San Ramon (California): Apple CEO Tim Cook will take the witness stand Friday to defend the company’s iPhone app store against charges that it has grown into an illegal monopoly — one far more profitable than his predecessor Steve Jobs envisioned when it opened up 13 years ago.
The technology company is counting on Cook’s appearance to put the finishing touches on Apple’s defense against an antitrust case brought by Epic Games, maker of the popular video game Fortnite.
Epic is trying to topple the so-called “walled garden” for iPhone and iPad apps that welcomes users and developers while keeping competition out. Created by Jobs a year after the iPhone’s 2007 debut, the App Store has become a key revenue source for Apple, a money-making machine that helped power the company to a $57 billion profit in its last fiscal year.
Epic is trying to prove that the store has morphed into a price-gouging vehicle that not only reaps a 15% to 30% commission from in-app transactions but blocks apps from offering other payment alternatives. That extends to just showing a link that would open a web page offering commission-free ways to pay for subscriptions, in-game items, and the like.
Apple fiercely defends the commissions as a fair way for app makers to help pay for innovations and security controls that have benefited both iPhone users and app developers, including Epic. Apple says it has invested more than $100 billion in such features.
It also argues that App Store commissions mirror fees charged by major video game consoles — Sony’s PlayStation, Microsoft”s Xbox, and Nintendo’s Switch — as well as a similar app store run by Google for more than 3 billion mobile Android devices. That is roughly twice the number of active iPhones, iPads, and iPods that rely on Apple’s store for apps.
Apple’s ironclad control over the App Store is already under investigation by regulators and lawmakers in Europe and the US.
Epic lawyers are expected to spend several hours grilling Cook on the stand. The questioning is likely to dissect the strategies Cook has drawn up since taking the CEO job nearly a decade ago, just a few months before Jobs died of cancer in October 2011.
The App Store ranks among Apple’s biggest successes during Cook’s reign. Since beginning with just 500 apps in 2008 the store has ballooned to 1.8 million apps, most of which are free. Apple has drawn upon its commissions and exclusive in-app payment system to help more than double the annual revenue of its services division from $24 billion in fiscal 2016 to $54 billion last year.
This boom wasn’t something Jobs foresaw. Shortly after the store opened, Jobs publicly said Apple didn’t expect the App Store to be very lucrative. Epic’s lawyers have repeatedly cited those comments as evidence that Apple reshaped the store to fuel its earnings growth once the popularity of mobile apps became clear.
Exactly how profitable the App Store is has been a point of contention throughout the three-week trial. An accounting expert hired by Epic estimated that its profit margins range from 70% to 80%, based on a review of confidential Apple documents. But Apple has insisted those numbers aren’t accurate because they don’t reflect expenses spread throughout the company’s operations.
Phil Schiller, a longtime Apple executive, and former Jobs confidant, conceded earlier this week that the company’s commission system had generated more than $20 billion in revenue through June 2017. Epic lawyer Katherine Forrest had presented him with that estimate, based on numbers that Apple publicly released in mid-2017.
Epic’s questioning of Schiller may foreshadow how Epic’s lawyers intend to go after Cook, who is generally unflappable in public and tightly focused on his message when dealing with reporters and lawmakers.
Epic’s lawyers have repeatedly referred to internal exchanges involving Jobs and other executives to depict Apple as using its investment in security and personal privacy as an excuse for preserving the huge profits that flow from its app store.
During Schiller’s testimony, for instance, Epic’s lawyers submitted a 2008 email Jobs sent to Schiller and another executive. On that note, Jobs wondered whether Google was taking aim at the then-nascent ad market that was emerging on the iPhone, which relies on operating software called iOS. “The more energy they devote to iOS the better,” Jobs wrote to Schiller.
Forrest then challenged Schiller with two questions. “You wanted Google to be beholden to Apple?” she asked, soon following with, “You were basking in the power to destroy a company’s business?”
Schiller answered no to both questions.