Tim Cook, Apple’s CEO, was on the witness chair for the first time this morning in what is probably the most anticipated testimony of the Epic antitrust case against Apple. But instead of a fiery condemnation of Epic’s gimmicks and allegations, Cook offered a mild, carefully cultivated ignorance that left many of the key questions of the lawsuit unanswered or unanswerable.
This disappointment may not make for exciting coverage, but it could serve to dispel the dangerous, if somewhat dubious, argument that Apple’s App Store is a monopoly.
After being called by Apple’s own attorneys, Cook commented, Dorothy Atkins of Law360, one of two media members admitted to court, reported in her extensive live tweeting of the testimony. Cook’s quotations are as reported and should not be taken literally; The court record will follow when the document is compiled and published. By the way, Atkins’ set descriptions are engaging and humanizing, though Tim Sweeney, CEO of Epic, does a little oddly:
The questioning of Cook by his own company’s attorney was gentle, and the aim was to reiterate the reasons why Apple’s App Store is superior and sufficient for iOS users, while also claiming the presence of stiff competition. He admitted a handful of conflicts with developers such as: However, e.g. different priorities or the need to improve detection, said the company is constantly working to retain developers and users.
The facade of innocent ignorance began when he was asked about Apple’s R&D numbers – $ 15 billion to $ 20 billion annually for the past three years. In particular, he said Apple could not estimate how much of this money went into the App Store because “we don’t allocate that way,” meaning that the research budgets for individual products are not broken out by the others.
That doesn’t sound right, does it? A company like Apple knows exactly how much it spends on its products and research. Even if it cannot be broken down perfectly – advancement in macOS code can affect a function in the App Store – the company needs to know to some extent how and to what extent its resources are being made available. The differences between a conservative and a liberal estimate of R&D allocation on the App Store may be large, perhaps on the order of hundreds of millions, but make no mistake, these estimates are almost certainly made in-house. Otherwise it would be folly.
But because the numbers aren’t publicly declared and broken down, and because they’re likely to be a bit fuzzy, Cook can honestly say there isn’t a single number like (to make up an amount): “App Store R&D was $ 500 million in 2019. Dollar.”
If Epic doesn’t have a fixed number, Epic can’t gain a foothold: if it’s big, they protect their golden goose (enforce market power). If it’s small, they just collect the eggs (collect the rent via market power). Apple’s only win is not playing, so Cook is playing stupid, and consequently Epic’s reasoning looks like speculation (and, as Apple would argue, like fabulation).
He then followed a similar strategy to starve the competition over profits with a preventative shrug. He only commented on total net sales, which were $ 275 billion at a profit margin of 21 percent, and said Apple does not value the App Store’s revenue as a standalone business.
Certainly the App Store is a tightly integrated part of a larger business structure. But the idea that it can’t be rated as a stand-alone company is ridiculous. Again, it is almost certain that, like all of Apple’s divisions and product lines, it will be dissected and internally reported down to the smallest detail. But again, it’s only plausible that, for legal reasons, it’s not easy enough to say that “the App Store’s revenue and profits are like this,” thereby denying Epic its date.
The point is important enough, however, that Epic felt there was a need for an independent investigation. And among the first things Epic’s attorney brought up when the witness was turned over to him was an expert testimony that operating margins on Apple’s App Store were around 79 percent.
It was not in Apple’s interest to confirm or reject these numbers, and Cook again pleaded ignorance. The mask slipped a bit, however, when Epic’s attorney asked Cook to break down the confidential income numbers that combined the Mac and iOS app stores. While Apple protested, saying it was privileged information that could only be revealed in a closed court, Cook offered that the iOS numbers were “much larger” than the Mac numbers.
What we’re seeing here is another piece of financial flair. By mixing iOS and Mac revenue, Apple can tarnish the water on how much money is being made and spent in and for them. Epic’s attempt to unravel them was unsuccessful, but the judge is no fool – she sees the same things Epic does, but just as weak. Apple is trying to deny Epic a legal win, even when it comes to looking rather shady and manipulative.
This was further demonstrated when Cook was asked about Apple’s contract with Google, which keeps the search engine as the default on iOS. Cook said he didn’t remember the specific numbers.
If the CEO of one of the world’s largest tech companies told you they forgot the details of a multi-billion dollar, decade-long deal with one of the world’s other largest tech companies, would you believe them?
Little of the remaining testimony is indicative of anything. Cook discussed the complexities of operating in countries like China, where local laws have technical and political implications, minimizing claims that Apple expanded the scope of in-app purchases and which transactions the company gets a 30% cut from . A little more testimony will take place in a closed court, but we probably won’t hear about it as it is confidential information.
The process that is just ending has brought few surprises. Both sides set out their arguments at the outset, and much of it will be due to the judge’s interpretation of the facts. There were no dramatic surprise witnesses or smoking guns – it’s just a novel argument about what constitutes monopoly behavior. Apple firmly believes that the competition in Android is present and fierce, and that it also competes with Windows and consoles in the gaming world.
It seems almost inevitable that whatever the verdict, the case will be challenged and brought to a higher court, but that verdict will also be a strong indicator of how well Epic’s (and Apple’s) arguments have been received were. Even so, Epic and other critics of Apple’s App Store fees, which are immensely profitable even though the company disguises them, arguably have already achieved their goals. Clearly in response to developer unrest and bad press, Apple’s reduced 15% fee for the first million dollars is now being placed in a position to defend the making of the sausage.
The tarnishing of Apple’s anodized aluminum tower was always at least partially deliberate, and winning or losing Epic might feel like it got its money’s worth. In addition, the rematch in Europe is still pending.