTIONS FOR SWEENEY 

Apple’s Doren continues to cross examine Sweeney. As a side note: The two have continued their exchanges through clear face shields, as they did yesterday.  

RD begins to ask TS about the Coalition for App Fairness, which Epic belongs to, and its members, as well as Epic’s own Epic Games store. RD asks whether Spotify is now on Epic’s game store, as well as other non-gaming apps like iHeartMedia.  

RD: It was important to you to get all these transactions completed before this trial?  

TS: “Yes, that was one of my motivations.... I wanted for Epic to demonstrate that we welcomed apps from other stores on our store.”  

RD asks if Epic committed minimum guarantees for apps on Epic’s own stores. TS agrees that Epic did so.

TS: “I don’t expect to recoup those minimum guarantees from the games” themselves, but may recoup the guarantees some other way.  

RD asks whether Epic expects to lose hundreds of millions of dollars on the Epic Games store.  

Now K. Forrest breaks in to raise an issue of possible confidential information in a document about a third-party deal, that Forrest says they’ve only been made aware of this morning. Doren says this is the first he has heard about it. Judge YGR says she has been sealing references to revenue sharing agreements. She will allow sealing of “particular numbers” or “any kind of specialized negotiated terms” but otherwise wants to proceed with the line of questions.

The media gallery cannot see the full document now, and RD is reading from it.  

The document comes from September 2019 from David Wallerstein, a Tencent executive who has taken a seat on Epic’s board. The document says the board is reviewing large minimum guarantee outlays being made by Epic to games in its store.  

In a reply email to Wallerstein, TS wrote (according to RD’s reading of the document) “Obviously the direct ROI...is super crappy” for the minimum guarantees to developers on the Epic Store, but the larger goal of the minimum guarantees is to bring users into the Epic Games store and create a large lifetime value of customers from the Epic Games store.  

RD how turns to an October 2019 review of the performance and strategy of the Epic Game store (exhibit DX-4361). It shows a 5 year profit and loss forecast as of that time, with an “aggressive pursuit” model and a “winding down” model depending on how much Epic invested to promote growth, or if it gave up the store and just paid off the minimum guarantees to developers.  

We now dive into the report itself. By 2024, under the aggressive pursuit model, Epic projected a $15 million profit, but a cumulative loss (over the course of the investment into the store) of a $854mln. The store will still be in a cumulative loss state for $719mln in 2027. In the winding down model, there would be $36mln profit for 2024 but cumulative loss of $654mln, while 2027 has a cumulative loss of $642mln.  

RD asks about what kind of expenses it would include in the models. TS says “there’s a people cost running into the tens of millions of dollars” in the model. RD asks if there are engineering costs. TS says he does not know if engineering costs are included in “people.”  

JUDGE YGR moves DX-3818 into evidence, though waiting for K Forrest to weigh in on sealing after lunch, but DX-4361 is moved to evidence.  

RD now asks TS about the “Project Liberty” planning for the hot fix launch in May 2020. It focuses on a conversation between Mark Rein, an Epic co-founder, and Dan Vogel, the company’s chief operating officer. Vogel raised concerns implementing a V bucks price cut “without us looking like the baddies.”  

RD asks TS whether he was focused on this planning for Project Liberty. “I was focusing on various other things,” TS said. Vogel “played a major role in the planning of the price drop.”  

RD continues reading. Vogel had raised concerns about “Fortnite” being blocked.  

TS says that he was “not certain” that Apple and Google would block Fortnite, but that Vogel appeared to be certain FN would be blocked.

Now RD moves back to the June 30, 2020 4 a.m. email to Tim Cook and Phil Schiller et al, laying out Epic’s demands. (DX-4477) He points out a spot where it looks like Sweeney forgot to change “Google” to Apple and asks if it was a “form demand letter.”

TS: “This was a fairly customized, specific policy of each platform that differed.”

RD now asks about a July 2020 board update presentation gave about Project Liberty. He highlights one line where the presentation saying: “Solve this problem now before AR takes off and that rate is set at 30%.” RD asks whether TS believes Apple will be a major augmented reality player.  

