Epic v. Apple: And the winner is…

MarketWatch reports that the antitrust experts’ verdict is in on Epic Games Inc.’s antitrust lawsuit against Apple Inc. – it’s deemed a split decision, with Apple earning an edge only because it is unlikely to be deemed a monopolist.

There is a real chance, however, that when federal Judge Yvonne Gonzalez Rogers, decides the bench trial later this summer or fall, she could try to force Apple to make changes to the App Store. The iPhone maker’s payment system and the 30% commission fee it charges software developers are the expected targets among observers of the recent three-week trial who spoke with MarketWatch.

Throughout closing arguments last Monday, the judge signaled she was troubled by monopolistic forces at work in the iOS ecosystem, but acknowledged that federal courts don’t run businesses. How she defines the relevant market in the historic case could lead to remedies that push narrow, nuanced prescriptive measures, but none of the experts that MarketWatch spoke with expected that she would outright rule Apple is exerting illegal control over a monopoly. “The judge will rule in Apple’s favor because the law is clearly on Apple’s side,” said Carl Szabo, vice president of tech lobbying group NetChoice, whose members include Google parent Alphabet Inc., Amazon.com, Facebook, and Airbnb. “And she, like other judges, does not want her decision to be overruled.”

If anything, he said, Epic’s website and app store offered evidence of ways to “circumvent” Apple’s In-App Purchase system, which is at the core of Epic’s lawsuit. Apple does not allow app makers to guide consumers to other ways to pay that would allow them to avoid the App Store’s payments system and commission fee, as Epic attempted to do before Apple kicked “Fortnite” out of its App Store, which prompted the whole legal battle in the first place.

“I tend to think that the judge may support Apple’s ability to manage their App Store, but find for Epic on forced use of ApplePay,” Ted Claypoole, an intellectual property lawyer told MarketWatch. Prescriptive measures that could address the 30% commission fees or seek alternatives to Apple’s payment system are more likely than a full ruling against Apple, experts said. “[The judge’s] questions [during the case’s conclusion on Monday] showed that she is uncomfortable with the lack of competition that Epic was able to introduce at the trial in terms of pricing and responsiveness to developer concerns,” antitrust lawyer Valarie Williams told MarketWatch. “I am not sure how that will translate into her final order.”

“Courts don’t usually like to regulate prices. I think she would be more likely to allow steering to other ways of paying,” Williams said. The ruling could hinge on the relevant market: Epic argued that the relevant market at the core of this case should be defined narrowly as iOS apps. Epic’s best path to legal victory may be the assertion that rival platforms — in particular, Android phones — are not reasonably interchangeable with iOS because of the “walled garden” constructed by Apple, according to Ari Lightman, professor of digital media and marketing at Carnegie Mellon University’s Heinz College.

Conversely, Apple insists there are plenty of options for developers within its store — there are 1.8 million apps across 27 categories — and plenty of market competition, in the form of online stores from Google, Microsoft, Samsung, Sony, Nintendo, and others.“If I decide the relevant market is gaming, there’s not a monopoly, but there is evidence showing anticompetitive conduct,” Gonzalez Rogers countered to Apple’s lawyers at one point Monday. “Well, if I decided the market was mobile games, how would that impact your analysis?”

Gonzalez Rogers asked tough questions of both sides on the final day of the trial Monday, without indicating where she stood, At one point, she admonished Epic.“Your formulation seems to ignore the reality that customers choose an ecosystem. There’s a lot of evidence in this trial that in the foremarket of devices, it is Apple’s business strategy to create a particular ecosystem that is incredibly attractive to its purchasers,” she said. “If those consumers choose to enter into that ecosystem, then your economic substitutes as you define them destroy the ecosystem into which they have made a choice to enter.”

In another exchange, she commented about Apple, “Well, Apple is not just being sued by Epic. It is also being sued by a class of developers. It’s not just [Epic Chief Executive Tim] Sweeney.” Apple attorney Daniel Swanson, who was handling the market definition portion of Monday’s proceedings, could only offer this. “I would be rather sad,” he said. “But the monopoly power would go away. We think other devices that iPhone owners have would come into play.”

Regardless of where Gonzalez Rogers lands in the historic case when she issues a decision in the summer or fall, don’t expect things to end there. The case is likely to wend through appeals courts for years, and could ultimately end up in the U.S. Supreme Court, like Google v. Oracle, according to legal experts. “As the judge remarked, the outcome won’t be decided with her decision, as the losing side will surely appeal the case to the federal court of appeals,” Larry Downes, project director at the Georgetown Center for Business and Public Policy’s Evolution of Regulation and Innovation.

What the trial did shine a light on was the bruising treatment of developers and profitability of the App Store — its margins are as much as 80% — which would require some form of corrective measure, according to Apple’s fiercest critics. “This trial is just part of the world-wide momentum addressing the competition in the digital marketplace, and I only expect it to grow,” Meghan DiMuzio, executive director of Coalition for App Fairness, a group of companies who want a “fairer deal” for the inclusion of their apps into the App Store and Google Play. Its nearly 60 members include Epic, Spotify, Match, and Tile. “As important as the Epic trial is, it’s just part of a broader discussion,” said DiMuzio.

—
Photo Credit: Camilo Concha / Shutterstock.com