Thread by @thedextriarchy

T-minus 10 until Day 8 of Epic v. Apple. More testimony from Epic expert witness Susan Athey, then Apple’s first experts Richard Schmalensee and (possibly) Francine Lafontaine. Yesterday’s stuff below:

theverge.com/2021/5/11/2243…

https://twitter.com/thedextriarchy/status/1392130942379102210

Belated congrats to my second-favorite Phoenix Wright meme so far

https://twitter.com/FinalNanner/status/1391835124614909952

We’re on the stand with Apple’s cross-examination of Athey. Apple is asking about Steam’s iOS app — where people can buy games (but not iOS games) and Steam Wallet funds.

Apple is also citing Steam Link, which lets you stream games from a PC to iOS. Quoting this tweet:

https://twitter.com/Steam/status/1128818992582234112

Apple lawyer is implicitly criticizing Athey for not mentioning Steam as a cross-platform iOS gaming option. “There’s no place where you say Steam has apps in the App Store, correct?”

Athey says she’d need to double-check the report.

Apple: “Do you have any idea how many times a day Steam Link is downloaded?”

Lawyer is citing what appears to be this Sensor Tower report, which says it was downloaded 52,000 times a day (on iOS/Android) in its first week. sensortower.com/blog/steam-lin…

Not being discussed right now, but Apple has effectively drawn a distinction between cloud gaming (like xCloud) and streaming from a specific PC (like Steam Link). @tomwarren notes this has caused some confusion on the App Store theverge.com/2021/5/5/22421…

Apple also cites remote play options from PlayStation and Xbox (again, worth noting these are specifically about streaming from a console rather than pure cloud gaming).

Apple also bringing up GameClub, which it describes as a cross-platform competitor to Apple Arcade. Athey said there was unnecessary “friction” there, but Apple is asking her if she’s actually measured the effect of friction. “I didn’t perform that specifically for this case."

As a refresher, Athey spent a lot of yesterday talking about high costs and friction in switching between iOS and Android. Apple’s rebutting this by highlighting third-party multi-game services that work across both platforms.

Last week also saw testimony from Xbox and Nvidia about how Apple put undue restrictions on their cloud gaming services, and Apple’s looking to undercut that by talking about Xbox/PlayStation remote play options.

These distinctions are all, as a side note, sort of a muddle — Apple and Epic are arguing along a bunch of different axes about whether GeForce Now is different from Steam Link and Apple Arcade is different than Roblox and how Apple’s App Store should treat all these services.

Last week Apple emphasized that it needed to lock down certain services because they posed a security risk, right now it’s focusing on the opposite — showing services it *does* allow and saying the friction involved in reaching them is negligible.

Apple’s lawyer notes a line from testimony saying “technological incompatibilities can increase competition by providing consumers with choice.”

Athey disagrees that “incompatibility for its own sake” is useful.

Athey has said that requiring interoperability could be a legal remedy to antitrust. Apple’s lawyer asks about it, but Epic lawyer objects: “We’re venturing far into legal opinion now."

Lawyer: Is it your view that “forced interoperability” should be a remedy in this case?

Athey says her testimony favored removing restrictions on middleware (i.e. third-party stores).

We’re having a debate over the definition of “interoperability.” Athey’s saying Apple seems to be using a very broad definition — her definition is “a specific restriction on the specific experiences of a consumer.”

Epic lawyer is coming back up, and we’re going back to GameClub and its iOS service. “Do you remember from your report whether GameCloud’s entry into iOS was smooth?”

Athey says no — it was rejected more than 100 times, and it can only offer certain games.

Athey says GameClub was only approved with contractual restrictions saying it can’t offer third-party games.

Epic asks about Steam’s app now — Athey notes that Steam’s app is for helping people install games on *desktop* platforms, not iOS/Android.

Also a little more elaboration on Steam Link, which requires that you have a computer along with your phone. Implicitly that’s a pretty significant point of friction for using Steam Link as an iOS gaming service.

