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Apple pushes back against Epic claims to defend app-payment system

By Jon Swartz

Epic Games v. Apple got into the weeds Tuesday, as the gaming company's main economic witness clashed with an attorney for the iPhone maker.

David Evans, chairman of Global Economics Group, picked up where he left off Monday. For a second day on the stand, he asserted Apple Inc. (AAPL) has maintained a monopoly for more than a decade over the iOS in-app payment solutions for digital content, which has harmed consumers by raising prices for developers, who pass on some portion of their fees to consumers.

"Apple has substantial market power" in smartphone operating systems, Evans said Monday. Apple and Google's Android, he concluded, are a duopoly that have controlled 100% of the smartphone OS since 2013. Globally, excluding China, the split is 60%-40% Android; in the U.S., it's about even, he said.

Read more: Epic takes aim at Apple's financial advantage in App Store model (link)

When pressed by Apple attorney Daniel Swanson, Evans said he would "guess we've been retained" in the Google Play antitrust litigation. Swanson pointed out Evans previously had not testified in antitrust litigation during a grinding cross-examination that got into the weeds of defining in-store app payments.

Apple's game transactions are not substitutes for digital game transactions on the Sony PlayStation store nor Valve Corp.'s Steam, according to Evans. "They are not significant substitutes in the way we use the term," he said.

Swanson countered, however, that 11 apps use their own payment processing: Grubhub Inc. (GRUB), Wish, StubHub , Uber Technologies Inc. (UBER), DoorDash Inc. (DASH), Lyft Inc. (LYFT), Instacart, Postmates, Amazon Shopping (AMZN), Walmart Inc. (WMT) and eBay Inc. (EBAY)

"When I go to the App Store, it's because there's an app I want to get," Evan replied. "I don't go to the App Store and troll around for apps that have in-app purchases."

"By and large in the world we live in now, we are smartphone-based and app-based for much of what people do," Evans said later. "I don't believe that's really a realistic option."

An Apple legal strategist characterized Evans' testimony as evasive and stalling, and the economist struggled to pin down when the App Store became a monopoly.

Epic ended the day with Susan Athey, economics of technology professor at Stanford University's Graduate School of Business, on the stand. She's a former top economist at Microsoft Corp. (MSFT), and currently advises Expedia Group Inc. (EXPE), car-sharing company Turo and, which operates an online marketplace for people to buy and sell pet-care services. (An Apple lawyer dwelled on Athey's work for Microsoft.)

While Tuesday's dry proceedings were hardly grab-the-popcorn stuff, they are considered crucial in defining what constitutes a relevant market in the federal case. Epic Games Inc. faces an onerous task in establishing that Apple broke antitrust law with an ecosystem that gouges developers, who pass those costs to consumers, legal experts say.

"The question is, can Epic define these tech markets based on large ecosystems, with inherent monopoly power?" longtime antitrust attorney David Kesselman told MarketWatch. "If it can't, then the onus is up to Sen. [Amy] Klobuchar and others to change the law."

Regardless of Judge Yvonne Gonzalez Rogers' decision in the bench trial, Kesselman expects it to be appealed to the Ninth Circuit court of appeals.

Evans, whom Epic is leaning heavily on to prove its case, has detailed Apple's monopoly in smartphone operating systems as the relevant market in question in the federal trial being held in Oakland, Calif.

Smartphones and game consoles are different types of markets, he stressed, with iOS and Android examples of a "general purpose operating system" used for multiple apps, while game consoles are a special operating systems dedicated to gaming. It is Epic's contention that Apple has abused its dominance on the App Store to charge developers 30% commission fees; Apple counters that 30% is the industry average on similar app stores run by the likes of Alphabet's (GOOGL)(GOOGL) Google, Samsung Electronics Co. Ltd. , Sony Group Corp. (6758.TO) and others.

Larry Downes, project director at the Georgetown Center for Business and Public Policy's Evolution of Regulation and Innovation, has a contrarian view.

Downes believes the case boils down to whether Apple engaged in an abuse of market power that is harmful to consumers through higher prices, and the fore-closing of competition to developers.

On Tuesday, Apple poked a hole in Epic's assertion during the trial that fraud is rampant on the App Store because of a slipshod review process. Apple said its review team stopped more than $1.5 billion in potentially fraudulent transactions last year (link) by keeping nearly a million risky and vulnerable apps out of the store.

Apple's case could start as early as Friday. Apple Chief Executive Tim Cook is scheduled to be the last witness.

-Jon Swartz; 415-439-6400;


(END) Dow Jones Newswires

05-11-21 1923ET

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