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Apple Epic Trial

Epic CEO argues Fortnite trial is an existential fight for the future

Day two in Epic v. Apple featured the second half of multi-hour testimony from the Epic CEO.

Epic CEO argues Fortnite trial is an existential fight for the future

The trial threatens to reveal the App Store's commission bounty.

Photo: David Paul Morris/Bloomberg via Getty Images

Epic CEO Tim Sweeney finished his time on the stand Tuesday afternoon, during day two of the Epic v. Apple trial. His multi-hour testimony offered a rare glimpse at the philosophy and business strategies of one of gaming's most powerful and influential executives, if only in the context of his quest against the most valuable tech company on the planet.

The theme emerging from both days of testimony is that Sweeney sees this as a fight that goes well beyond a single game and even a single platform. In Epic's eyes, suing Apple is an existential fight for the future for media, computing and software distribution, and maintaining the status quo would represent a major setback for Epic's ambitions.

Sweeney faced cross-examination from Apple counsel Richard Doren, while Epic lawyer Katherine B. Forrest was given an opportunity to construct more ironclad defenses to some of Apple's sharper lines of questioning during redirect. Among the many questions and answers that arose during Sweeney's day-two testimony, four major points became clear.

Epic and Sony's relationship is an Apple attack line

Apple spent a fair amount of its cross-examination of Sweeney questioning the exec about the relationship between Epic and Sony with regard to the PlayStation platform. This is in many ways one of Apple's strongest lines of attack because, as court documents have made clear, PlayStation is the most dominant platform for Fortnite by both player count and revenue. Meanwhile, iOS accounts for just 5.5% of overall Fortnite revenue through 2020. "It makes you wonder what we're even doing here," Apple lawyer Karen Dunn said during the iPhone maker's opening argument.

Doren raised a number of questions about Sony's negotiations with Epic. The most important of those was how Epic paid Sony additional revenue over the standard 70-30 revenue split on PlayStation to compensate for cross-play, a feature Epic received significant pushback over and which it had to carefully orchestrate across all major console platforms.

Why is this relevant? Apple's line of argument is that Epic's major financial and strategic concerns over Fortnite are the cause of friction with Sony and other console makers, not Apple. And yet Apple is the one Epic has chosen to target because, in Apple's eyes, this is less about trying to ensure a more fair playing field for Fortnite on mobile and more about trying to disrupt the entire iOS ecosystem for financial gain. If Epic were truly concerned about the 30% cut, would it not have gone after Sony, the true Fortnite moneymaker, instead of Apple?

The differences between consoles and phones are evident. But will it matter?

Sweeney and Epic's lawyers offered some explanations to the PlayStation argument in their console versus phone rebuttal. For one, Sweeney pointed out that game console makers are willing to negotiate, making the 70-30 cut more palatable because a store owner, like Microsoft, can often sweeten the deal with free marketing, partnership efforts and perks.

Submitted exhibits showed extensive discussions between Sweeney and Xbox chief Phil Spencer in which the two execs discussed favors Epic could do for Microsoft if Microsoft opened Xbox Live to free-to-play games like Fortnite without charging its standard subscription fee. (It included Sweeney's now-infamous line, "You'll enjoy the upcoming fireworks show," referencing the lawsuits.) Epic's argument is that Apple's platform is differentiated because its owner is unwilling to bend (unless you happen to be Amazon), making the App Store fee more punitive over time.

In one somewhat perplexing exchange, Sweeney was asked by an Epic lawyer whether he'd accept a deal from Apple for a lower App Store commission that applied only to Epic, and he replied he would. Though this may have signaled Epic's many unheeded attempts to negotiate with Apple ahead of the so-called "Project Liberty" campaign, the answer potentially undermines Epic's argument that it's fighting for the "basic freedoms of all consumers and developers," as Sweeney wrote last on Twitter last summer.

Sweeney was pressed further on this point and clarified that Epic "never negotiated a different commission structure with the console makers." But he also repeated his argument that game consoles, which are largely single-purpose devices and not general computing ones, are often sold at a loss and make up the difference through software sales. In Sweeney's eyes, that justifies a higher commission.

That led to perhaps the most amusing courtroom display thus far, in which Sweeney was asked to demonstrate the complexity of a Nintendo Switch and its detachable controllers, much to the bemusement of Judge Yvonne Gonzalez Rogers. "You can see I'm not a Switch player," Sweeney said, as he fumbled with the controllers.

The point of the exercise, including a hypothetical from Epic's lawyer over checking a bank balance at the doctor's office using a game console, was that phones are multi-purpose, general computing devices and that game consoles are not valid substitutes. It's not clear to what extent Gonzalez Rogers will buy this argument as the trial goes on, but it's a central one to Epic's defensive strategy as it tries to deflect Apple's comparisons between the App Store and console platforms.

The Epic Game Store is a huge money sink, and Epic's motives are unclear

A lengthy part of Sweeney's testimony was dedicated to explaining the business model behind the Epic Game Store, which, according to court documents, loses hundreds of millions of dollars a year and won't be profitable for nearly half a decade. Apple's lawyer made the point that the Epic's PC marketplace, because it pays minimum guarantees to developers to secure exclusive games and compensate developers and publishers for giveaways, may end up losing close to $1 billion total by 2024, the earliest point at which it could conceivably turn a profit.

The point here is a savvy and strategic one for Apple's defense, because it paints Epic as a cash-flush competitor willing to spend enormous sums of money — far more than it gives up to Apple in Fortnite fees — to compete with Valve on Windows and establish its competing software marketplace. Apple's lawyer quoted an email from Sweeney in which he says "obviously the direct ROI scenario here is super crappy," referencing the Epic Game Store, but that "the long-term value is in bringing consumers into Epic's multi-game, multi-platform social and ecommerce system."

Apple is trying to establish the Epic Game Store as an underlying motivation for Epic here, in part because Sweeney has outright admitted he'd like to distribute an iOS version of the store on iPhones and iPads that mirrors the company's PC version. And if Epic is willing to lose that much money competing on PC for a much larger share of consumers, what, then, is all the fuss about on iOS?

The future of Fortnite hangs in the balance

Sweeney's most salient testimony came near the end of his session when he was asked to explain what's at stake for the future of Fortnite, and why the fight for alternative app stores and payment methods on iOS is so important to Epic. Sweeney said the App Store's in-app purchase restrictions present an "existential issue" for Fortnite and its potential of evolving into a true metaverse-style platform.

"The long-term evolution of Fortnite will be opening up Fortnite as a platform for creators to distribute their work to users … and creators will make the majority of profits," Sweeney said. "With Apple taking 30% off of the top, it makes it very hard for Epic and creators to exist in this future world."

In other words, Epic sees Apple's platform fees as a threat to what Fortnite could become in the future, not necessarily what it is right now. If creators are selling digital goods on Fortnite, and giving a cut (presumably 12%) to Epic, it's not ideal to turn around and give 30% of that smaller cut right to Apple, Sweeney argues.

It's clear Epic has an uphill battle establishing the importance of iOS to its overall business when it represents such a small chunk of Fortnite's revenues, not to mention the difficulty in convincing Gonzalez Rogers that Epic's motivations here are predominantly altruistic and not just purely financial. Yet much of the case's path from here will depend on testimony from third parties, Epic employees, and, most importantly, Apple executives, who will have to mount the ultimate defense of the App Store as the trial moves forward.

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Image: Peloton and Protocol

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