Judge Grills Apple CEO Tim Cook on ‘Lucrative’ App Store Model in Antitrust Case

Apple CEO Tim Cook took the stand Friday to defend his company’s practices, but faced a tough cross examination and a series of probing questions from the federal judge overseeing its antitrust fight with Epic Games.

This March 19, 2018, file photo shows Apple’s App Store app in Baltimore. (AP Photo/Patrick Semansky)

OAKLAND, Calif. (CN) — Apple CEO Tim Cook struggled to defend the App Store business model under intense questioning on Friday by the federal judge overseeing a closely-watched antitrust lawsuit with major implications for how Apple does its business. 

U.S. District Judge Yvonne Gonzalez Rogers, who will decide whether Apple’s App Store model violates antitrust law, pressed Cook on his company’s alleged “maniacal focus on the user and doing the right thing by the customer” by prohibiting third-party digital storefronts on the App Store.

“What is the problem with allowing users to have choice, especially in the gaming context to have a cheaper option for content?” the judge asked, noting that evidence shown during the three-week trial revealed that a significant portion of Apple’s App Store revenue comes from gamers who buy digital goods.

“The majority of the revenue in the App Store comes from games,” Cook admitted, but people have a choice between different models of smartphones and people are buying “certain safety and privacy principles” when they choose iPhone. 

Fortnite maker Epic Games, Apple’s foe in the case, is challenging that premise, believing Apple locks customers into iPhone and iOS dependence by making it too costly to switch to something else, while charging developers a hefty 30% commission for in-app purchases.

Apple also requires developers to use its in-app payment (IAP) system for all transactions and bars developers from transacting directly with customers within the App Store— strict rules Epic tried to circumvent through a hotfix to the iOS version of Fortnite that allowed users to pay it directly for in-app purchases instead of going through Apple.

The move got Epic booted from the store last August, which is how the parties ended up in court.

Apple contends that its IAP and other requirements provide developers and users with superior privacy and malware protections. Forcing Apple to house third-party stores would create “a toxic kind of mess,” he said.

“If you look at the malware on iOS versus Android versus Windows, it’s literally an off the chart level of difference,” Cook said, pointing out that 1-2% of malware lands on iPhone compared to the 30-40% for its competitors.

Cook also parroted the testimony of other Apple executives and experts witnesses, that users can go outside the App Store to buy VBucks, Fortnite’s in-game currency, for later use in the Fortnite app.

But Gonzalez Rogers wanted to know why Apple wouldn’t at least allow developers to inform users that they can buy cheaper VBucks elsewhere. 

“If you allow people to link out like that we’ll give up a total return on our IP,” Cook said.

“But you can also monetize it a different way,” Gonzalez Rogers said. “The gaming industry seems to be generating a disproportionate amount of money relative to everyone else. In a sense it seems they are subsiding everybody else.”

“There are clearly other ways to monetize but we chose this one because it’s the best one,” Cook said, adding that game developers get the benefit of Apple’s developer tools and exposure to its large consumer base.

“But it’s quite lucrative, and it’s focused on purchases that are being made frankly on an impulse basis,” Gonzalez Rogers said. “Now that’s a totally different question — whether that’s a good thing not. It’s not ripe for antitrust law. But it does appear to be disproportionate.

“I understand the notion that somehow Apple is bringing customers to the games,” she continued. “But after that first interaction, the developers are keeping the customers with the games and Apple’s just profiting off of that.”

“I view it differently than you do your honor,” Cook said.

He also told the judge that Apple has “fierce competition” from gaming consoles like Xbox, Sony Playstation and Nintendo Switch, though Gonzalez Rogers didn’t seem to agree that console options count as competition for gaming app distribution.

She also questioned Cook on a survey Epic Games presented at trial where 39% of developers said they were dissatisfied with Apple’s distribution services.

“If 39% of all developers are dissatisfied, how is that acceptable? It doesn’t seem to me that you feel the pressure of competition to actually change the manner in which you act to address the concerns of the developers,” Gonzalez Rogers said.

“We turn the place upside down for developers,” Cook said, adding that developer complaints are usually addressed immediately. “Looking at the amount of time for a change to be made in the company, it’s amazing actually.”

Be that as it may, Gonzalez Rogers said she didn’t see any evidence showing Apple routinely surveys developers or makes changes in response to their concerns. 

Epic’s attorney Gary Bornstein put Apple’s profit motives front and center when he asked Cook why Apple expelled Epic from the App Store for deceptive and malicious conduct, only to invite the developer back in sometime later.

“Apple offered Epic the ability to come back to the App Store even though you said the only viable option was to terminate business with Epic entirely,” Bornstein said.

“Correct,” Cook said, adding that Apple made the offer for the benefit of users, who seemed to be caught in a “business dispute” between the two companies.

Bornstein asked whether the “hundreds of millions of dollars you made off Epic” also had something to do with it.

No, Cook answered. “We weren’t thinking about the money at all, we were thinking about the user.”

Bornstein also grilled Cook whether users “pay Apple to make decisions for them” and whether users actually benefit from Apple’s tightly controlled and “curated” App Store.

Cook said consumers buy into a total ecosystem when they purchase an iPhone, and that they shouldn’t be forced to make the burdensome and complex decision as to where to purchase their apps.

“It seems like a decision they shouldn’t have to make,” Cook said.

Bornstein asked whether “Apple’s vast marketing machine” could educate consumers about the difference between its App Store and third party stores, in a situation where  “Apple would actually have to compete and persuade users that it had the best offering.”

“We’d have to differentiate in some way, ”Cook said. “I don’t know what we would do.”

“You have no idea if anyone could do a better job than Apple because you’ve never given anyone an opportunity,” Bornstein said.

“That’s my business judgment,” Cook said.

“And the market could have a different judgment if you allowed it to exist,” Bornstein shot back.

Though Apple has staked its reputation on an unwavering commitment to protecting its users’ privacy and its “minimal collection” of user data, its weakness on this front has been its conciliatory business relationship with China.

Under questioning from Bornstein, Cook admitted that Apple shares its customers’ data with the Chinese state-owned Guizhou-Cloud Big Data, and that Apple also complies with government requests to remove “illegal” apps from the App Store when they contravene China’s policies.

“That is not an unusual occurrence is it?” Bornstein asked, to which Cook replied, “I wouldn’t say it’s a regular occurrence.”

“We have to comply with the laws in each of the jurisdictions we operate in,” Cook said. “Governments have the right to pass laws for their citizens.”

“But Apple doesn’t have to do business in those jurisdictions,” Bornstein observed.

“I strongly believe it’s in the best interests of the citizens that we do operate,” Cook said.

Bornstein showed Cook an email Epic CEO Tim Sweeney sent to Mark Grimm, Apple’s Game Developer Manager in 2019.

Sweeney wrote, “There are deep perils in Apple operating the only allowed software distribution facility, as it allows oppressive regimes to demand developer participation in their surveillance and censorship programs, using Apple as a proxy for enforcement.”

Cook said he’d never seen the email before, and would not comment on it.

Both Epic and Apple will get a chance to make their final arguments before Gonzalez Rogers on Monday with a point-counterpoint debate. At the close of testimony Friday, the judge said her decision “won’t be for some time.”

%d bloggers like this: