Apple vs Epic trial: CEO Tim Cook testifies in trial against Epic Games - The Wa...
source link: https://www.washingtonpost.com/technology/2021/05/21/apple-tim-cook-epic-fortnite-trial/
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Apple CEO Tim Cook faced some of the most forceful scrutiny of a major tech executive in decades on Friday when the judge in an antitrust case grilled him about the stranglehold Apple has over the app economy.
U.S. District Judge Yvonne Gonzalez Rogers is presiding over the case brought by Epic Games, the maker of the video game “Fortnite.” Epic has accused Apple of running its App Store as a monopoly and abusing its power by locking app developers into its closed system.
“It doesn’t seem you feel any pressure or competition to change the way that you act to address the concerns of developers,” Gonzalez Rogers said to Cook, some of the most pointed critiques she has offered over the course of the three-week trial. She appeared to challenge one of Apple’s key assertions that it competes fiercely with Google’s Android and game-console companies such as PlayStation and Xbox, including to entice developers into Apple’s operating system.
Although it is impossible to predict how Gonzales Rogers will rule, her tough interrogation suggests that she questions at least some of Apple’s arguments. Apple’s entire business model is at stake in the trial: A ruling against Apple could force it to open up its highly lucrative App Store to others, allowing users to download software to their phones in a variety of ways and bypassing the cut of up to 30 percent that Apple earns on all purchases made through apps.
Cook’s testimony came near the end of the landmark trial, which is expected to conclude early next week. Gonzalez Rogers said she hopes to issue a verdict by mid-August in the bench trial, which means there is no jury. It is the most high-profile case against a tech giant since Netscape sued Microsoft more than two decades ago and Bill Gates, Microsoft’s CEO at the time, testified.
Cook, like other elite Silicon Valley executives, has faced questioning in recent years during congressional hearings, where he has had to defend how Apple does business. He appeared at a congressional hearing last summer with other tech executives, when lawmakers probed them over the market power of their companies. But it was the first time for him to appear at a trial where, under penalty of perjury, he was forced to answer questions and submit to cross-examination.
Herb Hovenkamp, an antitrust professor at the University of Pennsylvania Law School, said judges will sometimes try to use tough questioning to make both sides feel they might lose the case, driving them toward a settlement. “If Apple is dead on sure it’s gonna win, it’s not going to settle for very much,” he said. “If, on the other hand, she can promote a little bit of uncertainty and anxiety,” it might bring the two sides to the table, he said.
Cook couldn’t use talking points to sidestep questions. Epic counsel Gary Bornstein raised questions about the credibility of Cook’s sworn testimony, including several of Cook’s statements that were contradicted by internal Apple documents and his own recorded deposition, taken before trial.
On at least one of those points, Gonzalez Rogers seemed to side with Epic. Last November, Apple launched a program for small businesses, reducing App Store commissions to 15 percent for developers who earn $1 million or less in App Store revenue.
Apple at the time touted the move as a way to help small businesses during the pandemic. But internal documents show that Apple executives saw the move as a way to deflect scrutiny of its allegedly anticompetitive practices from lawmakers and regulators. Apple did not produce any documents showing that the pandemic was a factor.
Executives such as Phil Schiller, who runs the App Store, and Cook, contended under oath that the pandemic was the main driver of the decision.
Gonzalez Rogers seemed to disagree. “It seemed to be the result of pressure that was coming from investigations or lawsuits, not competition,” she said.
In any event, Gonzalez Rogers said, whatever it was that prompted Apple to change its fees, “it wasn’t from competition,” hitting on one of the pillars of Epic’s legal arguments in the lawsuit: that Apple has little competition for iOS, Apple’s mobile operating system.
Gonzalez Rogers made another assertion in her questioning of Cook that supported that notion. “You don’t have competition in those in-app purchases,” she said.
Epic argues that Apple illegally forces app developers to use two separate services: Apple’s App Store and its payment processing system, known as “in-app purchases.” Under antitrust law, it is illegal for a monopolist to tie one product or service to the sale of another. Apple argues that they are not separate but part of a single service: iOS.
The spat between the two companies began when Apple kicked “Fortnite” off the App Store last year after the video game maker offered an alternative payment option to its customers, bypassing the mandatory 30 percent commission charged by Apple on its in-app purchases system.
The move by Epic was calculated. It had a lawsuit and a public-relations campaign ready, including an ad comparing Apple to Big Brother in George Orwell’s “1984.”