Epic’s lawyer is asking about one of Apple’s sticking points yesterday: the fact that Athey worked for Microsoft (in a way Apple says she didn’t fully disclose, and Athey says she did.)

When was the last time Microsoft was your primary consulting client? It was scaling down in 2015, Athey says. And did Epic hiring you have anything to do with Microsoft?

“Not as far as I know,” Athey says.

I do not know this offhand. Flagging it here, worth checking!

https://twitter.com/thattridentdude/status/1392508722736472068

Epic’s lawyer is also bringing up a Guardian article from yesterday, where Apple says Athey deliberately ignored the issue of piracy on Android theguardian.com/technology/app…

Epic’s lawyer questions whether the article actually says Android piracy is worse than iOS piracy.

“I think it’s suggesting that piracy may be more common, but also that people who have less money to spend might be substituting between piracy and not using the game at all rather than piracy and paying,” says Athey.

"So although piracy is more common, it doesn’t necessarily mean fixing the piracy would make developers earn more.”

Side note, this article is from 2013.

Athey is stepping down now. We’re getting our next witness, this time from Apple’s side: Richard Schmalensee, who @nickstatt notes also testified for Microsoft at its big antitrust trial nytimes.com/1999/01/14/bus…

Schmalensee describes his academic research as an economist in industrial innovation and policy, focused on platform economics. Judge asks him to talk a little slower.

Schmalensee and yesterday’s Epic witness David Evans have collaborated in the past, but they’re on different sides today, and Schmalensee is specifically here to rebut Evans’ claims.

(Evans was there to argue that Apple has a monopoly on the iOS ecosystem and is using it to levy an unfair fee on in-app purchases, among other things.)

Schmalensee characterizes iOS as part of a hardware/software bundle rather than a disctinct market Apple can monopolize.

“It’s a commission charged by Apple as part of its pricing strategy,” says Schmalensee of in-app purchases. “It’s not payment processing” alone.

Schmalensee also disputes Evans’ claim that you can separate IAP as its own market.

“Does it describe a plausible market, in your opinion?” lawyer asks.

“It does not."

Is Apple’s IAP system synonymous with payment processing services? “The closest analogue I can come up with in the brick and mortar world, it’s like the credit card terminal. It connects to a payment processor.”

“IAP is the essential way that Apple collects its commissions. This is how Apple in an automatic and seamless fashion collects the commissions it’s owed,” Schmalensee says. Developers have a “desire not to pay a commission,” not a demand for an alternative service.

Schmalensee says he can’t think of a single successful platform that asked for a commission and then made it very easy for people to avoid it.

“In an online business of this kind, the commission model is a natural way to monetize. In larger transactions the store makes more money the seller makes more money, so the percentage commission seems very natural."

"When stores handle a large number of transactions, collecting those fees automatically seems to be the natural model, the obvious way to go.”

Schmalensee draws a comparison to American Express, which has anti-steering rules (i.e. rules against telling people how to get around fees) he compares to Apple’s model. AmEx prevailed in a big court case about this, notably: natlawreview.com/article/now-am…

“In AmEx, there wasn’t a duopoly though, correct?” judge asks. “When you’re going to a store, you can see the store that says Visa/MasterCard/Discover/AmEx. So there were visual indications of options. Visual indications of options don’t exist in this circumstance."

Schmalensee says the important thing is that, to continue the analogy, "merchants can’t say to the customers … I’d really rather you didn’t use the AmEx card, could you use the Visa."

Judge asks: “What’s so bad about it anyway, to have consumer have choice?”

“The reason is if consumers have choice, if the app vendor can say if you press this button you can buy this for less, that means the App Store can’t collect its commission … you’re undercutting its revenue stream,” Schmalensee says.

“I don’t think it’s factually the same,” judge says of the App Store case versus the AmEx case. We’re moving on, though.

Schmalensee’s also bringing up what he describes as benefits of iOS being able to keep track of user purchases while still protecting privacy, compared to a bunch of separate processors/stores.

