Epic v Apple Day 6 - Daily Pool Report


Leah Nylen
 


Subject: Summary of pool reports for Monday, May 10.

 

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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

MLEX Market Insight

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