TS: “I expected Apple to be a significant AR market participant in the future.”

The presentation says that Epic’s revenue had declined in 2019 vs 2018. Total gross revenue for 2Q19 (ending June) was $1.1 billion, down 27% YoY from 2018. In 3Q19, Fortnite was projected to make $802 million, down 28% from an initial forecast of $1.1 billion, because of softening player conversion.  

RD asks if the day after the version of “Fortnite” with the secret hotfix code was approved by Apple, in August 2020, TS sent a note to Microsoft. He bring up an email from Sweeney to Microsoft’s Phil Spencer. DX-4579 is exhibit. Sweeney says there’s an “extraordinary opportunity” coming to show the value of Windows and Xbox versus platforms.  

TS testifies: “I was presenting it as an opportunity to Microsoft.”  

RD now moves into the PR campaign Epic launched after flipping the switch on the “hot fix” on August 13, 2020 and the “Nineteen Eighty Fortnite” video parodying Apple’s “1984” ad.  

The court reporter stumbles on the “Nineteen Eighty Fortnite” name and asks for a clarification.  

RD then asks about the “#FreeFortnite Cup” public relations campaign in which Epic told players what other platforms they could play on if frozen out of Chapter 2, Season 4 updates on iOS.  

Sweeney says: “We were just hoping our customers found a way to continue playing,” Sweeney says.

RD: “Today, an iPhone user can use the Safari browser” to purhcase V Bucks that can be used on Xbox, correct?  

TS: Yes.  

RD now asks Sweeny whether, if Fortnite was still on the iPhone, a player could buy V Bucks in the Safari we browser on iPhone and then go over to the Fortnite app to use them.  

TS says yes, that would be the case now.

JUDGE YGR ASKS: “Why wasn’t that an option before August of last year?

TS replies: “It wasn’t a very attractive option to our customers.”  

JUDGE YGR asks: “Did you have the technological ability, or you simply hadn’t programmed it?  

TS REPLIES: “We hadn’t programmed it yet.”

JUDGE YGR asks: “It was an option for you, but you simply chose not to do it?”  

TS replies “Correct.”  

RD asks if TS has given away Android devices he has been given and uses an iPhone. Sweeney replies yes.  

RD asks: “Do you prefer the iPhone?”

TS replies: Yes.  

RS asks whether privacy and security are among the reasons that Sweeney uses an iPhone. TS says yes.

Richard Doren wraps up his questions at 10:07 a.m., having cross examined for nearly two hours.  

SWEENY GOES ON RE-DIRECT EXAMINATION BY FORREST

Katherine Forrest (KF) of Cravath now takes up questioning Sweeney on re-direct. They are mostly clean-up questions to add things to the record. She ony has 8 minutes before the court takes a break.  

KF: Does Epic Games Inc have any relationship to Unreal Engine? Does it have a financial interest?  

TS: Yes, it’s all integrated.  

TS says that facets of The Unreal Engine have been distributed on iOS for two years and that it does not involve game play.  

KF asks about House Party. Does it involve game play? TS says no. She also asks about distribution etc and TS says House Party is distributed on iOS.  

KF asks how the cost structure of being a publisher, where Epic had a 40/60 split with developers.  

“Publisher’s generally bear the majority of the costs of creation of software. A publisher will generally have a higher cost structure” than a distributor, Sweeney said.  

KF asks whether those publisher services are the same or different from the Epic Game store as a digital distributor.  

TS: “The services that Epic provides as a digital distributor in the Epic Games store are entirely different” than what it offered as a publisher.  

KF now asks whether Epic knows what rates Microsoft charges for game distribution, and similar questions for Nintendo, Sony. Sweeney says that he does not know how much those companies charge game makers, and only knows what Epic pays.  

KF now asks about how the talks with console makers like Microsoft go.  

TS says that “There will be significant negotiations on a wide range of topics,” including Microsoft marketing help, technical issues with the products and other aspects of a deal.  