Schmalensee says Evans neglected “indirect network effects” that “magnify the impact of a price change.” Some elaboration on what this means from written testimony below

Evans is incorrectly "assuming that users don’t have much choice,” Schmalensee says. I am paranoid I am misspelling “Schmalensee” every time I type it.

There’s a feedback effect — if even small numbers of developers/consumers respond to price increases, others follow because of network effects and it shifts the overall power balance between Android/iOS. “That’s the stuff that’s missing."

The App Store(’s allegedly very high) operating margin also isn’t an indicator of profit margins either, Schmalensee says.

Schmalensee analogizes two factories: one invested in machines and 1 worker, another has lots of employees and no machines. The first would show a higher operating margin, but “that doesn’t mean it’s more profitable” since they spent lots of money upfront on the machines.

In this analogy Apple invested a bunch of money into building iPhones/iOS, and you should treat that partially as Apple spending on the App Store.

“There is simply no economically meaningful way to allocate joint costs among several products and services,” like iPhone/iOS/App Store, Schmalensee says.

There was a running pre-trial fight over whether Apple actually does have internal documents laying out how much it spends on the App Store.

Epic wants two things.

Smaller (but still big) one: Apple lets App Store devs use alternate in-app purchase systems.

Gigantic one: Apple lets you sideload third-party stores like Epic Games Store

https://twitter.com/michaelhazani/status/1392521916229980160

Related question: Schmalensee is asked if there are implications for other app stores. He says there are a number of online app stores that similarly require using their own payment systems — previously mentioned Xbox, PlayStation, Switch, Android, others.

Schmalensee says an Apple loss would create an incentive to simply not allow third-party apps at all, to keep control of your platform.

And with that, we’re moving into cross-examination with Epic’s lawyer, who wants to elaborate on that. Is Schmalensee saying a new entrant to the phone market would look at an Apple loss and decide not to allow third-party apps?

“I didn’t say it would necessarily be the decision.” But the thought of allowing third-party apps and then having to change business models if it became powerful enough would discourage allowing the apps, Schmalensee says. “Is it inevitable? No."

Epic’s lawyer is extremely dubious of the idea that a smartphone platform would decide not allowing third-party apps was a good idea.

There is a lot of extremely tetchy bickering going on between these two.

We’re going back to anti-steering provisions and delving into exactly what Apple’s policies ban — in this case, talking about Apple not allowing targeted emails notifying users of cheaper payment options.

Epic/Schmalensee are in a back-and-forth about whether you can separate the iOS ecosystem from the iPhone as a market.

Schmalensee says iPhone/iOS/App Store are all owned by Apple, they have joint costs, and they have indirect network effects linking them.

Lawyer says that’s just a feature of how Apple decided to run its business, not an “inherent feature” of them.

Epic lawyer is bringing up an old paper by Schmalensee saying that there’s a winner-take-all fight for phone operating systems. Schmalensee says he’s completely misinterpreted the statement.

We’re going to take a 20-minute break. I’m going to be gone a little longer than that, but I’ll be back around 2pm ET for more tweeting.

Okay, I’m back. Sounds like we’re still on Schmalensee testimony, per @leah_nylen

https://twitter.com/leah_nylen/status/1392540909275947009

Epic lawyer has asked if Schmalensee considered the smartphone gaming market specifically in terms of whether developers made mobile-only games versus mobile and console games. I’m still getting up to speed on the context.

Schmalensee and Epic lawyer have returned to the AmEx case. “You believe that the App Store here is like the American Express network in that neither buys nor sells any content, but it facilitates transactions including a wide range of products?”

Yes.

So the service it sells is “matchmaking” between developers/consumers. Lawyer asks: and does that have anything to do with the content of the transactions?

Schmalensee: Yes, but only insofar as it could distinguish between collecting a commission on only certain products.

Epic lawyer is hitting at the fact that Apple requires a commission for digital purchases but not physical goods sold in apps.

A little bit of levity in the court, including a reference to the Great Peely Dispute.

Epic lawyer: “I was thinking about the banana today.”

