Apple Epic Trial
Not even Phil Schiller knows the App Store's profitability, and that's great news for Apple
The longtime executive came out unscathed in Epic v. Apple.
Photo: Nina Riggio/Bloomberg via Getty Images
The longtime executive came out unscathed in Epic v. Apple.
Phil Schiller, one of the longest-serving and most public faces at Apple, consumed nearly two full days of testimony in the ongoing Epic v. Apple antitrust trial this week, having left the stand Tuesday afternoon. Despite the hours upon hours of questioning and cross-examination, Schiller and Apple largely came out unscathed due to the former marketing chief's skillful storytelling and artful dodging of some of the thornier lines of Epic's attack.
Schiller spent nearly six hours being questioned by Apple lawyer Richard Doren, who gave the executive ample opportunity to recount his days working with former CEO Steve Jobs in the '90s rebuilding and reorganizing the company into the powerhouse that would in 2007 release the iPhone. Schiller was given a chance to reveal that he in fact shares a patent on the iPod click wheel. Doren asked: How can a marketer have been involved in an aspect of such fundamental product design? Because even as a marketer he was "entirely involved in the definition and creation of our products from the very first concept up to when we bring it to market," Schiller gleefully explained.
Much of Apple's strategy here involved hammering home that point: that Apple is one big team working in unison, as Jobs envisioned it when he returned to save the company. That became an especially important tool for Apple on Tuesday when Schiller used it to deny any knowledge of the App Store's profitability.
The App Store, he said, is just one of many interwoven business units at Apple without a distinct P&L, or profit and loss statement. It's not fair to say the App Store makes an unjust amount of profit on the backs of developers because it's impossible to say how much it costs to operate the store; it's just one cog in the wheel of Apple and just one component of the overall iOS ecosystem. Even WWDC, which Schiller revealed Apple spends about $50 million per year on, isn't factored into the App Store's operating costs, even though arguably it should be.
That line of reasoning gave Schiller the ammunition he needed to fend off Epic lawyer Katherine Forrest, who grilled him on how it was possible no one at Apple knows how much money the App Store generates. "How is it as the executive responsible for this major business in the country, you don't know if it's profitable?" Forrest asked Schiller, who as an Apple Fellow still oversees the App Store. "It's not what we focus on. It doesn't come up," Schiller responded. Time and again, Forrest brought up the App Store's profitability, and Schiller would say it was not information he possessed because no one at Apple had calculated it.
"Doesn't anybody ever wonder, 'Hey, is the App Store profitable?'" Forrest asked, pressing the issue further at one point. When Schiller dodged once more, Forrest insinuated it was because Apple finds it "convenient not to" know, as a way of fending off antitrust pressure and developer backlash. "We don't deny that it likely is. It's just that we haven't managed the business that way," Schiller said, conceding at last that the App Store, estimated by Sensor Tower to have generated $22 billion in commissions for Apple last year, is likely a profitable enterprise.
This wasn't just a stubborn back-and-forth to get Schiller to admit to something plainly obvious, that of course the App Store makes money. The App Store's profitability is central to Epic's case because Epic has argued Apple slowly tuned the store in its early years to siphon away profits from developers and lock out competitors by adding restrictions and adjusting the rules to favor its bottom line.
Forrest went to great lengths to try to show that Apple designed the App Store without profit in mind, quoting Jobs's concession in 2008 that Apple did not "intend to make money off the App Store." But in 2010, Epic argues, Apple changed its mind when it saw it could use the marketplace and the closed nature of iOS to create a lucrative ecosystem it controlled.
Forrest pressed Schiller on the "whole plan," a reference to a line in an email he sent former iOS software chief Scott Forstall in 2008 arguing against letting Yahoo build a custom iOS widget engine. She also brought up decisions like introducing IAP, Apple's in-app purchase payment platform, and support for subscriptions after the App Store had launched, all of which Forrest argued were possible without having to fork over 30% to Apple.
