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APPLE INC.

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Epic Games vs. Apple Trial, Week One: Everything You Need to Know

05/08/2021 | 09:14am EDT

By Sarah E. Needleman

The first week of the trial between Epic Games Inc. and Apple Inc. was dominated by why the "Fortnite" creator has challenged the tech giant and how the iPhone maker treats apps looking to join its store.

Epic has accused Apple of violating U.S. antitrust law and sued it in August after the tech giant yanked the developer's hit videogame "Fortnite" from its 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.

Here's an overview of what has happened so far, the moments that stood out and what is next:

Who were the key witnesses and what did they say?

Lawyers for Epic called the first set of witnesses, starting with the company's chief executive and founder, Tim Sweeney. The 50-year-old programmer said Apple's 30% commission on digital app sales have created a "significant economic drag" and harmed his company's ability to reinvest in its business. He also defended Epic's decision last year to insert its own payment-processing system into "Fortnite," a move that violated Apple's requirement for developers to use its processor for in-app purchases of digital goods.

"I wanted to demonstrate to the world that Epic was using direct payment in order to pass on savings to consumers," Mr. Sweeney testified, and "to show the world through conspiracy actions exactly what the ramifications of Apple's policies were."

Other witnesses called by Epic included executives from Microsoft Corp. and Nvidia Corp., as well as the CEO of Yoga Buddhi Co., a small yoga company that does business under the name Down Dog.

Apple's legal team rejected claims that the iPhone maker has monopoly power because it doesn't have a majority share of the smartphone market and it faces stiff competition in connecting users with games.

Microsoft's vice president of Xbox business development, Lori Wright, testified that Xbox and other game consoles aren't substitutes for smartphones. While consoles may feature nongame apps, such as music and podcast service Spotify, she said, they are designed for providing users with more advanced game experiences and require a constant source of power, a screen and hand controllers.

What did we learn about the financials of Epic's "Fortnite" and Apple's App Store?

The first week of trial revealed, both through documents released and testimony, previously unknown details on the financial performance of Epic and its properties, including "Fortnite."

"Fortnite" created a financial windfall for Epic after its 2017 debut, and the closely held company has sought to accelerate the game's growth and bolster other parts of the business. But Epic's revenue fell by 25% to $4.2 billion between 2018 and 2019, largely because of weaker "Fortnite" performance, while its costs increased significantly, according to a January 2020 board presentation disclosed in an exhibit.

Epic revenue was forecast to decline again in fiscal 2020, according to the presentation, yet the game and overall revenue rebounded once the pandemic hit, according to Mr. Sweeney's testimony. "Fortnite" revenue rose to $5.1 billion in 2020, and overall it totaled $13.1 billion from 2017 through the end of last year, Mr. Sweeney said, confirming data shared by Apple lawyer Richard Doren.

Documents filed with the court also opened a window into the financials of the App Store, though Apple disputed the accuracy of the presentation. An analysis by forensic accountant Ned Barnes on behalf of Epic said the App Store operating margin was nearly 80% in fiscal 2018 and 2019. Karen Dunn, a lawyer for Apple, described the analysis as "incredibly misleading," because it only looks at one segment of its iOS software ecosystem.

What did we learn about Apple's app review process?

Apple has said the fees it collects from developers are necessary for covering expenses related to app submissions, security and user privacy. Epic's counsel attempted to show that Apple's app-review rules are applied unevenly to developers and that the company's process has problems.

Trystan Kosmynka, who oversees Apple's app-review process, said the last time he reviewed an app it took him five minutes and that the company's goal is to review half of app submissions within 24 hours and 90% within 48 hours.

Documents showed that Apple rejected 40% of app submissions last year, including 215,000 for violating privacy guidelines. Mr. Kosmynka said Apple has increased rejections over the years because "our system has improved."

He later testified that he was surprised Roblox Corp.'s free platform with millions of games and experiences was approved by Apple's executive review board. Apple's guidelines prohibit so-called stores within stores -- apps that offer a menu of games or other experiences from third parties.

Also during the trial, Epic lawyer Lauren Moskowitz pointed to emails showing instances when reviewers missed fraudulent or otherwise dangerous apps, allowing them to enter the App Store. Mr. Kosmynka acknowledged emails from a security firm saying it had found 17 apps that carry a malicious type of ad-fraud tasks in the background, and another email in which Mr. Kosmynka wrote: "We are making critical errors."

How is Epic attempting to portray the App Store as a monopoly?

Epic lawyer Katherine Forrest alleged that Apple overreaches in how it charges commissions, comparing its app marketplace to a car dealership. "Apple takes a cut of every stop at a gas station after the car has been purchased, with no payment alternatives," she said.

Apple's lawyers countered Epic's claims by citing the variety of devices where consumers can play "Fortnite" in addition to iPhones and iPads, such as on personal computers, Nvidia's cloud-gaming service GeForce Now and Nintendo Co.'s Switch.

"Apple did not create a secure and integrated ecosystem to keep people out; it created a secure and integrated ecosystem so it could invite developers in, without sacrificing the privacy, reliability, security and quality that consumers wanted," Ms. Dunn said.

What's coming next?

In the week ahead, Epic is expected to call more expert witnesses, as well as current Apple employees. It isn't clear yet when Apple CEO Tim Cook will take the stand.

Epic's slate of witnesses includes Mr. Barnes, who helped complete the App Store operating margin analysis, and two more expert witnesses, Brattle Group Chairman Michael Cragg and Global Economics Group Chairman David Evans.

Write to Sarah E. Needleman at sarah.needleman@wsj.com

(END) Dow Jones Newswires

05-08-21 1114ET

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Financials (USD)
Sales 2021 354 B - -
Net income 2021 86 503 M - -
Net cash 2021 36 915 M - -
P/E ratio 2021 25,1x
Yield 2021 0,66%
Capitalization 2 163 B 2 163 B -
EV / Sales 2021 6,01x
EV / Sales 2022 5,72x
Nbr of Employees 147 000
Free-Float 99,9%
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Number of Analysts 45
Average target price 156,40 $
Last Close Price 129,64 $
Spread / Highest target 42,7%
Spread / Average Target 20,6%
Spread / Lowest Target -30,6%
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Timothy Donald Cook Chief Executive Officer & Director
Luca Maestri Chief Financial Officer & Senior Vice President
Arthur D. Levinson Independent Chairman
Kevin M. Lynch Vice President-Technology
Jeffrey E. Williams Chief Operating Officer
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