We’re talking about Steam and it deciding to lower its commission in (Epic says) response to Epic launching a store. Schmalensee concurs there’s no evidence that platforms on *other* devices lowered their prices in similar ways.

Calling back to Schmalensee’s defense of Microsoft — he referred to an “operating system market” in the wake of the case.

Schmalensee says Windows was sold as a specific OS, just bundled with hardware. Compared to iOS/Android not being sold in the same way.

Lawyer says Android is “not free” in the sense that it’s monetized. “There’s a price being paid by these OEMs” to get Android, it’s just paid in a different monetization method. Schmalensee somewhat derisvely calls that a “novel” theory.

Lawyer brings up a slide from Tim Sweeney’s testimony last week. Apparently shows Xbox/Sony/Nintendo/iPhone/Android rows, each with commission rate, whether they prohibit 3rd-party distribution, and if there’s a requirement to use their in-app payment system.

This has in fact barely come up

https://twitter.com/Mooslan/status/1392548191069933571

In fairness digital-only consoles are becoming more common.

We’re comparing Windows and macOS and iOS and Android now — Windows makes money on [Windows OS, I think is the answer], macOS and iOS make money on hardware, lawyer says.

As for Android, “no one really knows how they make their money."

We’re arguing over the business models of general-purpose computing platforms and consoles — we’ve been over this debate many times in the past week.

In general Epic says the fact that Apple makes money off hardware reduces the incentive to treat developers well because it doesn’t need them as much as, say, console makers who sell at a loss

https://twitter.com/anarresian/status/1392550170466963457

Lawyer calls back to an earlier Schmalensee comment that if Apple was going to price-gouge based on its power, it already would have. He suggests that a fear of regulation/lawsuits has acted as a check on Apple’s behavior.

“If Apple had actually gone ahead and raised prices,” lawyer says, Apple would have lost a talking point about never raising its rates on develoeprs — something Tim Cook has testified about in front of Congress.

The trial involves a bunch of comments phrased as questions. So in this case the factual question was basically “if Apple raised prices, that talking point would become impossible, right?"

https://twitter.com/brianericford/status/1392553008223903748

We’re talking about whether it’s possible to really calculate Apple’s App Store profit margins — Schmalensee is arguing you can’t divide Apple’s businesses into discrete chunks and profits are not necessarily out of line with other app-selling companies.

As an aside, Schmalensee insists “there are other browsers available” on iOS and says he’d be “surprised” if Apple had ever barred them. Which doesn’t really reflect the reality of iOS theverge.com/21444995/ios-1…

tl;dr you can use other browsers on iOS but Apple spent years putting significant limits on them and requires them to use its Webkit framework — it’s definitely hobbled non-Safari browsers’ autonomy

Judge has a couple questions. First of all she’s asking, as I understand it, why both sides haven’t talked more about a “duty to deal” — basically a rule saying a service can be so essential that companies need access.

Schmalensee says “I think the argument that 'we can’t be in the store business without access to iOS apps' just fails. They’re in the store business. Other people are in the store business."

“We have not abandoned that theory,” Epic lawyer breaks in to say. Was apparently confusion on that point — judge thought they had.

Our next expert witness is stepping up — Francine Lafontaine, called by Apple.

“Your honor, may I pass up the binders?”

🚨📒🚨📒🚨📒🚨

Lafontaine was formerly the director of the FTC’s Bureau of Economics

A little more detailed explanation of the essential facilities/duty to deal conversation here, btw:

https://twitter.com/leah_nylen/status/1392558985643970564

Lafontaine is here to talk about the issue of what consumers (including developers in this case) could substitute in the markets being discussed here.

Lafontaine is asked to describe the criteria for judging substitutability. She uses the example of a pair of shoes — high heels versus flat shoes. Are those substitutes for each other? It depends on what the consumer need is.

Lafontaine also takes on Evans’ conclusions from yesterday — says his definitions are “too broad and too narrow.” I.e. it focuses only on one platform consumers can go to, and it covers categories of apps that shouldn’t be classed together.

Talking now about a case she dealt with at the FTC — a proposed merger of Staples and Office Depot.