KF asks if Epic negotiates with the console makers and look at those agreements “holistically.” She asks if it is true with regard to Nintendo, Sony and Microsoft, and Sweeney says yes.  

The court takes recess for 20 minutes, to resume at 10:35 a.m. 

AFTER THE FIRST RECESS, WITH MORE QUESTIONS FROM JUDGE YGR

K Forrest (KF) resumed her re-direct examination of Tim Sweeney (TS) at 10:35 a.m. PT. Side note, she has kept her mask on rather than wear a face shield, and wore a long black jacket and black and white dress with horizontal stripes. (Unlike Leah at Politico, I'm terrible at fashion.) 

GAMING CONSOLES AS GENERAL COMPUTERS:  

KF asks how consoles differ from smart phones. She seems to be making the point that consoles are not general computing devices and you can’t do things like get to your bank account on them. But Judge YGR does not understand the line of questioning.  

KF says she is trying to show that what is at stake in the case is Apple’s control over the distribution of all varieties of apps, like banking apps, rather than just game apps. “Our contention in this case is that all apps are at issue, not just a game app, and therefore the distinction is relevant,” KF tells Judge YGR.  

Judge YGR still does not understand the point of the line of questions but lets it proceed.  

TS says that game consoles like an Xbox are not really general purpose computing devices.  

KF makes the point, via questions, that consoles are not portable. You can’t take them with you.  

KF hands Sweeney an iPhone.  

TS describes it for the court, noting that it has a celluar data connection.  

Then KF hands him a Nintendo Switch and a controller for it.

TS describes them, and then KF asks them to hook them up to each other. He struggles to do it.

“As you can see, I’m not a Switch player,” he says.  

“Now the whole world knows,” Judge YGR says.  

“Given time, I’m sure I could” fit the two items together.  

Now KF asks him about whether you could use the Switch on a train. TS says yes, but you’d need a WiFi connection.

JUDGE YGR ASKS: “I thought the Switch was all one unit?”  

TS says yes, you can use it without the controller.  

KF asks more questions about cross-platform play.  

“Even on a closed platform, it is still possible to have cross-platform play.”  

KF now returns to the Eurogamer interview to clarify it.  

TS says that the interview didn’t pertain to mobile platforms, so that when he said developers have power, it meant on PCs. That doesn’t apply to iOS.  

TS says “Apple has complete control over what games and other apps can be distributed on iOS and wields that to make arbitrary policies and decisions, such that Apple has all of the power and the control on iOS.”  

NEW TOPIC: NON GAME EXPERIENCES IN FORTNITE  

KF asks about non game experiences in Fortnite and whether you have to play the game to see things like concerts. TS says the first concert was the musician “Marshmello.” “Was there competitive game play at the Marshmello concert?”

JUDGE YGR breaks in to ask whether Fortnite players go to these events as themselves or as their game avatars. “When someone is a Fortnite user and they go to one of these concerts, they are still in persona? It’s not like we are going on Zoom with friends and you go into a meeting room. People are in there in their game mode, aren’t they?”

Tim Sweeney says yes.  

JUDGE YGR: “Do you have any data to suggest that anybody goes to the concerts that aren’t already ‘Fortnite’ players?”

TS says that some players who haven’t played in some time do come back for concerts.  

JUDGE YGR asks but isn’t it all in the game context? “There are some movies about this, aren’t there?” and she mentions “Ready Player One.” “Because I’m not a gamer, that’s the one that comes to mind.” She asks, “Would that movie be the most readily available example of what is going on?” in the Fortnite universe.  

TS says yes, and “Snow Crash” is also a story that gets at this experience of an in-game reality.  

JUDGE YGR then asks whether they’re monetizing the time that friends spend in this 3D word. TS replies that yes, that is the case.  

KF then goes into asking whether Game play is required to attend a concert.  

JUDGE YGR asks whether people don’t play games all the time that aren’t competitive against each other. She mentions “Candy Crush.” “Is everything that you sell people playing against each other?”  

TS says no, there’s no “game mechanics” in much of the Fortnite universe.  

