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Apple Epic Trial

Is the App Store a monopoly? Epic’s expert makes the case.

For all the talk of "substitutions," the question comes down to whether Apple faces competition.

Two hands hold an iPhone in low light as the Fortnite screen glows on it

Epic's expert tried to zero in on the Fortnite maker's case in rigorous terms.

Photo: Chris Delmas/AFP via Getty Images

An economist testifying this week on behalf of Epic, in its landmark antitrust complaint against Apple, finally laid out the real crux of the game maker's complaint — and while couched in jargon, the argument is critical to Epic's case and larger questions about how to understand digital platforms.

David Evans explained in court on Monday and Tuesday that although Apple has competition when it comes to actually making smartphones, it monopolizes what he described as a market for distributing apps. That control, Evans argued, leads to inappropriately high prices for consumers and competitors as well as an array of other ills.

That's the argument Epic and many critics of big tech platforms have been making all along. Epic claims, among other things, that Apple uses its peerless economic muscle to extract its 30% App Store commission at a higher price than competitive markets would bear, and that Apple hobbles anyone who tries to get around the fee.

Evans, who is chairman of Global Economics Group, spent some time after Monday's discussion of Peely the Banana with another witness, trying to zero in on those ideas — though he had to use economic and research terminology like "substitution," "switching," "lock-in" and "aftermarket" to do it.

The first step for Evans was to answer the questions, "In what market is Apple an alleged monopoly?" and "How do we know?" Just being big, after all, isn't illegal. Antitrust law instead relates to what a company does with that power.

First, Evans explained, Apple monopolizes a market for getting apps to consumers. How did he know? He studied anonymous data from Epic's Fortnite players themselves before and after the game was taken off Apple's App Store. He found that most users only played on one platform — iPhone, PC, Xbox, etc. — in part because of the cost of switching to another way of playing. Those switching costs include the price of a new system, the difficulty of moving data, the appeal of a device that fits in a pocket or the desire to stick with other apps on the phone. Users' reluctance to switch platforms suggests there's less competition for getting apps than it might appear.

Evans also found that, even after Apple pulled Fortnite from the App Store, less than 20% of playing time switched over to a console or a PC. Playing time did go up on other platforms, but only by about nine minutes per week, versus the 56 minutes it went down on iOS, and even those who switched over likely were already playing on multiple platforms to begin with. "More than 80% of the [iOS playing] time was completely lost," Evans said.

Evans took the fact that players tended to only use one platform and rarely switched even when the game was removed to mean that for many consumers, there aren't really substitutions for Apple. Users are locked in to one competitor, in a way that's giving Apple power to destroy consumption of the game. Evans said that according to his analysis, although Fortnite and lots of other iOS apps are also available on other platforms, consoles and systems, Apple is essentially a market unto itself for most players because they don't want to or can't switch.

"My opinion is Apple has monopoly power in the iOS app distribution market," he concluded.

Costs and competitors

According to Evans, the lack of substitutions for the iOS version of Fortnite, even mobile competitor Android, implies Apple has monopoly power over the selling and supplying of apps to Apple users. That absence of serious competitors allows Apple to charge unreasonable fees or impose unfair terms on both app-makers and consumers.

Antitrust critics of big tech increasingly argue this point — that costs, behavioral nudges and the way data is guarded create lock-in across digital markets. Whether, or where, U.S. courts take up the reasoning is an open question, although Judge Yvonne Gonzalez Rogers seemed frustrated with some of the specific definitions and implications that Evans said he hadn't studied.

Evans on Monday also suggested, in a vague discussion referring to confidential financial figures, that Apple is able to pull in profits "vastly higher" than similar groups of companies, as monopolies often are. Evans said developers don't have enough incentive to create products for other platforms in a way that may break Apple's alleged monopoly.

He also discussed the other main prong of Epic's antitrust accusations against Apple: a related but separate alleged monopoly for Apple's in-app payments themselves.

It's important to discern how much users know upfront about costs of owning Apple devices, particularly what they'll pay for in-app purchases, Evans said. Such purchases relate to existing Supreme Court rulings about the antitrust implications of "aftermarkets." Common aftermarkets include, for example, the ink cartridges that you need for a printer or replacement parts you need for a car. According to Evans, buying apps and goods through the App Store after you've purchased a phone is one such aftermarket.

Even beyond market definition and the presence of monopoly, there are a lot of components to an antitrust complaint that Evans was trying to address. His overall point, though, was that Apple has monopoly power over distributing apps — in a technical, economically rigorous sense.

"Was it your understanding that Mr. Jobs was running a charitable enterprise here?" Epic lawyer Gary Bornstein asked at one point, referring to Apple's late founder. Evans said he was not.

Apple's view

The point Apple's economist will argue, not surprisingly, will be that everything Evans said is wrong. Antitrust cases often devolve into battles between experts, and economist Richard Schmalensee will argue on behalf of Apple that Evans completely misunderstands the market, the substitutions, the lock-in (or lack thereof) — everything. (Evans and Schmalensee have collaborated extensively in the past, so there's a bit of collegial sniping going on.)

During cross-examination, Apple hammered Evans for discounting Android as a competitor, forcing him to concede that Apple does not have a monopoly in the phone business by market share — approximately 47% of U.S. smartphone owners have iPhones. However, Evans argued, Apple still has monopoly power within the market because of users' reluctance to switch. Evans also had to defend his argument that buying a game on one platform doesn't substitute for buying it on another, while two vastly different iPhone apps, such as a graphing calculator and a video game, belong in the same market.

Apple's key argument in previous filings has been that what iOS really provides is a place for users to engage in transactions in the games they love, which they play across platforms. Substitutions in that market are numerous, according to Apple, with robust competition from the web, consoles and PCs. The in-app payment processing that Apple users and app developers are required to use? It's an integral part of the product that pays for improvements, not some afterthought that's invisible to consumers and delivers undue profit. And game transactions are thriving, Apple says, suggesting those fees and the privacy and security they pay for haven't harmed the market.

And since other platforms comprise robust competition, Apple will argue, it cannot possibly be a monopoly, which must therefore mean no violation of antitrust laws, especially if the market is thriving.

What Gonzalez Rogers will take from this is anyone's guess. She directed sometimes frustrated questions to Evans about whether players might have picked up other games in lieu of Fortnite when it was banned, if he had evidence of profit or loss on console sales and what she should make of his treatment of in-app purchases as separate from app distribution.

At one point Gonzalez Rogers pointed out Fortnite's in-game currency, V-Bucks, is available for purchase on the web where Apple doesn't get a cut. She also suggested Apple's prohibitions on app developers telling consumers they can buy digital goods elsewhere may be a problem. Evans began to explain why he thought the availability of V-Bucks on the web didn't alter his market definition and to discuss the prohibitions, but Gonzalez Rogers cut him off.

"Have you done any real analysis?" she asked.

Another Epic expert, Susan Athey, is testifying Wednesday. The trial is expected to last at least through next week.

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