FTC determined the same set of professionals went to both stores for the same set of office supply products, and this market wouldn’t be competitive if they merged. But it found a separate, more competitive market for ink/toner, where there were more options to buy.

Lafontaine similarly distinguishes the non-gaming mobile app market, which might be part of a duopoly, from the specific market for games, where she says there are more competitive options.

This is one reason why we sat through all those days talking about whether Fortnite was a game or not.

She gives another example as flower bouquets in a supermarket. A supermarket might monopolize the food market, but you can specifically buy flowers lots of other places, and it’s not monopolizing that. Gives a similar analogy involving liquor and liqour stores.

Even if a liquor store sold crackers, it wouldn’t become a grocery store, because people primarily go there to buy liquor.

Taking a recess now, we’ll be back 4:15ET. Just enough time to go buy some crackers at the liquor store.

Sorry, but Apple clearly established that a videogame has a beginning, an end, and challenges. Twitter never ends.

https://twitter.com/ben_a_adams/status/1392565058463584263

We’re back in session with Lafontaine. We’re still talking about the liquor analogy. Apple’s lawyer asks if the Epic Games Store adding Spotify and other non-gaming apps makes it something other than a games store — Spotify being the crackers in this scenario.

“The Epic Games Store is still mostly from the consumer’s perspective like the liquor store, a place they would think of to go for games,” Lafontaine says.

Games in this scenario are liquor.

Epic v. Apple testimony slowly but surely circling around this tweet

https://twitter.com/metasynthie/status/1161729804359610368

Lafontaine still rebutting Evans’ testimony. “The information that he’s using doesn’t really give consumers or developers the option to give in the most obvious type of substitution that they might want to engage in.” Like, say, buying V-Bucks through a browser.

We’re going to talk about the foremarket/aftermarket framework that Evans proposed, separating buying an app versus in-app purchases. Lafontaine reiterates an argument from earlier in the day, saying what Apple does is essentially run one unified matchmaking market.

Lafontaine also says that even if there was a distinction between the two markets, it wouldn’t necessarily be anticompetitive for Apple to tie both together.

Epic’s up now, starting by pushing back on Lafontaine for relying on economic analysis done by other people. She says that’s consistent with how she’d work at an agency like the FTC.

Lawyer asks if Lafontaine’s definition of a relevant market depends on the identity of the plaintiff — if it was Match Group, for instance.

Lafontaine says no, but she says the *product* matters, so if it was Match Group she’d define a market around the kind of app it made.

“It does matter that there’s a set of options for this product. I need to think about the ways that consumers and funds can reach each other, therefore it does matter what product we’re talking about.” Like wine distribution versus flowers in her earlier analogy.

One of Epic’s witnesses previously offered a different analogy where Apple is like one steel company that sells to furniture makers, construction companies, and other widely disparate markets. Epic lawyer brings that up (using iron as the example instead.)

“If it’s a single commodity that everyone is purchasing, you could have a market that is defined based on that one product,” Lafontaine agrees, although she doesn’t say Apple *is* that kind of market.

Match Group is set to testify later in the trial, BTW. It is not happy with Apple.

Not a huge beef, but they've recently testified in a “big tech is messing with competition” hearing and their planned testimony has been described to me as critical of Apple cnbc.com/2021/04/21/goo…

https://twitter.com/brockgs/status/1392584770853367808

Lawyer and Lafontaine are engaged in a back-and-forth about the granularity of the product/market she’s analyzing — she groups together a category of “game transactions” and Epic has built its case on wanting the judge to examine a broader app market.

Lawyer asks if when she did her analysis, “you were not aware of all the different kinds of apps that Epic develops?”

Lafontaine says she was “not fully aware.”

That includes her not knowing about Houseparty, a social app Epic acquired in 2019 theverge.com/2019/6/12/1866…

“Had you known that Epic was the developer of a social networking app,” would she have reevaluated her market definiton?

“I would have [lightly paraphrased] considered what it means, yes."

