Apple is set to take the stand Monday in a landmark trial that could alter the business model of the country’s most valuable company and serve as a catalyst for new antitrust laws.
Up for debate is how Apple allows apps to function on iPhones. The only way to install software on Apple’s mobile operating system, called iOS, is through the company’s App Store. Developers who make software for iOS must follow Apple’s rules and use its payment system, which charges a commission on every sale.
The trial will determine whether Apple’s control over iOS is a monopoly, and whether Apple can use that control to force developers to use the App Store and its payment system. One possible outcome in the case is a very different smartphone landscape, in which the powerful computers in everyone’s pockets operate more like desktop computers, where any kind of software is allowed to exist.
“Frankly, for Epic, it’s been a case of very good timing, because pretty much everybody around the world is looking at this problem,” said Herb Hovenkamp, an antitrust professor at the University of Pennsylvania Law School. “The DOJ I’m sure is paying close attention to this.”
Apple is also facing pressure from European regulators, who are looking into several aspects of Apple’s business. On Friday, the European Commission made a preliminary ruling that Apple is in violation of European competition law in the music streaming industry. The charge stems from a complaint brought by competing streaming service Spotify in 2019.
The outcome of the three-week trial, where the well-known chief executives of both companies are expected to take the stand, could have far-reaching implications.
If Epic wins, U.S. District Judge Yvonne Gonzalez Rogers, who will decide the case in the Northern District of California, could force Apple to give up control of app distribution, allowing customers to freely install software on iPhones, much like they do on desktop computers.
If Apple wins, the case could become a lightning rod for debate over new legislation in Washington and in states around the country, where lawmakers are taking a close look at whether new rules are needed to rein in Apple’s power. Evidence unearthed in the lawsuit could also become the basis for a future lawsuit brought by the U.S. Department of Justice, which is investigating Apple’s market power and has more leeway on arguments it can make in court.
Apple, Epic and the DOJ declined to comment.
The case forces Apple to defend its business tactics under oath. Tim Cook, Apple’s CEO, has taken the company to new heights, adding nearly $2 trillion of shareholder value since he took over a decade ago. During trial, he is likely to be cross-examined by lawyers for Epic who will aim to paint him as a monopolist who is hurting innovation and competition.
The Epic lawsuit represents a philosophical divide that the courts and lawmakers have yet to sort out: whether the mobile devices that play an increasingly important role in the lives of people all over the world should be open like traditional computers or tightly controlled by two companies: Google and Apple.
Epic’s lawyers will argue that Apple’s customers are “locked in,” and that the high switching costs from iOS to Android, Google’s mobile operating system, underscore Apple’s market power.
In emails that surfaced in the lawsuit, Apple’s senior vice president of software engineering, Craig Federighi, argued with Eddy Cue, Apple senior vice president of Internet software and services, about whether to allow iMessage, Apple’s proprietary messaging service, to be used on Android. Cue, who was in favor of an Android version of iMessage, was rebuffed by Federighi, who argued that an Android version would “remove an obstacle to iPhone families giving their kids Android phones.”
While Epic sees the emails as evidence that Apple erects barriers to switching form iOS to Android, Apple has argued there is nothing wrong with such tactics, because Apple is simply shying away from helping competitors like Google, which owns Android. Apple argues in the suit that customers switch from iPhone to Android at high enough rates that customers should not be considered locked in.
“It’s your phone. You should be able to run whatever software you want on it,” said Evan Greer, director of Fight for the Future, a digital rights advocacy group. Greer says Apple’s “stranglehold” on the App Store hurts competition and innovation, but also represents a human rights problem, because it gives authoritarian governments around the world a “choke point” to ban or censor apps.
Apple has argued that its tight control over iOS is necessary to keep the system secure and to protect the privacy of its users. Apple says it vets every app that is allowed on the App Store for malware. And the commissions it charges for digital payments go to funding the App Store, which provides tools that help developers build software for iOS.
Epic says Apple does a poor job of protecting users and is using the argument to justify its alleged monopoly power. In emails turned up during discovery, Apple executive Eric Friedman, who runs the company’s Fraud Engineering Algorithms and Risk unit, said the review process that vets iOS apps was “more like the pretty lady who greets you with a lei at the Hawaiian airport than the drug sniffing dog,” according to court records.
Epic’s first hurdle is to convince the judge that Apple is a monopoly. Only about half the smartphones in the United States are iPhones, but Epic argues Apple’s iOS is a market unto itself.
Apple wants Rogers to look at the case through a narrower lens. “Fortnite” is a video game, and an iPhone is just one of many ways to play the game, Apple has argued. Apple’s competition isn’t just Android. It’s Xbox, PlayStation, Nintendo and anywhere else “Fortnite” is available. Apple says it can’t be a monopoly when there is so much competition.