Epic argues in its lawsuit that, even though only about half the smartphones in the United States are iPhones, Apple’s iOS is a market unto itself.
But even if Gonzalez Rogers rules that Apple does have a monopoly, Epic still must prove Apple is abusing that monopoly.
The morning of questioning started off smoothly for Cook, who answered questions from his own attorney, Veronica Moye of Gibson, Dunn & Crutcher. Cook shared the company’s view that privacy is a fundamental human right and that security and user safety is of the utmost importance.
One of Epic’s arguments on Apple’s alleged abuse of monopoly power centers on App Store profitability. Epic has cited statements by Apple co-founder Steve Jobs around the time of the App Store’s launch in 2008 that it would not be aimed at making a profit, but instead would break even, earning just enough money to keep it up and running.
But the App Store has become wildly profitable, Epic argues. Epic cited another Supreme Court opinion, Aspen Skiing v. Aspen Highlands. In that case, Aspen Skiing made a deal to sell combined lift tickets with Aspen Highlands. But once Aspen Skiing became powerful enough, it revoked the deal. The Supreme Court ruled that Aspen Skiing, which had a monopoly on the mountain, could be forced to continue the deal.
Apple has argued in court that it doesn’t maintain a separate profit-and-loss statement for the App Store.
In court Friday, Cook stuck to his guns, claiming that Apple doesn’t track profit and loss of its App Store. But Bornstein, Epic’s counsel, of Cravath, Swaine & Moore, confronted him with documents showing that Apple does, in fact, discuss this internally.
One document showed that Cook had a meeting with Apple CFO Luca Maestri to discuss App Store profitability.
Cook’s point was that although the company might make informational calculations, it doesn’t track it carefully enough to know the full cost of running the store. But emails that Bornstein brought up discuss accounting methods used to determine App Store costs. Emails mentioned “method 2” for allocating operating expenses.
“So your corporate planning and financial analysis group does have at least two methods for allocation of operating expenses?” Bornstein asked.
“I think so,” Cook answered.
Cook had a meeting to discuss the numbers referenced in the email, which is sealed from public view for confidentiality reasons.
“This wasn’t a one-off presentation?” Bornstein asked.
“I don’t remember having this presentation before,” Cook answered.
“How about since?” Bornstein asked.
“I don’t know,” Cook answered.
Cook at times seemed to plead ignorance on key aspects of Apple’s business. For instance, he said he couldn’t remember the exact price Google pays Apple to remain the default search engine on iPhones. “You don’t know whether it’s upwards of $10 billion?” Bornstein asked him. “I don’t know,” Cook answered.
Cook went on to disagree that Google pays Apple to be the default search engine, first saying it was for the searches themselves, and then saying he really didn’t know why Google is paying Apple. “You don’t have an idea sir as the recipient of these billions of dollars why it is that Google has entered into this deal? That’s what you’re saying?” Bornstein asked.
Cook later said he didn’t know basic information about Apple’s advertising business. “So you don’t know whether when I type in a search for running or some other activity, that Apple will log that so that it can provide personalized ads to me in the store and other information that is tailored for me based on the searches?” Bornstein asked.
“Yeah, I’m not familiar,” Cook responded.
That’s a wrap for Tim Cook
Cook finished the last of his testimony in closed court. But the public portion of his testimony generated the biggest fireworks of the trial.
He can now go back to running the nation’s most valuable company.
Tim Cook testimony moves into closed session
Toward the end of Tim Cook’s testimony, things heated up as U.S. District Judge Yvonne Gonzalez Rogers peppered the Apple chief with questions about an apparent lack of competition on the App Store.
The drama could be continuing, but we don’t know. The testimony is in a closed session, which means the media can’t listen in.
Cook grilled by Judge Yvonne Gonzalez Rogers
In the biggest moment of the Epic Games v. Apple trial so far, U.S. District Judge Yvonne Gonzalez Rogers pushed back against some of Apple’s defenses in the case, peppering Cook with tough questions and assertions about competition.
Gonzalez Rogers zeroed in on Apple’s business model for the App Store, grilling Cook on the fact that a disproportionate amount of App Store revenue comes from the gaming industry. She noted that video game players seem to be subsidizing the rest of the app developers: “You’re charging the gamers to subsidize Wells Fargo.”
She also asked Cook whether he thought the basic idea of competition is good. He said he did, asserting that there is fierce competition with Apple.
“You don’t have competition on those in-app purchases,” Gonzalez Rogers said. Cook countered that gamers have the option of making purchases on a PlayStation or Nintendo Switch.
