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Economists Offer Dueling Testimony on Product Substitutes in Epic v. Apple

Experts disagree on both the relevant market definition in Epic’s antitrust battle with Apple, as well as the substitutes available to consumers looking to purchase Epic’s digital currency VBucks.

OAKLAND, Calif. (CN) --- With much of the antitrust fight between Apple and Fortnite maker Epic Games centering on consumer choice and convenience, the warring tech giants trotted out dueling experts Thursday to quibble over whether computers and consoles are meaningful substitutes for iOS gaming and digital transactions. 

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.

Epic is challenging Apple’s requirement that developers use its in-app payment (IAP) solution, and the 30% cut it takes from every purchase Fortnite players make in the iOS app. Epic’s star economist David Evans testified earlier this week that the App Store functions as a single-brand market, effectively locking consumers into iOS dependence because it costs too much to switch to an Android phone. 

But Apple’s experts view the App Store as a two-sided marketplace that benefits both app developers and consumers. Unlike Evans, who defines the relevant market as iOS app distribution and in-app payment solutions for these iOS apps, Apple sees it as one market for digital game transactions. 

Both sides have argued fiercely over the proper market definition in the case because it will factor heavily in U.S. District Judge Yvonne Gonzalez Rogers’ decision as to whether Apple’s conduct is anti-competitive.

Evans’ market definition is wrong, Apple expert Lorin Hitt testified Thursday, because Evans focused on the substitutability of devices rather than the digital game transactions the App Store provides developers and consumers; transactions that the two sides can freely conduct on other platforms.

The Wharton School professor of operations, information and decisions said Fortnite fans have plenty of options, both for playing the game and buying  in-game credits, or “VBucks” to spend on virtual goods.

“There are a variety of ways in which consumers can meet up with developers to transact," he said.

He also refuted Evans’ claim that customers don’t often switch to the Android operating system once they’re locked into Apple’s iOS.

“People do indeed switch platforms when they can,” he said, citing an undisclosed industry study that claims 26% of consumers switch between Apple and Android, as well as a sealed document submitted by Google.
He also testified that of the Fortnite players who use iOS, 35.9% also use other platforms. Users logged a little over 10% of gameplay on iOS, and a little under 90% on computers, consoles and other platforms.

As for in-game purchasing, Hitt said 75.9% of iOS users don’t buy anything. “Of the remaining consumers that do purchase, about 15.8% play Fortnite on iOS but never buy anything there,” he said. The remaining 5.6% only buy on iOS and nowhere else, and 2.8% buy on both iOS and non- iOS platforms.

"The vast majority of spending and play is on other platforms,” Hitt said. 

In fact, iOS accounted for only 13.2% of Epic’s revenue from March 2018-July 2020, or $745 million out of $5.6 billion in total game revenue for that time period. Hitt also said Epic retained 81-88% of spending after its explosion from the App Store.

On cross, Epic’s attorney Yonatan Even attacked Hitt’s claim that iOS users can buy digital goods on the web as a substitution for iOS, showing him an exhaustive spreadsheet of all the popular iOS games that are not available on PCs, like Candy Crush, Clash Royale and Big Fish Casino. 

Any in-game items they offer for sale are not available to purchase on the web. Clash Royale, for example, offers in-game currency, but it must be purchased through the app since its developer’s website does not process payments. 

Hitt admitted that he had not gone through personally and checked to see if each popular iOS game was available across platforms.

Even said that in fact, Epic’s research team had found only three developers that offer gaming storefronts on their websites — Roblox, PubG and Epic Games.

Hitt said that doesn’t change his analysis. “Certainly we also have examples where it’s very, very easy, such as the purchase of V-bucks,” he said, adding that he’d bought plenty of the in-game currency on the web.

Gonzalez Rogers observed that Even's examples made the process for buying in-game items, or even playing iOS games on the web “pretty difficult.”

Epic later brought in Michael Cragg, an economist and chairman of the consulting firm The Brattle Group, to assail Apple’s market definition as too narrow because it focuses exclusively on gaming apps.

Epic’s goal has been to distinguish itself not just a game developer, but a creator of a virtual world where people can and meet up with friends, attend concerts and design islands in "creative mode."

Cragg said Apple’s market is also too broad because it assumes that consoles and mobile devices are interchangeable. He said consoles tend to offer “static” games that are more complex.

"They take advantage of the fact that you have a bigger screen and different ways of interacting with the game and as a result those games provide a different experience," he said.

Mobile games are on the other hand, "are simpler and experience has to be limited because of the size of the screen.” 

Even Fortnite, which is offered on both platforms, provides a different experience for console and mobile users.

“Fortnite is being played in different ways on these platforms,” Cragg said. “So the platforms from a consumer perspective don't act as substitutes for each other since game play is done in a different way.”

On cross, Apple’s attorney Daniel Swanson grilled Cragg over the online stores offered by Apple’s rivals and whether they view themselves as competitors to the App Store. Craig said he did not know.

Swanson also dwelled on Cragg’s past work with Microsoft to raise doubt about Cragg’s credibility when he said he didn’t know Microsoft’s view on the subject.

Last week, Microsoft executive Lori Wright testified that the company does not view itself as a competitor to Apple, at least with respect to the Xbox and the iPhone. 

Epic expects to wrap its case on Friday.

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