Apple opens defense with testimony from App Store executive

Apple opened its defense in an antitrust court battle waged by Fortnite creator Epic Games on Monday by calling former marketing chief Phil Schiller to the stand to discuss the creation of the App Store and the landscape of competition in the smartphone industry.

Schiller, who oversees the App Store and was involved in the conception of Apple's core products, is the first company executive to testify as Epic rested its case in chief. He contested accusations from Epic that Apple abuses its power as the sole gatekeeper to the marketplace for apps on its mobile operating system by requiring developers to use its payment system for purchases made inside apps and pay commissions.

During the first two weeks of trial before U.S. District Judge Yvonne Gonzalez Rogers, expert and executive witnesses for Epic testified that Apple leverages its monopoly in the distribution of apps to more than a billion iPhone owners to strong-arm developers into accepting unfavorable conditions. Epic Games v. Apple Inc., 20-cv-05640 (N.D. Cal., filed Aug. 13, 2020).

Schiller, in an effort to deflect the characterization, aimed to portray Apple as a firm advocate of developers whose policies have promoted competition and preserved enhanced security and privacy on its smartphones. His testimony will be followed by Craig Federighi, vice president of software engineering; Eddy Cue, vice president of internet software and services; and chief executive Tim Cook later this week.

When the iPhone first launched, Schiller testified it did not come with any third-party apps because of the security and privacy risks associated with opening its mobile operating system to others. Apple created a formal marketplace for apps after it realized developers were "jail-breaking" devices to install software on them on their own.

"We were very concerned this could create unreliable and unstable devices," he said, wearing a dark suit and striped tie with a clear face shield.

Schiller said the commission on the App Store has always been 30% and that rate remains competitive. He noted that developers do not have to pay for hosting, engineering costs or marketing for their apps. Epic has pointed several times to a statement from company founder Steve Jobs indicating Apple does not intend to make money off the App Store.

But Schiller emphasized that Apple took a huge risk in launching the App Store and did not know whether it would pay off. Apple attorney Richard Doren, a partner at Gibson, Dunn & Crutcher LLP, showed another communication from Jobs in which he described the App Store as a "for-profit project."

The mechanism through which Apple facilitates purchases made inside apps, Schiller said, was created because it was requested by developers.

In 2008, the App Store did not offer games that sold in-game purchases, or microtransactions. Schiller said Apple implemented a payment system for developers to sell in-app purchases after he was sent an email detailing the business models used by competing digital marketplaces from Microsoft, Nintendo and PlayStation, which had the feature.

Asked why he wanted to be sent communications on these companies, Schiller said, "Because in our mind, these are competing stores."

Much of the expert testimony in the trial has been focused on establishing the boundaries of the market the two companies are fighting about in the case.

Epic argues Apple maintains a monopoly over the distribution of apps on its mobile operating system. Apple, taking a much broader view, says there is robust competition in marketplaces for digital games.

Schiller also defended Apple's decision not to approve an app from Microsoft called xCloud that offers a library of games for a subscription fee.

Game streaming services are required to separately submit their catalog of games for approval and to have customers individually download each game. Epic, which similarly wants to offer a game streaming app, and Microsoft have argued Apple inconsistently enforces its rules to stifle competition and favor its own products.

XCloud was not allowed onto the App Store, Schiller said, because Apple wants to show customers the apps' age ratings, privacy policies and parental controls.

Asked by Rogers, who was wearing a shirt with a yellow collar and a black mask, whether this rule is being equally enforced because Apple does not review the content of all the titles offered by Netflix, Schiller responded that the App Store is not a movie store but rather an apps and games store.

"When you bring in games in a different way, it no longer works as a game store," he said.

Schiller noted that Microsoft announced plans to reduce its commission rate for computer games from 30% to 12% in response to Apple's App Store Small Business Program in which businesses that earn more than $1 million are only subject to a 15% commission. Google, he said, similarly followed Apple's lead.

The trial will continue Tuesday with more testimony from Schiller. Cook is expected to take the stand on Friday.

Schiller testified that Apple has spent $100 billion in research and development since 2005.