US judge presses Tim Cook on App Store fairness

The federal judge presiding over Fortnite creator Epic Games' antitrust court battle against Apple held nothing back on Friday, questioning Apple chief executive Tim Cook about the fairness of the App Store's business model.

During a continuous line of questioning lasting more than 10 minutes, U.S. District Judge Yvonne Gonzalez Rogers told Cook, "It doesn't seem to me that you feel pressure or competition to actually change" Apple's relationship with app developers.

The exchange came on the last day of testimony of the trial on whether Apple has a monopoly with its App Store. The outcome will have wide-reaching implications for efforts to rein in the world's most valuable public company in Congress and in court.

Cook, wearing a face shield over his glasses and a dark gray suit, took the stand for more than two hours as the closing witness for Apple. He was pressed in the first trial he's testified in over accusations that Apple has abused its power on the ability of developers to market apps to more than a billion iPhone owners. Epic Games v. Apple Inc., 20-cv-05640 (N.D. Cal., filed Aug. 13, 2020).

At the outset of her questioning, Gonzalez Rogers got Cook to acknowledge that the majority of revenue from the App Store is generated by purchases made inside games where Apple gets 30% of all transactions. She followed up by examining whether Apple's rules for game developers are overly restrictive.

"So what's the problem with allowing users to have a choice, especially in the gaming context, to have a cheaper option for content?" she asked. She referenced rules prohibiting developers from directing users to places to buy items offered inside apps at a cheaper price.

"We would be giving up our return on our intellectual property," Cook responded.

But Gonzalez Rogers replied that there are other ways to monetize Apple's innovation that do not take advantage of game developers.

"The gaming industry seems to be generating a disproportionate amount of money relative to the amount of intellectual property you're giving them, and everyone else," she said. "In effect, it seems like they're subsidizing everybody else."

Although he accepted that "there is some subsidy," Cook offered a clashing interpretation of the value Apple's centralized distribution platform for apps provides to developers. He explained that the company drives traffic to the App Store by hosting free apps without subjecting them to a commission.

Gonzalez Rogers remained skeptical of the reason Apple takes a cut of transactions made inside gaming apps and not others. She said, "You're charging gamers to subsidize Wells Fargo."

Game developers owe Apple a cut of their profits, Cook replied, because they are using Apple's payment processor to facilitate transactions inside apps.

Gonzalez Rogers appeared skeptical that the reason justifies Apple's 30% cut.

"I understand this notion that somehow Apple is bringing customers to the gamers," she said. "But after that first interaction, developers are keeping customers in the game. Apple is just profiting off of that it seems."

Cook disagreed. "We're creating the entire amount of commerce on the store" by "focusing on getting the largest audience there," he said.

Epic has outlined what it says is a decadelong scheme by Apple to create a "walled garden" for its apps that locks in customers to using Apple's mobile operating system. Epic has pointed to expert reports that claim the App Store has a 78% operating margin.

Cook dedicated a large portion of his testimony on Friday to contesting the accuracy of those reports. He testified that they do not reflect the full costs of operating the App Store.

Apple has tried to show it's only one player in the distribution of gaming apps competing with app stores offered by Google, Sony, Microsoft and Nintendo. It has aimed to portray itself as a firm advocate of developers whose policies have promoted competition, emphasizing multiple times the launch of the App Store Small Business Program in which developers who earn less than $1 million in revenue are only subject to a 15% commission.

During another sharp back-and-forth, Gonzalez Rogers questioned Apple's claim that it rolled out the program because it was worried about the COVID-19 pandemic's impact on small businesses.

"It looks like, from what I've seen, that this wasn't the result of competition," she said. "It seems to me a result of pressure you're feeling from investigations and from lawsuits."

Cook maintained that the primary motivation was to help small businesses but that antitrust scrutiny was "in the back of our head."

He noted that competition led to Google dropping its commission to 15% on the first $1 million developers earn from its app store.

Gonzalez Rogers concluded her questioning by citing a survey that found 39% of developers were dissatisfied with Apple's app distribution services.

Cook said that Apple rejected 40,000 apps a week and that the incentives of developers and users, which Apple prioritizes, are sometimes not aligned. Asked if he has another survey on this issue, he replied that he does not receive regular reports on this issue.

During the first week of trial, Epic chief executive Tim Sweeney acknowledged he does not know how opening up Apple's app distribution system would impact other developers.

Trial was scheduled to wrap up Monday with closing arguments in which Gonzalez Rogers will ask both sides questions she has presented to them in advance.