Antitrust trial judge asks if Apple should be regulated as a utility

The federal judge presiding over an antitrust battle waged by Fortnite creator Epic Games against Apple considered Friday whether Apple should be regulated as a public utility.

Touching on the broad movement to rein in big tech companies in courts and Congress, U.S. District Judge Yvonne Gonzalez Rogers hinted that a possible outcome of the case is to treat Apple's mobile operating system as an essential service because the App Store is a foundation of the digital transactions market. She called Apple's services "foundational" and "absolutely essential" for the ability of developers to reach more than a billion iPhone owners.

The observation came as Epic approached resting its case accusing Apple of abusing its power over the iOS software market to charge developers monopoly commissions of 30% for purchases made inside apps and restricting alternative payment processing methods. The second week of the trial has featured dueling expert testimony on the boundaries of the market, including from two longtime collaborators serving on opposite sides of the case whose friend-of-the-court briefs have been cited by the U.S. Supreme Court.

Epic argues Apple maintains a monopoly over the distribution of apps on its mobile operating system while Apple says there is robust competition in marketplaces for digital game transactions. Epic Games v. Apple Inc., 20-cv-05640 (N.D. Cal., filed Aug. 13, 2020).

As expert economist David Evans took the stand for the second time to contest testimony from Apple, the chairman of the Global Economics Group and University College London professor said gaming consoles are a "niche industry" and should not be considered a competitor to Apple. Operating systems controlled by Google and Apple, he said, comprise a "big portion of the digital economy."

Rogers cut in to ask. "Are the smartphones utilities?"

Evans pushed back on comparing access to smartphones to electricity. He would not advocate for Congress, he said, to regulate Apple and Google as utilities.

"You don't think that the government should break them up or something to add competition like they did with the steel industry," Rogers asked.

Evans responded that he does not support splitting the companies.

"I'm a strong believer that antitrust laws, when properly used, can deal with the problems," he said. "Antitrust law is a flexible method that I can think can be very useful for reining in and dealing with competition problems in the digital economy,"

The remark was not the first time Rogers suggested Apple might have a duty to deal with developers because of its dominance in the mobile operating systems market. On Wednesday, she asked Apple expert economist Richard Schmalensee, professor of economics at the Massachusetts Institute of Technology, whether Apple should be considered an essential facility.

Like Evans, Schmalensee challenged the consideration of Apple as a public utility. The two economists serving on opposite sides of the case are longtime collaborators.

During questioning by Apple's counsel, Evans was grilled on whether Apple's rules prohibiting developers from steering customers away from purchases inside apps, where the company can exact its 30% commission, were upheld in an antitrust case against American Express. Both cases deal with rules prohibiting merchants from avoiding higher fees by encouraging patrons to use another payment service.

Evans agreed with Apple attorney Daniel Swanson, a partner at Gibson, Dunn & Crutcher LLP, that the high court concluded merchants cannot impose a preference for payment methods in which they obtain more revenue. But the expert economist clarified that "the government had not proved that American Express had market power," unlike Apple in this case.

Testimony from Ned Barnes, Epic's accounting expert and director of consultant firm Berkeley Research Group, over the App Store's massive profitability followed. He concluded that the App Store had profit margins of 74.9% in 2018 and 77.8% in 2019.

Apple contested the accuracy of the figures.

An analysis from Barnes showed Alibaba in 2019 had a profit margin of 29.4%. eBay's profitability was lower at 21.5%.

Trial for the day wrapped up with James Mickens, Harvard computer science professor, taking the stand. He testified that Apple's App Review guidelines to get onto the App Store provide "minimal additional security benefits."

Asked why phones running the Android operating system have more security issues than iPhones, Mickens replied that they are both equally susceptible to malware.

Mickens will resume his testimony on Monday.