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Tim Cook defends Apple against Epic Games’ price-gouging claims

Apple CEO Tim Cook has taken the witness stand 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.

Cook was sworn in at the federal courthouse in Oakland, California shortly after court was called to session at 8am PT on Friday, putting the finishing touch on Apple’s defense in the suit filed by Epic Games.

Epic, which makes the wildly popular Fortnite video game, is waging a legal and public relations battle against Apple, arguing that the company runs an illegal monopoly that crushes app developers with exorbitant fees for all transactions.

Under direct examination, Cook said that Apple was justified in charging the 30 percent commissions it takes on all transactions made through the App Store, which anchors Apple’s $53.8 billion services business.

Cook testified that Apple has invested $100 billion in research and development since developing the iPhone, and that App Store revenue ‘provides a return on our investment.’

Apple CEO Tim Cook gestures from the elevator as he arrives in court on Friday to testify at the conclusion of a weeks-long antitrust trial

Apple CEO Tim Cook wears a plastic face shield as he walks through the Ronald V. Dellums building on Friday in Oakland, California before taking the witness stand in an antitrust trial

Apple CEO Tim Cook wears a plastic face shield as he walks through the Ronald V. Dellums building on Friday in Oakland, California before taking the witness stand in an antitrust trial

Cook was sworn in at the federal courthouse in Oakland, California shortly after court was called to session at 8am PT on Friday

He is seen above arriving at the trial

Cook was sworn in at the federal courthouse in Oakland, California shortly after court was called to session at 8am PT on Friday. He is seen above arriving at the trial

The CEO emphasized Apple’s devotion to consumers and commitment to privacy, saying that much of the company’s investments were targeted at preserving privacy.

‘Privacy, from our point of view, is one of the most important issues of the century. And safety and security are the foundation that privacy is built upon,’ he said. 

Cook also touted a program launched last year — after Epic filed its suit — that cuts the commission rate in half for software developers with less than $1 million in annual net sales on its platform.

Cook insisted that the reduction in App Store fees was primarily in response to the coronavirus pandemic and out of concern for small businesses, rather than a defensive move in response to litigation and potential regulations.

He also called the App Store an ‘economic miracle’, saying that almost 2 million people are estimated to have had jobs created through the App Store. 

Apple started with 500 apps, and now has 1.8 million, Cook said. ‘It’s likely been one of the most important job segments out there in a growth point of view over the last decade,’ he added. 

Apple's App Store chief Phil Schiller arrives in court on Friday as Tim Cook took the stand

Apple’s App Store chief Phil Schiller arrives in court on Friday as Tim Cook took the stand

"Fortnite" creator Epic Games' Chief Executive Tim Sweeney arrives on Friday for the final stages of the weeks-long antitrust trial at federal court in Oakland, California

‘Fortnite’ creator Epic Games’ Chief Executive Tim Sweeney arrives on Friday for the final stages of the weeks-long antitrust trial at federal court in Oakland, California

Apple's general counsel Kate Adams arrives at the Oakland courthouse on Friday

Apple’s general counsel Kate Adams arrives at the Oakland courthouse on Friday

The Apple CEO entered the courthouse through a side door, avoiding a large gaggle of TV cameras that had gathered at the main entrance.

However, he was spotted through a window of the courthouse as he made his way to the trail room. His testimony was broadcast live to the media on a conference call. 

Cook is expected to spend at least three hours making what are likely to be his most extensive public remarks on the App Store business. 

Just hours before he took the stand, media mogul and IAC Chairman Barry Diller, who is not a party in the case, weighed in and said that the App Store ‘overcharged in a disgusting manner’ in an interview with CNBC.

Diller said the Match dating app, which IAC spun off into a separate company last year, paid $500 million a year to Apple for App Store commissions, asking ‘Does that seem rational to you?’ 

‘The idea that they actually justify it by saying, ‘We spend all this money protecting our little App Store,’ Diller said. ‘I mean, it’s criminal. Well, it will be criminal,’ he predicted. 

Media mogul and IAC Chairman Barry Diller, who is not a party in the case, weighed in and said that the App Store 'overcharged in a disgusting manner'

Media mogul and IAC Chairman Barry Diller, who is not a party in the case, weighed in and said that the App Store ‘overcharged in a disgusting manner’

Apple CEO Tim Cook took the witness stand on Friday to defend the company's iPhone app store against charges that it has grown into an illegal monopoly (file photo)

Apple CEO Tim Cook took the witness stand on Friday to defend the company’s iPhone app store against charges that it has grown into an illegal monopoly (file photo)

The maker of Fortnite (above) is trying to topple the so-called 'walled garden' for iPhone and iPad apps that welcomes users and developers while keeping competition out

The maker of Fortnite (above) is trying to topple the so-called ‘walled garden’ for iPhone and iPad apps that welcomes users and developers while keeping competition out

Barry Diller brands Apple’s ‘quasi-monopoly’ in the app space ‘criminal’  

Diller also took aim at Apple saying the fees the tech giant charges companies for hosting their apps in its App Store ‘criminal’ and ‘disgusting.’ 

‘The idea that they actually justify it by saying, “We spend all this money protecting our little App Store.” I mean, it’s criminal. Well, it will be criminal,’ Diller said. 

Apple charges large companies 30 percent commission on their in-app transactions, lowering to 15 percent for some smaller firms.

Diller blasted the hefty proportion ‘irrational’ and accused the company of running a ‘quasi-monopoly’ alongside Google with its Google Play app store for Android devices. 

‘It’s irrational, 30%. I mean, it makes no sense,’ Diller said.

‘Match, little Match.com, pays $500 million a year to Apple to go through their store. Does that seem rational to you?’ Diller said. 

Diller’s IAC spun out the dating website into a separate business last year. 

Apple 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. 

The video game maker has waged a public relations and legal campaign, arguing that Apple acts anticompetitively by forcing developers to use Apple’s in-app payment system, which charges commissions of up to 30 percent on sales. 

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 percent 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.

Workers are seen carting filings by Apple lawyers into Oakland Federal Court on May 3

Workers are seen carting filings by Apple lawyers into Oakland Federal Court on May 3

A member of Epic Games legal team pulls a cart with documents while entering federal court on in Oakland, California on May 4

A member of Epic Games legal team pulls a cart with documents while entering federal court on in Oakland, California on May 4

Apple’s ironclad control over the App Store is already under investigation by regulators and lawmakers in Europe and the U.S.

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 percent, 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. 

In 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. 


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