Epic Games expert says Apple approach led to higher prices

An expert economist for Epic Games provided a deeper look Monday at Apple's business model as the sole gatekeeper to the marketplace for apps on its smartphone operating system that he said has led to higher prices, less innovation and an inferior distribution system.

David Evans, chairman of the Global Economics Group, testified that Apple's profit margins "provide evidence of market power" because in a competitive environment they "would have declined either as a result of prices falling or as a result of substantial investments in the App Store."

The testimony opened a pivotal phase of the trial before U.S. District Judge Yvonne Gonzalez Rogers that will focus on establishing the market in which Apple allegedly maintains a monopoly.

Apple offers a broad view of the market. It says the case is about all digital game transactions between developers and consumers, including those from Microsoft's Xbox, Sony's Playstation and Nintendo's Switch. Epic Games v. Apple Inc., 20-cv-05640 (N.D. Cal., filed Aug. 13, 2020).

Evans said the market is apps on iOS, Apple's mobile operating system. In this market, he said the App Store is the distributor, the product is apps and that the developers are the customers.

Asked why app stores on gaming consoles should not be included, Evans explained they are separate devices with different purposes and capabilities.

"The key distinction is that smartphones can be used anywhere, anytime," he said.

But a gaming console, he contrasted, is "typically a fixed device that is not something that people carry around."

Further aiming to establish that console app stores are not Apple's direct competitors, Evans noted only four of the top downloaded games on the App Store are available on Xbox, Playstation or Switch.

Using data Apple provided in the lawsuit to calculate Apple's estimated profit margins on the App Store, Evans testified that the company's "high and persistent" margins suggest it has "monopoly power in the iOS app distribution market."

Comparing its margins to other online retailers, including Alibaba, eBay and Etsy, Evans said Apple's was "vastly higher than the benchmark group of ... even the most successful of these companies."

The smartphone operating system market is a duopoly controlled by Apple's iOS and Google's Android, Evans maintained. He said those companies have had roughly a 100 percent market since 2013.

Apple does not have to respond to normal market forces because of the switching costs implicated with transitioning from an iOS device to an Android device, he said, essentially locking users into the iOS ecosystem once they adopt it.

In addition to the cost of buying a new phone and repurchasing apps, he noted most data will not transfer between the two operating systems. Texts in Apple's app for texting, for example, will not be retained if a user switches to an Android device.

"Switching between ecosystems isn't much of a competitive constraint on the iOS app market," he said.

Evans also followed up on testimony last week over Microsoft's business model and it's approach to its app store. It concerned claims from Lori Wright, Microsoft vice president of business development for gaming media, that the company sells consoles at a loss.

Evans said console manufacturers do so with the expectation they will make money on sales from their digital marketplaces, where they similarly charge a 30% commission on all transactions.

Rogers cut in.

"I have heard this a number of times -- in order for good law, you need facts," she said.

Evans said he has seen documents from Microsoft and financial estimates of Sony and Nintendo on their console sales.

Noting there's no direct evidence, Rogers replied she does not know if the theory "is based on a generic understanding of what's out there" or if she will "be able to verify this theory I've heard multiple times." She requested to see the documents he reviewed from Microsoft.

Evans responded that the "proposition that consoles are sold at cost is a noncontroversial point in the economic literature I've seen on the topic."

Sony has reported in financial filings its "strategic price points" for its latest console were lower than its manufacturing costs. Nintendo has contested claims it sells its consoles at a loss.

Trial will continue on Tuesday with Evans' cross examination.