JUDGE YGR: “How would you define a game?”  

TS: “I think a game involves some sort of win or loss or a score progression whether it’s an individual or a social group of competitors, as opposed to some open ended creative experience,” like some of the other Fortnite experiences. In those experiences,  Sweeny says, “There’s no score. You’re never done, and you never win.”  

Judge YRG sighs. “Alright, go ahead.”  

NEW TOPIC – ARKIT AND WEBKIT  

KF then moves on to ask about two of Apple’s developer tools, WebKit (for making web apps) and ARKit (for making native augmented reality apps). She asks whether Apple makes ARKit available as part of WebKit, and Sweeney says Apple does not.  

TS replies: “It means that a web app can’t compete with a native app in terms of augmented reality,” Sweeney said. “It means it can’t even exist.”  

NEW TOPIC – FORTNITE AS A CREATOR PLATFORM, IMPULSE PURCHAES  

KF now asks about the evolution of Fortnite to becoming more of a platform to let people create experiences and distribute those creations to other users on the "metaverse.”  

TS: “These fees are an existential issue to the development of the metaverse in general. Fortnite is increasingly a creator-driven platform. Companies and individuals besides Epic are working to distribute to users. We are early in development of a creator-based Fortnite economy,” TS says.  

TS goes on: “Epic is trying to build a metaverse where the majority of the profit should go to the creators themselves,” he said. “With Apple taking 30% off the top, it makes it very, very difficult for Epic and creators to exist in this world.”  

TS then talks about “customer friction associated with selling an item outside of an app”

JUDGE YGR breaks in to ask about how old many of the users are on the Fortnite platform. “Do you know the numbers in terms of the ages of the individuals who use Fortnite?”

TS: “We don’t track customer age.”

JUDGE YGR: “Do you have an understanding generally whether a majority of the people who use your product are young people?”

TS says the game has an age rating off 13 plus.  

JUDGE YRG wants to know why young people need to be allowed to make impulse purchases. “Why is this so inconvenient, that someone can’t make what I would call, as a parent, an impulse purchase?”

TS replies that “most platforms have parental controls” preventing cash purchases.

Judge YGR presses the question further, asking why Epic wants to sell V-bucks accounts without those controls: “What you are really asking for is the ability to have impulse purchases.”  

TS replies: “Yes, customer convenience is a huge factor in this.”  

KF wraps up her re-direct at 11:18 a.m., about 40 minutes.  

RE-CROSS EXAMINATION OF SWEENEY BY APPLE  

Richard Doren of Apple takes the podium for re-cross examination. He ends it at 11:23 a.m. PT.  

JUDGE YGR ASKS DIRECT QIUESTIONS.  

Judge YGR has a series of direct questions of her own.  

Judge: “Do you have any understanding of the economics of developers who engage in apps that relate to food?”

Sweeney: “No"  

Judge: “Do you have any understanding of the economics with respect to developers who have apps related to maps or GPS?”

Sweeney “I do not.”

Judge YGR asks the same question for coupons, weather, dating and instant messenger apps.  

JUDGE YGR: “So you don’t have any idea how what you are asking for would impact any of the developers who engage in those other categories of apps, is that right?”

SWEENEY: “I personally do not

Sweeney exits the stand at 11:27 a.m. PT.  

But then Judge YGR has one more question for Sweeney and calls him back.

JUDGE YGR: “You’re asking the court for equitable relief. Part of the equitable relief I already provided was that Apple keep Unreal Engine open. What is your backup plan if I don’t?”

SWEENEY “If Apple’s actions are lawful, that means Apple would have the right to remove Epic from the developer program for any reason at all, or no reason at all. If Apple cut us out then, we would not be able to support the iOS platform.”  

Sweeney re-exits the stand at 11:28 a.m.

EPIC CALLS THIRD-PARTY WITNESSES 

Epic Games calls Benjamin Simon, founder and CEO of Yoga Buddhi Co, who is sworn in at 11:30 a.m. and is questioned by Wes Earnhardt of Cravath. Simon, wearing a dark blue suit and white shirt, testifies through a face shield, while Earnhardt, wearing a gray-brown suit, ask questions through a mask.

