Apple’s Epic Battle Heats Up

Dear Rich Lifer,

The trial between Epic Games and Apple grabbed worldwide attention early this month when lawyers entered the courtroom to do battle.  

The $28 billion gaming giant accused Apple of violating antitrust laws after it yanked Epic’s popular video game “Fortnite” from the App Store.

Apple continued to maintain that its app-marketplace policies are just and that Epic breached its contract with Apple when it allowed Fortnite players to pay for the game’s currency using Epic’s own payment processing system at a rate lower than Apple’s. 

Epic believes their move to breach their contract was warranted due to the 30% commission both Apple and Google take from purchases made through their app stores. 

The trial could redefine the multibillion-dollar market for distributing apps on mobile devices.

Today we will break down everything you need to know about the second week of the trial and bring you up to date on the latest information coming to light. 

And what the challenge to a key business segment of Apple could mean for it’s stock price…

Week Two Overview 

Much of the second week of the trial focused on testimony from various economists that both sides called to defend their stances. 

The expert-witness testimony has centered on whether smartphones are interchangeable with other video game platforms and the definition of a market in the digital age.

Some are calling this week of the trial the “battle of the experts.”

Gamma Law managing partner David B. Hoppe says that although Epic has made a decent effort in asserting its view of iOS as “a gaming universe unto itself,” Apple managed to “parry every thrust Epic has made.”

Here’s what the key witnesses had to say…

Key Witnesses for Epic

One expert witness for Epic was David Evans, a University of Chicago economist, who argued that game consoles aren’t good substitutes for smartphones because they can’t be used to access the internet by consumers on the go.

If they could, he said, “people wouldn’t use smartphones,” explaining that even the portable Nintendo Switch doesn’t have cellular connection.

He also went on to say that Apple’s rules prevent developers from informing consumers if their prices for in-app purchases take into account the iPhone maker’s 30% commission or if consumers could get better deals elsewhere.

Another witness for Epic was Susan Athey, economics of technology professor at the Stanford Graduate School of Business. She testified that Apple locks consumers into its mobile operating system, known as iOS, because switching to any other operating system would force them to repurchase all of their apps. 

Epic attorney Yonatan Even presented an email from 2013, which revealed Apple executive Eddy Cue told current Apple Fellow Phil Schiller and Chief Executive Tim Cook: “Who is going to buy a Samsung phone if they have apps, movies, etc., already purchased? They now need to spend hundreds more to get where they are today.”

Key Witnesses for Apple

In-app purchase pricing was covered by Lorin Hitt, a professor at University of Pennsylvania’s Wharton School. He testified that developers can charge various prices on iOS devices, attempting to prove that Apple has a flexible App Store. 

When pressed by Epic’s counsel, Mr. Hitt could not explain how such transitions were possible and ultimately said his research team had determined it was possible, and he stood by their findings. 

Mr. Hitt also showed that in 2016 Apple lowered developer fees on long-term subscription sales and noted that Apple plans to lower them again this year for companies that generate less than $1 million in annual revenue through its marketplace.

He further noted that anti-competitive measures tend to result in reduced quality. However, he argued that this doesn’t seem to be the case as developers have “been able to raise their prices because consumers perceive the value in what they’re offering.”

Another witness for Apple was Richard Schmalensee, emeritus professor of economics at the Massachusetts Institute of Technology, who stated that Epic’s belief that the App Store is a monopoly is incorrect.

What will it mean for Apple’s Stock?

Former Apple executive Phil Schiller attempted to provide insight into how many games would be potentially impacted by the ruling of the trial. 

Mr. Schiller claimed that only 17% of iOS games are freemium (a free download with the option to make in-game purchases) like Fortnite.  6% of iOS games are premium (an upfront purchase, although some will also have microtransactions). 75% of all games are completely free.

The exact profits of the App Store are still uncertain. When Mr. Schiller was pressed to present a number, he told the court that Apple has never broken down its finances to determine whether the App Store makes more than it costs to run.

However, he did confirm that Apple’s 30% commission fee has raised over $20 billion for the company between 2008 and 2017.

What’s clear is that a lot is at stake for Apple as it transitions from relying on hardware sales to relying more on services. The App Store accounts for by far the largest share of Apple’s service segment.

Just look at this dashboard of estimates from Treifs. The App Store’s near 30% share compares to just about half of that for licencing fees, the next biggest segment… and a paltry 3% for Apple TV+.

A loss could be a big hit to Apple’s stock. 

Where is Tim Cook? 

Apple CEO Tim Cook will likely be the last witness called for Apple’s defense. Mr. Cook has been the chief executive of Apple since 2011 and will likely testify about Apple’s corporate values and operations, the launch of the App Store and Apple’s current competition. 

On Tuesday, Judge Gonzalez Rogers questioned when Mr. Cook would take the stand. Apple attorney Richard Doren stated: “It’ll be the last day of our case, we believe.” 

There will be much more to cover as the trial wraps up and the verdict is announced, so stay tuned for more updates that will have lasting ramifications for the digital economy…

To a Richer Life,

The Rich Life Roadmap Team 

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