AAPL Apple Inc

By Sarah E. Needleman 

The second week of the trial between Epic Games Inc. and Apple Inc. has centered on expert-witness testimony debating whether smartphones are interchangeable with other videogame platforms and the definition of a market in the digital age.

Epic sued Apple in August and accused the tech giant of violating antitrust laws after it yanked the developer's hit videogame "Fortnite" from the App Store. Apple has defended itself by arguing that its app-marketplace policies are fair and that Epic breached a contract applicable to all developers distributing apps on its mobile devices.

The trial, in which U.S. District Judge Yvonne Gonzalez Rogers will decide the outcome, is slated to run at least three weeks in Oakland, Calif., and could help reshape the multibillion-dollar market for distributing apps on mobile devices.

Ms. Gonzalez Rogers is used to handling tech-industry cases, and neither Apple nor Epic are newcomers to her courtroom. She says she helped her son find success as an aeronautical engineer by denying him videogames but also noted that her daughter has Nintendo Co.'s Switch.

Here is an overview of what has happened so far and what is next:

Who were Epic's key witnesses and what did they say?

David Evans, a University of Chicago economist, argued on Epic's behalf that game consoles aren't good substitutes for smartphones because they can't be used to access the internet by consumers on the go. If that were the case, "people wouldn't use smartphones," he said, adding that while Nintendo's Switch is portable, it doesn't have a cellular connection.

Dr. Evans further stated that Apple's rules unfairly prevent developers from letting consumers know if their prices for in-app purchases take into account the iPhone maker's 30% commission or that consumers may be able to get better deals elsewhere.

Also speaking for Epic was Susan Athey, economics of technology professor at the Stanford Graduate School of Business. She said Apple locks consumers into its mobile operating system, known as iOS, because to switch devices they would in many cases have to repurchase the apps they already bought and deal with other hurdles.

Epic attorney Yonatan Even referenced a 2013 email from Apple executive Eddy Cue to current Apple Fellow Phil Schiller and Chief Executive Tim Cook: "Who is going to buy a Samsung phone if they have apps, movies, etc., already purchased? They now need to spend hundreds more to get where they are today."

Who were Apple's key witnesses and what did they say?

Lorin Hitt, a professor at University of Pennsylvania's Wharton School, discussed in-app purchase pricing, noting that developers can charge various prices on iOS devices to demonstrate the flexibility of the App Store. He also said Apple lowered its developer fees on long-term subscription sales in 2016 and has said it plans to do the same this year for companies that generate less than $1 million in annual revenue through its marketplace.

Mr. Hitt said anticompetitive measures tend to result in reduced quality, yet that hasn't happened with iPhone and iPad apps, as developers have seen their revenue increase over time. "They've been able to raise their prices because consumers perceive the value in what they're offering," he said.

Mr. Hitt also rejected the notion that Apple locks iPhone and iPad users into its mobile ecosystem. "For one thing, consumers actually do switch, " he said. He added that high customer retention rates aren't evidence of high switching costs. "I stick with the product I have because I like the product I have."

Another witness for Apple said Epic's conclusion that the App Store is a monopoly is incorrect. Richard Schmalensee, emeritus professor of economics at the Massachusetts Institute of Technology, said Apple's behavior is similar to credit-card companies because they offer transaction platforms and have rules to ensure they collect commissions from sellers.

Mr. Schmalensee also argued that because Apple has the unique ability to identify the hardware connected to its App Store, it can benefit consumers by making purchases easy to complete, private and secure. With multiple third-party providers, users couldn't automatically share purchases with family members, he said.

Why did a banana in a tuxedo come up during the trial?

Testimony early in the week from Matthew Weissinger, vice president of marketing at Epic, added some levity when referencing a banana-like "Fortnite" character known as Peely. During Mr. Weissinger's cross-examination, Apple's attorney showed Peely's tuxedo-wearing alter ego "Agent Peely," saying it would have been inappropriate to show Peely without a suit in a federal courtroom. To set the record straight, Epic's counsel questioned whether there is anything inappropriate about Peely without a suit. Mr. Weissinger replied: "It's just a banana man."

Mr. Weissinger also testified that his employer has had a much better relationship with console makers Sony Group Corp., Microsoft Corp. and Nintendo than it did with Apple. Promotional collaborations with Apple around "Fortnite" were less successful and less targeted to gamers, he said.

When will we hear from Apple CEO Tim Cook?

Mr. Cook may be the final witness that Apple calls as part of its defense.

On Tuesday Judge Gonzalez Rogers asked the parties if they are on track with witnesses and when Mr. Cook plans to take the stand. Epic's attorneys said they will wrap their expert testimony this week, while Apple attorney Richard Doren said in regard to Mr. Cook: "It'll be the last day of our case, we believe."

Mr. Cook has been Apple's chief executive since 2011 and is expected to testify about the company's corporate values and operations, the launch of the App Store and the competition that Apple faces. He has defended the company's App Store practices, saying in a congressional hearing last year that they help create a reliable and secure user experience. Under his leadership, Apple's market value has risen to more than $2.2 trillion from around $350 billion.

(END) Dow Jones Newswires

May 14, 2021 09:10 ET (13:10 GMT)

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