Tim Sweeney and Epic Games kick off high-stakes antitrust confrontation against Apple

Trading in his usual T-shirt and cargo pants for a suit and tie, Epic Games CEO Tim Sweeney took the stand in federal court Monday, as part of a blockbuster antitrust trial that pits his company against the tech titan Apple.

The trial could have a huge impact on how apps are distributed to the world’s 1 billion iPhone users.

U.S. District Judge Yvonne Gonzalez Rogers is presiding over the trial, which is expected to last three weeks. Prominent tech industry executives are expected to testify, including Tim Cook, Apple’s CEO.

The trial in Oakland, California, is being held partly in person, as COVID-19 restrictions are being slowly lifted across the country. But there were some technical glitches on day one.

Dozens of Fortnite supporters, many of them seemingly young, hijacked the court’s teleconference line briefly before the trial, using the phone line to play music, shout curse words and slurs and ask for Fortnite to be restored to the App Store. (Fortnite players haven’t been able to download the game on the iPhone since August.)

Sweeney’s own testimony was tricky to understand over the teleconference line as well, as the microphone’s quality and Sweeney’s mask muffled the audio. And at one point, the trial was stopped, as one teleconference line completely failed.

Cary-based Epic launched its anititrust crusade against Apple last August, and the company is hoping to prove Apple’s App Store is overly restrictive and its fees (up to 30% for purchases made on the iPhone) are an exploitative monopoly.

At the heart of the trial is how Apple dealt with Epic’s popular Fortnite video game, which hundreds of millions of people use to compete in battle-royale-style competitions and to socialize.

Fortnite is a free game for people to download, and Epic makes money from purchases made within the game, for things like costumes and custom celebrations. For purchases made on iPhones, though, Epic had to give Apple a 30% cut.

If Epic had its way, the company would want its users to download its games onto iPhones directly from its Epic Games Store rather than the App Store, and it would bypass Apple’s mandatory 30% fee on in-app purchases.

Epic is currently barred from doing so, and it was kicked off the App Store when it tried to insert its own payment system within Fortnite last August.

“Apple’s policies have kept us from implementing the future we wanted on Fortnite,” Sweeney said during the trial.

In its opening argument, Epic’s lawyers painted Apple’s App Store as a “walled garden” that prohibits competition and makes it unlikely for consumers to switch to other operating systems.

Epic also argued Apple could easily open its iOS system, but chooses not to since the App Store’s exclusivity allows it to charge its 30% fees. In fact, Apple already operates a relatively open system with MacOS, the operating system used by its laptop and desktop computers, Epic said. You can download the Epic Games Store on an Apple computer, for example, while you cannot on the iPhone.

This was all done on purpose, Epic lawyer Katherine Forrest said, as a way to maximize how much money Apple could get from developers and customers.

Epic Games made $5.1 billion in revenue in 2020

Sweeney also defended his company’s lawsuit against one particular claim put forth by Apple.

Apple — which will soon become Epic’s neighbor with its new Research Triangle Park campus — claimed the lawsuit was an attempt to gin up support for a game declining in popularity.

Sweeney said that was not true. Rather Fortnite has grown to 400 million users worldwide, a number the company had not yet revealed before. Previous statements from the company put its user base closer to 350 million.

Sweeney also said Epic made $5.1 billion in revenue in 2020, another figure the company had not yet publicly revealed.

That meant the company grew in 2020 despite being booted out of the App Store in August. According to information submitted by Apple, 7% of Fortnite revenue came from iPhone users.

The success of Fortnite since 2017 has catapulted Epic into an industry juggernaut and gave it the financial might to even consider challenging Apple, which has a market capitalization of more than $2 trillion.

Epic, on the other hand, is valued at $28 billion and recently raised another billion dollars from investors. Its own Epic Games Store, which competes with the App Store and has fees of 12% for developers, is still not profitable, Sweeney said. Though, the company is pouring hundreds of millions of dollars into it and hopes it to become profitable within three to four years.

Epic’s own filings with the court put the App Store’s profit margin at around 78%.

Apple argues App Store promotes security on iPhones

Apple said its exclusive ecosystem was not about profits but about security. It’s a GPS-enabled device in your pocket, and it is much easier to lose in public, Apple’s lawyers said.

“Epic is demanding that this court undo Apple’s fundamental design decisions,” Apple attorney Karen Dunn said. Those decision are pivotal to protecting the security and privacy of iPhones. An open system, Dunn warned, would be fragile to bad actors that might try to hack an iPhone or load malware on an app.

Apple, its lawyers noted, rejects more than 40% of the apps submitted to its store — evidence the exclusivity of its App Store is warranted.

Apple also pushed back against Epic’s claims it has a monopoly that is harming developers.

The creation of the App Store has been an “economic miracle,” its lawyers said, referencing a quote from Cook. Apps have been downloaded billions of times since the App Store was introduced in 2008, and developers have made billions of dollars.

“Since the App Store first opened its doors in 2008, there have been more than 180 billion app downloads,” Dunn said. “This is kind of output antitrust laws dream about.”

30% fee is industry standard

A large focus of the day’s precedings was put on Apple’s 30% fee for in-app purchases. Apple said the number was not arbitrary, but an industry standard set before the App Store came into being.

The video game publishing platform Steam, Apple said, popularized the 30% fee on digital distribution in 2003, and other companies, like Microsoft, Google and Amazon, also charge the same amount.

In fact, the 30% fee could be viewed as an improvement, as distribution fees were much higher before digital publishing was popularized, in part, by companies like Apple, Dunn said.

Additionally, Dunn told the court Epic’s viewpoint is too narrow. There are many other places where consumers can download apps and games outside of the App Store, Dunn said, like video game consoles, such as the Xbox and PlayStation, as well as personal computers.

The fact people can move fluidly between all of those platforms prevents Apple from holding a monopoly.

Yet, antitrust cases are proliferating against Apple, and even members of the U.S. House of Representatives have described the company as a monopoly.

The European Union charged the company last week with violating its antitrust laws for how it controls the distribution of music apps, such as Spotify. The E.U. says the company’s fees give it an advantage over Spotify, which Apple competes against with its own music streaming service.

Similarly, Sweeney said on Monday it also must directly compete against Apple’s own business, and its control over the App Store provides a disadvantage.

This story was produced with financial support from a coalition of partners led by Innovate Raleigh as part of an independent journalism fellowship program. The N&O maintains full editorial control of the work. Learn more; go to bit.ly/newsinnovate.