But, she said, Apple implemented those specifically to ensure all revenue streams happening on the iPhone were under Apple's control. Schiller again maneuvered his way around that. "You keep going back to that sentence referring to 'the plan,' as if there was one special plan that we referred to," he said. Later on, Schiller retorted, "If there's any plan here, it's simply to come up with new features to help protect users from security and privacy scams."
Schiller wasn't flawless in his performance. He was on noticeably weaker ground when the obvious reality of Apple's business and policy interests ran up against the clean narrative he's helped construct over his 30 years at the company.
For instance, Forrest got Schiller to admit that one consideration of Apple's in lowering its commission for small businesses late last year was not just pandemic relief, but also antitrust pressure, regulatory scrutiny and the very lawsuit they were participating in: "The lawsuit was not the only thing that mattered, and there has been scrutiny and criticism of the App Store around the world and that mattered," Schiller said. "These were all contributing factors to doing this."
Schiller also seemed to be stretching when he argued that email exchanges between him, Forstall, Jobs and other executives discussing ways to make iOS more sticky and to increase lock-in were about security and nothing else. "Simply that if users are better protected from phishing scams on our systems, they're going to want to use our systems," he said. Schiller was also asked why in 2011 he wrote an email to fellow executives saying, "Food for thought: Do we think the 70/30 cut will last forever?" Schiller didn't have much to say, and he wouldn't agree with Forrest who suggested it was inevitable the commission structure would one day change.
But Epic at times also declined to pursue some of the more obvious arguments against Apple. Forrest chose not to dig in deeper on iMessage lock-in, despite emails produced as part of discovery showing Apple executives Eddy Cue and Craig Federighi discussing how keeping iMessage off the Google Play Store kept families from buying Android phones for their children. (Cue and Federighi are set to take the stand later this week, and perhaps Epic plans to question them directly on this point.) Instead, she homed in on password managers and TV show rentals as points of Apple lock-in, which Schiller dismissed as trivial because users can change passwords at will and most people stream media nowadays anyway.
Forrest also spent a fair amount of time on content moderation and App Store slip-ups, at one point going through a series of sexually explicit apps, including one called "Sex Positions 3D," and asking Schiller if he'd ever visited Reddit or knew what the website Pornhub was for. The implication was clear: The iPhone has a Safari browser, and it also contains apps featuring user-generated content, all of which can be just as harmful and readily accessible as a native app.
Even native apps can contain this content, too, if they disguise it well or carefully maneuver the App Store guidelines. But Schiller wiggled out of those points as well, with Apple's lawyer on redirect helping him lay out the defense that Apple has rules against pornography and nudity and requires platforms like Discord, Reddit and others to have adequate content moderation policies.
Perhaps the biggest opening Epic left unchecked was when Schiller laid out Apple's central concern with allowing competing app stores. "We make rules that apply to all developers," Schiller said. "If it's a rule that allows stores-within-stores, it allows every developer to have a store-within-a store if they choose to. I don't know how the idea of unreviewed apps within other apps an endless amount of times can be reviewed." It would be a free-for-all, he argued, and the iPhone ecosystem would crumble.
But Apple doesn't apply its rules equally, and internal documents have proven that. Apple courted Netflix with a list of perks and other benefits to try and convince the streaming platform to continue offering in-app subscriptions, ensuring a cut of that revenue would go to Apple. Netflix ultimately decided to remove its in-app signup option altogether. Amazon, too, got special treatment when Apple agreed to lower its commission rate for Prime Video in 2017.
Epic brought up neither of those, so Schiller didn't have to justify them as standard negotiations with trusted partners. If he did, it might have opened up the possibility that Apple would be asked to do the same for Epic's store or other app stores that want to compete on the iPhone, so long as Apple reviewed them beforehand, like with any other app.
Instead, Schiller left the stand late Tuesday having reminded us yet again how vital a role he plays as Apple's proudest and most well-mannered representative. Schiller, who was scheduled for the longest length of testimony of any of Apple's executive leadership, was largely unflappable, and it's unlikely Epic will get another chance before the end of the trial next Monday to dive this deep into the heart of its rival's inner workings.