Silicon Valley’s highest-profile court case in a decade begins next week, and it could lead to a decision that would change the landscape for app developers, consumers and U.S. law.
When Apple Inc.
and “Fortnite” maker Epic Games Inc. square off in federal court in Oakland, Calif., on Monday, this much is at stake: the livelihood of thousands of app developers and the very definition of antitrust law. The eyes of Washington, D.C., not just the San Francisco Bay Area, will be riveted as Epic attempts to make the case that Apple’s App Store rules unfairly leverage the tech giant’s dominance.
Familiar battle lines have hardened since Epic sued Apple in August and attempted to bypass Apple’s 30% commission fee via a server software update that skirted the App Store payments system. Apple countersued in September, and removed “Fortnite” from its App Store, preventing iPhone users from playing the popular game.
The case “will help decide key issues about control of an ecosystem and if a third party can charge their customers on their own terms,” Tim Bajarin, president of market researcher Creative Strategies Inc., told MarketWatch.
Bajarin and others believe Apple has the stronger case if it “provides a huge audience to Epic and gives [it] still the lion’s share of the profit,” he added.
“Apple did not force them to sell on their site. It was Epic’s choice,” Bajarin said.
In a trial that is expected to last three weeks, Apple executives, including CEO Tim Cook, software head Craig Federighi and former top marketing executive Phil Schiller are scheduled to testify, according to a court filing by Apple on April 14. Live audio of the day’s proceedings will be available for up to 500 journalists, two of whom will be designated as pool reporters and report live from the courtroom daily. Exhibits will be posted online.
Day 1 in court could shape up as a digital shoot-’em-up. After Epic and Apple present opening statements, Epic CEO Tim Sweeney is expected to take the stand. Later in the trial, Schiller is scheduled to be Apple’s first witness, and, after more expert testimony, Cook is slated to be the iPhone maker’s final witness, during the week of May 17.
The 12-year-old App Store is an ecosystem with 28 million members in 227 countries and regions, and it houses 1.8 million apps for more than 1.5 billion iPhone owners. Apple Services, in which the App Store is the crown jewel, hauled in $15.76 billion in the December quarter, up from $12.72 billion in the year-earlier quarter. Cook has repeatedly highlighted the services business as a formidable engine of growth the past few years.
That revenue is based on the large chunk of app developers’ revenue that Apple keeps, which Epic has challenged. The onus is on Epic to both show that its contract with Apple is illegal, and that Epic did not breach that contract when it bypassed the App Store with its own store, according to Adam Kerpelman, director of strategy for business-to-business company NetWise.
“This is a tough fight for Epic,” Kerpelman, who has a legal background, told MarketWatch.
Ultimately, the outcome of the momentous case hinges on the success of each company’s legal team in selling a narrative. While Apple intends to prove Epic plotted to disrupt the App Store to maximize profits, Epic will insist it was forced to confront Apple after years of unsuccessful negotiations to put an end to what it and others call Apple’s history of using its platform to unfairly limit competition to its products.
Consumer harm vs. developer harm
The influence of the case extends well beyond Silicon Valley and could help redefine antitrust law — something lawmakers have been unable to do, despite frequent saber rattling over the influence of Big Tech on the economy and on American culture.
“This is not just about Apple being a monopolist, but a new way of interpreting antitrust law,” Valarie Williams, an antitrust attorney based in San Francisco who is closely following the case, told MarketWatch.
Antitrust law started with a populist bent, in the protection of mom-and-pop businesses from marauding corporations. It morphed to the Chicago School approach that took hold in the 1970s and 1980s, with a focus on efficiency, prices and consumer welfare. A new approach, however, harks back to the original theory of structure-oriented competition policy to preserve innovation, which could mean trouble for Apple and Amazon, both of which oversee platforms that critics claim put smaller companies at a competitive disadvantage. It is called the “New Brandeis” or “Neo-Brandeis” movement because it, like the early 20th-century Supreme Court Justice Louis Brandeis, is concerned with the downsides of bigness and economic concentration. The argument was summarized in a legal blog post from late 2018 called “A Brief Overview of the ‘New Brandeis’ School of Antitrust Law.”
One interested party in Apple-Epic with plenty at stake financially is Ben Volach, founder of Blix Inc., the maker of an email app that is also suing Apple over its 30% App Store commission.