Key Quotes:  

The Down Dog Yoga app has to have higher prices on Apple’s App Store to help cover the costs of Apple’s commissions. Web subscriptions are cheaper.  

Simon says that about 50% of the company’s iOS users subscribe via in-app purchases even though those are more expensive because Apple prevents Down Dog from telling iOS users about the cheaper price for a web subscription. On Android, where Down Dog is allowed to show a link to its website, only 10% of users use in-a—purchases.  

But in iOS: “Because we can’t advertise the website offer in our app, we end up having about roughly have of our users subscribe at the in-app price.”  

Google did once remove Down Dog for telling users about its cheaper prices on the web. Simon said Down Dog disagreed with Google’s interpretation of the rule, and Google reinstated Down Dog. But then Google later decided it would implement an interpretation similar to Apple’s rule and would start enforcing it.  

Down Dog ran an experiment on Android in August, removing the link to the lower prices on its website. “If we didn’t include the link, we saw roughly the same proportion of users using in-app purchase as we do on iOS,” Simon said. “Overall, there was a 28% reduction in the number of subscribers,” after implementing the Android change, Simon said, likely due to higher prices but also because some customers may want a direct billing relationship with Down Dog.  

Earnhardt moves on to asking about how refunds and other customer relations work – when iOS in-app customers come to Down Dog, the app must send them to Apple for a refund for any in-app purchases. Simon says that Apple handles refunds for in-app purchases. Judge YGR asks about how refunds work when Apple handles them. Simon says Apple has a long delay before they get payments – typically 45-60 days. So if there is a refund via Apple, Down Dog never sees the funds due to the processing delay, Simon says.  

Earnhardt says the way Apple handles those refunds causes problems with customer service. “We have a much more generous refund policy” for direct payments than Apple does, and Apple does not allow for specific refunds like giving a discount for a promotion that went into effect after a user has subscribed, Simon says.

Earnhardt asks who provides a better payment processing service: Apple or Stripe? Stripe, Simon answers. In Apple’s system “it is perhaps slightly easier for users to go through the payment flow, versus looking up their credit card number,” but does not justify Apple’s higher fees than Stripe.

Simon testifies that Apple blocked Down Dog because of how the app wanted to implement free trials. Apple imposes rules on free trials, requiring developers to use in-app purchases to offer a free trial. After the user signs up, but before they can take a yoga app in the class, they must go through Apple’s payment flow, even though they won’t be charged until later, when it ends. Users can’t unsubscribe from in-app payments in the app – they must go to their Apple settings.  

“We wanted to offer a truly free trial, and only after the free trial would we prompt you to subscribe,” Simon said. “In general, we don’t want to make our money for users who forget to unsubscribe.”  

Down Dog didn’t think they were in violation by offering such a free trial, but then Apple’s App Store reviewers said that they were and blocked the app. Simon waited several days for a call back from Apple, but then tweeted after he was frustrated.  

“Four hours after we tweeted, we got a phone call from Apple,” though Simon missed it. The next morning, he connected with Apple, who said the issue had been escalated and the decision reversed.  

Simon said he decided to tweet his frustration because “I hate auto-renewing free trials, and I thought on this issue, we would be able to get user support.”  

Simon says the Apple has also rejected the Down Dog app for the ways it integrates with Apple Health. Apple requires developers to say in the app description in the App Store that the app works with Apple Health. He said app updates were blocked when Apple’s reviewers could not find the Health integration that was mentioned in the app description. Simon said his team realized from screen shots provided by Apple’s reviewers that the reviewers were using iPads, which do not support the Apple Health system.  

“We then had to explain to Apple’s own reviewers that Apple has decided not to support Apple Health on iPads,” Simon said, adding that blockage caused “arbitrary delays” of unrelated features.  

Simon also said the Down Dog app was blocked during the COVID-19 pandemic because it wanted to make the app free for users because of the pandemic, but Apple had said it was not allowed to use phrases like “lockdown” or other COVID-19 related terms.  

