Epic vs. Apple opening arguments suggest a bitter battle over iOS’ future

In leading off the opening arguments in Epic’s long-anticipated bench trial against Apple, the Fortnite studio noted that it was “not suing for damages” or a “special deal.” Instead, Epic’s counsel said, it was “suing for change, not just for itself, but for all developers.”

While “Epic is far from the only unhappy Apple developer and distributor,” Epic’s lawyers said it just happened to be the one company that could “finally [say] enough to Apple’s monopolistic conduct” by “taking on the world’s largest company” in court over the matter.

Apple, meanwhile, used its opening arguments to characterize Epic’s lawsuit as “just an attack on Apple’s 30 percent commission that Epic does not want to pay” and Epic as a company that “has decided it doesn’t want to pay for Apple’s innovations anymore.”

“Rather than investing in innovation, Epic [is] investing in lawyers and PR… to get the benefits that Apple provides for free,” Apple said.

Lock-in and the developer bait-and-switch

Much of Epic’s opening argument focused on the idea that iOS users and developers are effectively locked into Apple’s mobile ecosystem and that Apple knew from early in the iPhone’s history “what it needed to do to lock users in.” Epic produced a number of emails from Apple executives intended to demonstrate this argument, including a 2013 email from Eddy Cue regarding how to get users “hooked to the ecosystem.”

As Cue wrote to Apple’s Tim Cook and Phil Schiller in 2013:

The more people use our stores, the more likely they are to buy additional Apple products and upgrade to the latest versions. Who’s going to but a Samsung phone if they have apps, movies, etc., already purchased? They now need to spend hundreds more to get to where they are today.

Epic said Apple lured in developers with an initial promise that the App Store itself wasn’t going to be a major profit generator for Apple. Steve Jobs said in 2008 that the company didn’t “intend to make money off the App Store,” instead using the existence of an app marketplace to increase the value of profitable iOS hardware itself.

That worked well for everyone at first, in Epic’s telling. But around 2008, Apple realized that some free iOS games were beginning to sell additional levels “for a fee.” Apple VP Greg Joswiak identified that in an email as “a possible leak in the system” and said “we’ll have to make sure our terms don’t allow this.” In 2009, a new requirement was imposed to use Apple’s in-app purchase (IAP) system for such sales, complete with a 30 percent cut to Apple. By 2011, subscriptions made through apps also came with the same requirements.

Epic argued this imposition of in-app purchase fees was capricious, and had nothing to do with security risks, the amount of support offered by Apple, or the costs of processing user payments. And Epic points out that Apple eventually cut its asking fee to 15 percent for the second year of auto-renewing subscriptions, despite there being no change in costs. “There’s a name for businesses that set prices without regards to costs,” Epic’s lawyer said. “Monopolies.”

Despite Jobs’ expectations, Epic says internal Apple documents show the iOS App Store now makes profit margins in excess of 75 percent on hundreds of millions of dollars in annual revenue. Apple says these numbers are misleading and don’t account for iOS SDK and API costs that are filed in other portions of the company, such as the software division.

In any case, Epic characterized this massive profit-taking on app revenue as a bait-and-switch by Apple. “The most appealing flower in the garden was a venus fly trap,” Epic counsel said. Developers “helped add value to iOS, and once they committed to the iOS ecosystem… their businesses depended on Apple.”

Consumers, meanwhile, have invested real, sunk costs into the iOS ecosystem and would incur significant costs from switching, Epic said. Epic cited studies showing “a developer like Epic could not leave the iOS platform even in the face of a price increase without suffering a loss of profit.”

But Apple cited its own data to suggest that anywhere from 12 to 26 percent of iOS users who purchased a new phone in recent quarters switched to a different mobile platform, showing that there are competitive alternatives even for users who have been allegedly “locked in.” And when iOS usage of Fortnite shrank after its iOS App Store removal, play on competing gaming platforms went up concurrently, according to data Apple presented, suggesting further alternatives in that use case.

Security precaution or pretext

Epic argued that Apple could have built the iOS’ software “walled garden” with a door, as it did for MacOS, which shares the same kernel yet allows for the installation of unsigned apps not sold through Apple’s official Mac App Store. Forcing iOS apps through the App Store and its review process was “not a technical decision, but a policy one” Epic argued.

But Apple answered that locking down the iOS App Store was also a security decision and that “putting [unreviewed] native third-party apps on the iPhone could compromise the phone itself.” A mobile device provides a larger and more attractive attack surface than a desktop OS, Apple argued, thanks to the mobile device’s additional capabilities and near-constant powered-on status. This requires additional security layers to protect users, Apple said.

“It is a rare moment when someone leaves a Mac on a bus or a movie theater,” Apple’s lawyers said. “A Mac doesn’t know where you are or you children are.”

Epic said that argument is just a pretext for what amounts to a business decision to exert total control over the iOS app marketplace. Epic counsel quoted Apple executives and materials saying that MacOS is secure, and counsel argued that there is “no [security] failing in MacOS that iOS has cured.”