(Houseparty is still on the App Store) apps.apple.com/us/app/housepa…

Lawyer asking about popular iOS games that aren’t available on consoles — cites iOS games Fortnite, Minecraft, Roblox, which Lafontaine mentioned, but confirms she hasn’t done analysis on others.

Lawyer cites this paragraph, objects to the bit about steering — notes that Apple doesn’t, in fact, let developers tell users about cheaper options on other platforms.

The opposite, sorry — he cites those games that are multi-platform as things she addresses, but confirms she hasn’t analyzed market of iOS-only games

https://twitter.com/brianericford/status/1392590227785539588

(And yes we had a good hour of testimony about whether Roblox is a game or an app, Epic thinks it’s a game and it’s asking the questions right now, so here we are.)

Some more detail on a debate about what counts as a substitute for an iOS game

https://twitter.com/leah_nylen/status/1392591638833373189

Can there be competition concerns in an aftermarket, lawyer asks? (Yes.) That can include situations where people are locked into platforms after something changes? (Yes.)

Lawyer notes Steve Jobs once saying he wanted to only break even off the App Store — whereas now he says it earns a huge profit (Apple’s witnesses say you can’t precisely compute how much, but Lafontaine agrees it makes lots of money) off it.

This was wild yes

https://twitter.com/leah_nylen/status/1392594372932345856

Apple is calling its next expert witness, Lorin Hitt.

Hitt has worked on the economics of software and has testified in cases relating to smartphones and IT business practices more generally, he says.

Hitt analyzed the competitive effects of Apple’s policies and pricing. He concluded there’s “no evidence based on those metrics that Apple engaged in anti-competitive conduct."

Apple lawyer notes that Apple and Epic have different definitions of whether this should be a case about apps in general or just games. Hitt says that difference wouldn’t broadly change his conclusions.

“Dr. Evans didn’t really do anything with competitive effects” with Apple interaction data, says Hitt.

Hitt’s criteria is about output and quality — more of both are what you’d expect on a healthy platform.

For output, he looks at number of transactions (including non-paid ones) and revenue. Calls non-paid interactions a “critical” part of the App Store.

“The number of game transactions has been increasing over time" … game transactions have expanded 1200% from the inception till 2018.

Revenue expanded 2600% around the same period.

“These are enormous changes,” says Hitt.

App store has been growing around 6 times as fast as the overall market for digital game transactions, Hitt says.

Did you examine other measures of output, lawyer asks? (Yes.)

Hitt says he didn’t see any slowdowns in output around the time Apple allegedly attained monopoly power, which would have happened around 2010 according to one of Epic’s witnesses.

“Has Apple reduced its commission over time?” lawyer asks.

Yes, says Hitt. App store started at 30% commission for purchases and in-app purchase, but in 2016 Apple reduced subscription renewal rates and added the video partner program discount.

Hitt also cites the small businesses developer program, which reduced fees to 15% for smaller devs.

Judge asks if Hitt has seen any evidence that Apple considered this latter change before Epic’s lawsuit — he says he doesn’t know.

theverge.com/2020/11/18/215…

Lawyer asks about the issue of whether consoles are sold at a loss — there’s an objection, it appears to relate to a redacted portion of Hitt’s testimony, but there’s disagreement over whether Hitt has any meaningful knowledge of this.

Hitt proceeds, says that whether hardware sells at a loss is irrelevant to whether the platform should charge a specific commission. “There are platforms that subsidize hardware. They charge 30%. There are platforms that don’t subsidize hardware. They charge 30%."

Hitt cites Valve’s Steam as an example of a platform that doesn’t have any kind of hardware (he doesn’t go into Steam Machines and Valve Index, but TBF those are niche) but charges 30%. (It dropped its rates in 2018, though, around the Epic Games Store launch.)

(Details of the Steam changes here):

theverge.com/2018/11/30/181…

https://twitter.com/Ramrod316/status/1392603888516100097

We’re wrapping for the day. We’ll return tomorrow morning with Hitt.

visualization of a two-sided transaction market, in which both sides of the transaction want snacks