Digital marketplace future at heart of Apple v Epic Games trial

An antitrust court battle grappling with the future of digital market transactions opened Monday with "Fortnite" creator Epic Games detailing an alleged decadelong scheme by Apple to create a closed marketplace for its apps where it controls all operations to extract monopoly fees from developers.

Apple, in an effort to deflect the accusations, portrayed itself as a benevolent jobs creator and competition promoter that maintains exclusive oversight of its App Store to preserve enhanced security and privacy on its smartphones.

The defense strategy pits the credibility of Epic, which claims it's suing the world's most valuable public company to advance innovation and lower costs for developers and consumers, against that of Apple, which argues that its practices are necessary to ensure the safety, security and quality of apps. It sets up clashing narratives between the game maker's highly publicized campaign depicting Apple as a monopolist because it's the lone distributor of apps and controls the only payment system to more than 1.5 billion iPhones and claims from Apple that Epic only resorted to suing after failing to secure a special deal for itself.

Both sides of the case, over allegations that Apple engages in anticompetitive behavior by offering no alternative to its marketplace and its in-app processing system, focused much of their arguments on the market in which Apple allegedly has a monopoly.

Epic says the market is apps on the App Store.

Apple, offering a less narrow view of the market, says Epic ignores all other digital gaming platforms that it competes with, including Microsoft's Xbox, Sony's Playstation and Nintendo's Switch. It's impossible, the company says, not to be a monopolist of its own products.

U.S. District Judge Yvonne Gonzalez Rogers will decide whether Apple illegally stifled competition and if so, the remedy to fix the conduct, in a bench trial expected to last at least three weeks. Epic Games v. Apple Inc., 20-cv-05640 (N.D. Cal., filed Aug. 13, 2020).

In her opening statement, Epic attorney Katherine B. Forrest emphasized that the company isn't seeking damages or a special deal from the litigation.

"Epic is suing for change," the Cravath Swaine and Moore LLP partner and former federal judge for the Southern District of New York said.

Forrest outlined a series of emails between Apple founder Steve Jobs and chief executive Tim Cook, among other executives, that she argued revealed them scheming to intentionally build the App Store as a "walled garden" to lock people into using their products, an occurrence called "network effects" that economists recognize as a major driver of monopolization. She said, "The garden could have had a door. There was no reason that it needed to be closed."

Apple instituted the 30% fee on in-app purchases, Forrest said, with no consideration of security or maintenance costs.

"There's a name for businesses that set prices without regard to costs: monopolists," she said.

The App Store launched in 2008. Apple implemented a requirement a year later that developers use its payment processing system.

The App Store's profit margins in 2019 were nearly 80%, according to an Epic analyst's estimate in the case that Apple says is inaccurate.

When Epic chief executive Tim Sweeney took the stand wearing a clear face mask, he testified that Apple often makes more money from certain apps through its commissions than the developers of the game.

Defense attorneys objected to the claim.

Apple attorney Karen L. Dunn, based in Washington, D.C., told Gonzalez Rogers that the App Store has created unrivaled economic growth through the creation of millions of jobs and businesses. Noting that there's been over 108 billion app downloads, the Paul Weiss Rifkind Wharton & Garrison LLP partner said, "This is the kind of output antitrust law dreams about."

The relief that Epic is requesting to force Apple to allow a third party marketplace for apps and an alternative payment processing system, Dunn argued, will wipe out the company's reputation as a safe, reliable and secure brand that users have come to associate with its products.

Apple also wielded a recent order from a federal appeals court dismissing the Federal Trade Commission's antitrust lawsuit against Qualcomm in defense of its practices. In that case, Dunn said that the court recognized a business' right not to "deal on terms and conditions that competitors might prefer."

The bench trial continues Tuesday.