Simply having a monopoly is not a crime. Epic must also convince Rogers that Apple is abusing its alleged monopoly. Epic argues that because Apple forces all app developers to use both the App Store for software distribution and Apple’s proprietary payment processing system, Apple is violating an antitrust provision that prohibits tying one product or service to the sale of another.
Apple says Epic’s reading of the law is wrong because Apple’s payment processing system is part of one product: iOS. Tying can only occur if there are two separate and distinct products.
Because developers are forced to use Apple’s payment processing system, they must pay a commission of up to 30 percent on all revenue earned on the App Store. Apple recently reduced the commission to 15 percent for developers who earn less than $1 million in revenue per year. But that group of developers accounts for a tiny portion of the overall revenue on the App Store, according to industry analysts.
Epic’s lawsuit started when it gave iOS users of its “Fortnite” game an alternative payment option without Apple’s permission. By using Epic’s payment processing service, customers got a discount. When Apple discovered this, it kicked “Fortnite” off the App Store and Epic immediately sued.
The move by Epic was planned out well in advance. The lawsuit came with a big public relations campaign, including an ad comparing Apple to Big Brother in George Orwell’s “1984.”
Epic is also suing Google, which also removed “Fortnite” from the Play Store for the same reason Apple removed it. Google is slightly different from Apple, however, because it allows Android customers to install software outside of the Play Store. “Fortnite,” for instance, can still be installed in Android phones now. Epic argues it is still difficult to install software outside the Play Store.
Google declined to comment.
In a court hearing, Rogers admonished Epic for the theatrics around the lawsuit and the company’s calculated tactics on the App Store.
But the public relations component of Epic’s gambit against Apple, led by its founder and CEO, Tim Sweeney, a well-known figure in the video gaming industry, has also been successful.
Epic helped create the Coalition for App Fairness, a group of roughly 50 app developers, some big and some small, who aim to convince lawmakers to loosen Apple’s grip on mobile software. Members of that coalition testified on April 21 in front of the Senate Judiciary Committee for a hearing on the power of the app stores.
The trial evokes memories of the U.S. Department of Justice’s case against Microsoft more than two decades ago, the last time there was an antitrust trial of this magnitude involving a technology giant. That trial changed the public image of Microsoft and its founder, Bill Gates, when emails unearthed in the case put Microsoft’s anticompetitive tactics on full display, and a videotaped deposition of an obstructionist Gates hurt Microsoft’s case.
There are some similarities between Epic’s case against Apple and the one against Microsoft, which had control over the Windows operating system and was accused of using that power to hurt competitors, such as Netscape. Apple controls the iOS operating system even more tightly than Microsoft controls Windows.
Apple has argued that mobile phones are different from regular computers, because they are portable and contain more personal data and information, like location and photographs. Tight control is needed to ensure customer safety.
Epic’s legal team is led by Christine Varney who represented Netscape in its antitrust lawsuit against Microsoft. Varney also served as the antitrust chief for the U.S. Department of Justice under President Barack Obama.
But Epic’s case against Apple is unlikely to generate the same damaging fireworks as the Microsoft case. There have been no emails uncovered from Cook, a seasoned executive, discussing ways to leverage the company’s power over competitors, as was the case in the Microsoft trial. Apple listed Cook as a witness in the trial, but Epic did not, a sign that Apple sees Cook as an asset, rather than a liability, legal experts say.
There is some legal precedent supporting Epic’s position. In 1992, the U.S. Supreme Court ruled that the service and repair market for Kodak’s copiers was its own market. Despite the fact that Kodak had lots of competition for copy machines, it had market power when it came to repairs and service. The court ruled against Kodak in part because consumers who bought Kodak copiers were locked in. Epic has cited the Kodak case in its filings in the case against Apple.
Legal experts say they are unsure of how the judge will come down on Epic’s argument that the Kodak case applies. Since 1992, the courts have grown more favorable to large companies in their interpretation of antitrust law, so much so that some lawmakers see the need for an overhaul of the underlying laws.
In the Senate Judiciary Committee hearing last week, lawmakers grilled Apple’s chief compliance officer, Kyle Andeer, on its business tactics.
Sen. Richard Blumenthal (D-Conn.) called the tactics by both Apple and Google on their app stores worse than the conduct of Microsoft in the 1990s and said he supported strengthening antitrust laws.
“If you presented this fact pattern in a law school antitrust exam, the students would laugh the professor out of the classroom because it’s such an obvious violation of our antitrust laws,” he said. “Enforcement of them is too little, too late. Courts are overly deferential, agencies are reluctant to bring lawsuits and therefore we need to reform our laws is the takeaway here.”