“The next day, Apple released their own COVID-19 app that would allow you to check your symptoms, which was featured on the front page of the App Store,” Simon said.

Simon said he does not believe Apple treats all app developers equally because Apple has an editorial team that selects specific apps to feature prominently in the App Store. “The most obvious example is the mere presence of the editorial team and the featured apps in the App Store,” Simon said.  

Simon said that Apple’s guidelines suggest against complaining publicly about Apple’ App Store review guidelines. “If you run to the press and trash us, it never helps. That was in the guidelines,” he said.  

APPLE CROSS EXAMINES SIMON 

Representing Apple, Meredith Dearborn Paul, Weiss begins cross examining Benjamin Simon at 1:18 p.m. PT.  

In 2020, Down Dog earned $10 million from iOS users, up dramatically from years before.

Simon says it is not possible to make an app that will open on iPhones without using Apple’s SDK. He also says that most of the company’s code is no longer in Apple’s Swift programming language. He says the company still uses the XCode programming tool provided by Apple but that “is because of Apple’s restrictions” and not any technical reasons.  
 
Simon testifies that the company uses “TestFlight” - an Apple app for testing new apps – but only does so because Apple does not allow any other method of loading software to iPhones.  

In 2021, for three days, Simon said he added a link subscribe on Down Dog’s website. Simon said he knew this violated Apple’s rule and did not tell Apple the truth when Apple asked about the link and Simon said that the link had only been intended to show up in the Android version of the app.  

Down Dog earlier this year included a message telling users about Apple’s app store policy, but the apps have remained on the store.  

Dearborn Paul ends here cross examination at 1:34 p.m. and Earnhardt resumes with a re-direct.  

Earnhardt asks what limits Down Dog faces developing for the web. He said that certain functions, like swiping a clock-like circle with a finger, do not work well on web apps.  

Earnhardt asks whether Down Dog negotiated its license agreement with Apple.  

Judge YGR breaks in with a question for Simon: “Do you find that objectionable that Apple has millions of developers and has one set of terms? Do you negotiate the various terms of agreements with your customers?”

Simon: “No.”  

Judge YGR “Do you find that objectionable?”

Simon: “Not necessarily.”

Judge YGR: “Yes or no.”  

Simon: “No.”  

Earnhardt ends re-direct of Simon at 1:39 p.m. Dearborn Paul declines any further questions on re-cross.  

Judge YGR has some detailed questions about the balance of users and numbers for Down Dog. She asks whether they can purchase a subscription through Safari on the iPhone browser.

Simon answers that yes, users can.  

“Oh they can?” Judge YGR asks.

Simon says: “We’re just not allowed to link to that from the app.”  

Judge YGR asks whether it’s easy for users to do that.  

Simon replies that it is. Users must log into PayPal or get their credit card number out, but they most also usually re-enter a password to authorize an in-app purchase. “It’s not clear whether it’s actually a smoother process” to purchase in the app, he says.  

Judge YGR asks how long Down Dog had the 30% commission messaging in the app. Simon responds that it was about four months.  

Judge YGR asks whether Down Dog saw traffic changes over that time. Simon says they did not, but only had a link to the lower priced subscription live in the app for three days. Judge YGR asks if he saw traffic patterns change during those days. Simon says it was hard to say because the company also had a sale going on, but that the link likely had a negligible effect.  

Judge YGR excuses Simon from the stand at 1:44 p.m. PT.  

EPIC CALL'S NVIDIA'S PATEl, COURTS CONCLUDES FOR THE DAY

Epic Games calls Aashish Patel, director of product management at Nvidia, who is sworn in at 1:45 p.m. Cravath’s Earnhardt begins the questioning. Patel wears a dark grey suit, white shirt, gray and dark red tie, and speaks through a mask with sheer sort of material through which you can see the movements of his mouth.  

