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Apple’s App Store Not Anticompetitive, Economist Testifies

Apple’s lead expert took the stand Wednesday to refute Epic Games’ market definition in its antitrust fight with Apple over the strict requirements it imposes on app developers. The federal judge hearing the case wondered whether to apply an old antitrust doctrine requiring a duty to deal.

OAKLAND, Calif. (CN) --- The federal judge who will decide whether Apple runs its App Store in a way that abuses its power and stifles competition said Wednesday that she is interested in whether the App Store provides an essential facility for app developers to which Apple is required to provide its competitors unrestricted access.

“I have the ABA’s Antitrust Law book up here. I've heard quite a bit of evidence throughout this trial regarding how big Apple is and how anti-competitive it is,” U.S. District Judge Yvonne Gonzalez Rogers said Wednesday.

Reading from the book, she turned to Apple’s economics expert, MIT professor Richard Schmalensee, who was on the stand. She asked him whether Apple has a duty to deal if its App Store is “is so superior to anything else available that competitors cannot succeed without accessing it.”

“It sounds to me like what Epic is saying is 'we want Apple to allow us to deal on their platform,' and there are only two of these platforms,” she said, referring to Apple iOS and Google’s Android operating system. “And all of these competitors cannot be successful without access to these platforms.”

Schmalensee said the doctrine which arose from railroads that provide essential access across bridges doesn’t quite fit Epic’s case. For it to work, Epic has to be able to argue that it cannot be a viable online storefront unless it has access to Apple’s iOS platform. Epic does have access to iOS, he added, but it doesn’t like the terms.

The judge is considering where this “essential facilities doctrine” fits into the high stakes case where Fortnite game maker Epic claims Apple is abusing its monopoly power over iOS app distribution to foreclose competition.

Epic is targeting Apple’s requirement that developers users its in-app payment (IAP) solution, and the 30% cut it takes from every in-game purchase of Fortnite credits, or “VBucks,” that players can exchange for weapons, character skins and dances (emotes) with which to taunt their opponents. 

The dispute started when Epic Games introduced a “hotfix” to the iOS version of Fortnite, allowing users to pay it directly for in-app purchases instead of going through Apple and getting Epic banned from the App Store. Epic answered with a federal antitrust lawsuit that seeks no monetary damages, but aims to get Apple to change the way it runs its store, perhaps eliminating the rule prohibiting apps that act as storefronts.

Apple claims it has not refused to deal with Epic, but expelled it from the store for breaching its developer contract.

As the case drags into its second week, Apple called on Schmalensee to refute the testimony of his longtime colleague and collaborator, economist David Evans, with whom he’s written three books.

Schmalensee challenged Epic’s market definition, which Evans described earlier this week as a market for solutions for accepting and processing payments for digital content purchased in an iOS app.

"That might be the longest market definition I've ever heard,” Schmalensee said. “But it's not a plausible market. A market is something with buyers and sellers. There's nothing bought and sold in that market as far as I can tell.”

“Apple’s iOS business is clearly a platform linking consumers and developers,” he offered instead. "The App Store facilitates transactions between consumers and app developers.”

Apple’s IAP, he added, is just its way of seamlessly collecting its 30% commission. 

Schmalensee also disagreed with Evans’ testimony regarding the product at issue in the case, which Evans described as both app distribution on iOS and iOS in-app payment solutions.

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“Dr. Evans concludes that there is a separate demand for payment solutions distinct from demand for facilitating app transactions. Do you agree?” Apple’s attorney Daniel Swanson asked Schmalensee.

He answered, “What I've seen on that in his testimony is that developers would really rather not pay the 30% and would like to find another solution to handle their own payments so they don’t have to pay Apple. I don't view that as a separate demand for a service. I view that as a desire not to pay a commission.”

Swanson then asked if it is anticompetitive of Apple to require developers to use its IAP for digital transactions. 

“It is an efficient way to collect commission. It appears to be the natural business model for online stores," he said, adding that IAP is an integral part of the App Store itself, functioning like a credit card terminal that connects to a payment processor.

The 30% commission is also standard for the industry, he said.

Schmalensee drew a comparison between Apple’s IAP requirement to the anti-steering rules imposed on merchants by American Express, prohibiting them from skirting transaction fees by steering customers to use other credit cards at the point of sale.

The U.S. Supreme Court did not find those restrictions anti-competitive in Ohio v. American Express, in which Schmalensee submitted an amicus brief co-written with Evans.

Gonzalez Rogers interjected that she did not find the Amex case factually similar to Epic’s since merchants are allowed to display logos of all the credit cards they accept at their cash registers, giving customers a “visual indication of options.”  

Apple’s rules prohibit developers from directly communicating with users inside the iOS app, so they cannot steer users away from the App Store to purchase digital content elsewhere at a discount.

"What's so bad about it anyway, for consumers to have choice?” Gonzalez Rogers asked.

The problem is, Schmalensee said, is that it threatens Apple's revenue stream. “You're giving the consumer a better deal but undercutting the App Store's ability to collect commissions," he said.

Epic may not like the model, Schmalensee said, but those are the rules, and the Supreme Court says they are not anticompetitive.

Gonzalez Rogers didn’t seem persuaded by his answer. “I don’t think they’re factually the same,” she said.

The judge also heard from former antitrust enforcer Francine LaFontaine, who poked holes in Evans' proposed single-brand aftermarket of all apps on the App Store. The former Federal Trade Commission economist said Evans' definition is too narrow because it “focuses on the one platform and consumers have options to go and transact on other platforms.” 

In other words, people can go buy their V-Bucks on Safari, Steam and other places, and still use them on the app.
She said it’s also too broad because not all apps are good substitutes for one another.

The case hinges in large part on how the relevant market is defined. But Gonzalez Rogers said she has yet to see any authority from the higher courts on the precise way to define a market.

“There are a lots of different considerations that go into defining what the relevant market is,” she said to the attorneys at the close of Wednesday’s testimony. “If it was clear-cut you would agree. But you don’t.”

She continued, “It reminds me of qualified immunity. There are lots of things you need to think about. One side says it's black, the other says it’s white. Typically the answer is somewhere in the grey.”

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