“Apple is monopolistic by locking in consumers with the sign-in feature,” Volach told MarketWatch. Blix’s suit defines Apple as operating monopolistically in the U.S., with about 61.5% of the U.S. mobile market vs. Android’s approximately 38%.
“It’s like the last line of the song ‘Hotel California,’ ” Volach says. “You can check out any time you like, but you can never leave.’”
Yet few companies have been willing to take on Apple in court. Few have the money, time and nerve to take on the only U.S. company in history to achieve a market value of more than $2 trillion, thanks to more than 1 billion iPhone customers, in the view of Volach, antitrust attorneys and software companies. “People are terrified of retaliation from Apple if they take legal action,” Volach said. “Perhaps it takes a loss in court to encourage others to join in later.”
A setback in court for Apple would also pique the interest of the politicians on both sides of the aisle who view the company as a monopolistic threat.
The U.S. House of Representatives Judiciary Committee on April 15 approved the recommendations of a scathing 450-page report advocating legislation to rein in Big Tech’s expansive power. The report, released last October, recommends an overhaul of antitrust law to counter the growing influence of tech behemoths.
In an April 9 letter, Sens. Amy Klobuchar, a Minnesota Democrat, and Mike Lee, a Republican from Utah, of the Senate Judiciary Committee’s Subcommittee on Competition Policy, Antitrust and Consumer Rights chided Cook for belatedly backing out of providing testimony at an April 21 hearing on antitrust. (Cook cited the coming Epic trial as a reason for declining to testify; Kyle Andeer, Apple’s vice president of corporate law and chief compliance officer, took his place.)
“More than half of internet traffic comes through mobile phones, whose users rely on mobile applications to access online content and services — and the vast majority of mobile apps are downloaded from either Apple’s App Store or Google’s Play Store,” the senators wrote. “Apple’s power over the cost, distribution, and availability of mobile applications on the Apple devices used by millions of consumers raises serious competition issues that are of interest to the Subcommittee, consumers, and app developers. A full and fair examination of these issues before the Subcommittee requires Apple’s participation.”
During the Senate hearing, lawyers from Spotify, Match and Tile claimed that steps taken by Apple had undercut their competitive status while at the same time charging them millions of dollars in App Store fees annually.
“Apple abuses its dominant position to insulate itself from competition,” Horacio Gutierrez, head of global affairs and chief legal officer of Spotify, testified. “We have been successful despite Apple’s anticompetitive behavior.”
As Apple and Epic lawyers furiously filed documents in the days leading to the trial, regulators in Europe were reportedly about to charge Apple with anticompetitive behavior for the first time. The charges stem from Spotify’s SPOT complaint in March 2019 that Apple abused its control over which apps appear in the App Store to restrict competition against its Apple Music service. A crucial element of Spotify’s allegation is that Apple’s 30% fee made it difficult for Apple Music rivals to market themselves.
The historical impact of Apple-Epic trial
In the pantheon of technology-industry legal cases, only a few are as significant as Apple v. Epic.
Perhaps the most consequential was just resolved. In April, Google prevailed in the Supreme Court, in a 6-2 decision, in its decade-long tussle with Oracle Corp.
over software development.
Nearly two decades ago, a chancery judge in Wilmington, Del., ruled in favor of then–Hewlett-Packard Co.’s $25 billion merger with Compaq Computer Corp. in 2002. The company subsequently was split into HP Inc.
and Hewlett Packard Enterprise Co.
Yet the closest parallel to the Apple-Epic case is Microsoft Corp.’s
face-off with the Justice Department in the 1990s over how the software giant tied its fledgling internet browser to its dominant Windows operating system. Netscape Communications, a far smaller company whose browser had been the industry leader, took a position similar to Epic’s, and the resulting case led to restraints on Microsoft’s outsize ambitions that opened up adjacent markets for the likes of Google and Facebook Inc.
More on the Microsoft case and its effects: Big Tech was built by the same type of antitrust actions that could now tear it down
Where Apple v. Epic lands on the historical timeline depends on the outcome, which will resonate from Silicon Valley to the Beltway. “The importance of the lawsuit simply comes down to its result,” Volach said, with a sigh of apparent exasperation. “If Apple loses it, it is hugely significant for generations to come. If it wins, it’s business as usual.”
The onus will be on Epic to make the case that Apple enjoys monopoly status in a fragmented smartphone market, said Dan Wang, an associate professor of management at Columbia University.
“It will be hard to prove with the platforms of Android and Samsung,” Wang told MarketWatch.