Patel explains how Nvidia’s GeForce now streaming game service. It lives in the cloud and streams games down to a device. Nvidia does not actually offer the games for purchase – users much purchase the game in an App Store or a game store. Then they must come back to GeForce Now to play.

“Only once that App Store or game store verifies the game, is the user allowed to play the game,” Patel says.  

The computers in the cloud are similar to PCs. They cannot run Xbox, PlayStation or Nintendo games.  

GeForce Now can stream to either a browser or a native application. However, “the native application affords us a lot more control on video and quality.”  

Patel says “We had written an invested in a native application. We submitted it to Apple for review. A few days or a few weeks later, Apple rescinded their approval.”  

Patel says it would have been GeForce Now’s preference to be a native app.  

Patel says the web-based version that Nvidia offers now is more difficult for users to use compared to a native app.  

Native apps give Nvidia more control over things like latency. Latency hurts game play because it can cause problems such as turning too late in a racing game, despite the user having made the move at the right time.  

Patel said that Nvidia used “a combination of our engineering teams as well as user interface design teams” to make a native iOS app that cost time and money to make.  

Apple rescinded its approval of the iOS app and “provided a pointer to their application guidelines and said the application was not” in compliance. He does not remember exactly which guideline but believes it was related to remote desktop services.  

Earnhardt point to an Apple App Store guideline that allows for streaming games but says each title must be submitted as a separate app. To comply, Patel said, “We would have to take the 850 games that we have a license for and create individual app store apps and submit them for approval.”  

Nvida does not own the rights to those games, so it cannot do that, Patel said.  

Patel said that Nvidia faces streaming game app competition from Google’s Stadia and others.  

Patel says that GeForce Now faces limits on game play versus playing a game on a device. There are bandwidth requirements. And GeForce Now capacity is limited and sometimes must ask users to wait to play later.  

After several questions about other technical constrains, at 2:28 p.m. Earnhardt turns Patel over to cross examination by Apple’s attorney. Earnhardt had wanted to asked some questions related to sealed material but Judge YGR declined and said the court would hear the cross examination first.  

Apple attorney Jay P. Srinivasan, wearing a dark brown suit with subtle pinstripes, takes up Patel on cross examination. He first presses Patel on whether he is a neutral observer and asks about several critical re-tweets about Apple.  

Srinivasan also asks Patel whether some users might get a better experience via streaming if they have local machines that are less powerful than the cloud machines. Patel replies that some users may get a better experience.  

Patel says that as Nvidia expect its user base to increase and that “our goal is to steadily increase capacity as the business grows.” “We strive to have very low to zero wait time for paying users,” he said.

Patel has permission to add some 2,500 additional games to the GeForce Now lineup. “Fortnite is a popular title on GeForce Now. League of Legends is a popular....CyberPunk in the top 10.”  

Srinivasan turns to positive press reviews and asks about latency and some of the technical issues. Srinivas asks whether latency is a major issue for users.  

“Bandwidth has increased, and that does help the service have better quality,” Patel said.  

Srinivasan moves on to GeForce Now on iOS. He asked Patel about the positive reviews the browser version has received. Srinivas points to one review of GeForce Now for Safari on iOS that said games were “smoother than a slab of butter wrapped in silk.”  

“I have not read that specific review,” Patel responds, but he read other reviews, and while “that one has a lot of adjectives that I am not used to,” he remembered that most of them were positive.  

Srinivasan presses Patel on whether Nvidia pays anything to Apple for GeForce Now. Patel said Nvidia does not pay anything to Apple to enable to deliver the GeForce Now service, which Nvidia monetizes, through the Safari browsers.

At 3:05 p.m., Judge YGR has decided to stop the cross examination and move to seal the courtroom. She also wants to talk to counsel about their motions to strike expert testimony, and she may have to handle that tomorrow first thing. She doesn’t want to bore the public. “People might not be really be interested in listening to that kind of legal argument,” she said. “If you call in and you just hear lawyers arguing, it will be because of those pending motions.”  

Best,

Stephen Nellis

415.606.5922 - works for Signal, Confide and other services
stephen.nellis@...
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@stephennellis
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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