“Only if they know, right?” Gonzalez Rogers said, referencing Apple’s prohibition on developers letting customers know about alternative options.
Gonzalez Rogers later turned to surveys, entered into evidence by Epic, that “showed 39 percent of all your developers are dissatisfied,” she said. “It doesn’t seem you feel any pressure or competition to change the way that you act to address the concerns of developers,” she said.
“You don’t recall seeing any other surveys or business records showing that you routinely conduct surveys?” she asked.
Cook said he didn’t know, and that another executive, Phil Schiller, would know that.
“You as CEO don’t receive regular reports on that?” Gonzalez Rogers asked, in a question that seemed to suggest that it was of limited importance to Apple.
“That’s correct,” Cook said.
Tim Cook said he’s not a gamer
Apple CEO Tim Cook said in testimony on Friday that he’s not a gamer. During a line of questioning in which he was asked by Apple lawyer Veronica Moye whether he was familiar with gaming streaming services, he said, “Somewhat, I’m not a gamer.” He agreed that gaming services are a competitor to App Store games and that the Epic Games Store is a competitor to Xbox and PlayStation. His answer led to some on social media jokingly remarking on the fate of Apple Arcade, the company’s gaming subscription service it launched in 2019.
It was a moment of levity in an hours-long testimony from Cook. At another point during cross-examination from Epic Games, Epic counsel Gary Bornstein joked, “I have an iPhone, sir, I hope it still works after the examination today.” Tim Cook said nothing but chuckled in response.
Epic’s questioning took on more serious arguments, like — if Epic is such a bad actor, as Phil Schiller testified earlier in the trial, then why would Apple allow “Fortnite” back on the iOS platform like it says it would if “Fortnite” cooperates? Epic also grilled Cook on App Store profitability and whether the tech giant CEO had read Apple’s developer agreement which says that the company can withhold developer earnings if it suspects any suspicious behavior. Cook replied that he had not been aware of that language.
Epic takes on Apple’s operations in China
Epic’s counsel, Gary Bornstein, pressed Cook on Apple’s operations in China, calling Apple a “proxy enforcer on behalf of the Chinese government.” Apple has come under criticism over the years for moving its iCloud servers for Chinese customers into mainland China, where they can be accessed by the Chinese government, and for blocking VPNs from its Chinese App Store.
Of course, Epic is partly owned by Tencent, a Chinese conglomerate. That topic hasn’t come up at trial, which is somewhat surprising and possibly because both sides didn’t want to open the door to this line of criticism. Epic opened the door on the penultimate day of the trial, so it’s unclear how Apple will combat the line of questioning.
Cook is questioned on Apple’s own targeted advertising business
Tim Cook was questioned by Epic counsel Gary Bornstein about Apple’s targeted advertising business. Bornstein questioned Cook about data Apple collects.
Bornstein came up with a hypothetical scenario in which another competing app store could theoretically collect less data than Apple collects, creating a more private app store than Apple’s.
“I think we generally collect the minimum amount that we can,” Cook says.
Bornstein asked the question again: Another store could collect less data, right?
“Then they couldn’t make recommendations,” Cook says.
It was a remarkable exchange, because it put Cook in a position he has never been in: defending the use of data collection for targeted advertising.
Companies like Facebook and Google have long made the argument that targeted advertising is positive for users, because it helps bring them more personalized services and relevant ads.
Now up for debate: The meaning of ‘curated’
Tim Cook has long claimed that the Apple App Store is “curated.” If you observe the App Store and its 1.8 million apps, you become aware very quickly that Cook doesn’t mean curated like a museum, or even a grocery aisle. And that kind of marketing language does confuse some users. For instance, people who fell for a bitcoin wallet scam and lost their cryptocurrency said the main reason was that they believed Apple’s marketing around the curation of the App Store.
Epic counsel Gary Bornstein drilled down on that term in his cross-examination of Cook. Curation is more “like a museum exhibit,” he said, reading from the dictionary. “It’s not a good description of a 1.8 million apps in the App Store to say it’s curated,” he said. Cook disagreed.
The two went back and forth, arguing about what curation actually means.
“I think you’re confusing curation and featuring,” Bornstein said.
Here’s the Merriam Webster definition: “carefully chosen and thoughtfully organized or presented.”
Cook couldn’t talk to his legal team during 15-minute recess
During the 15-minute recess, Tim Cook wasn’t allowed to discuss his deposition with anyone, including his legal team.
We’re not physically in court because of covid restrictions, but Cook, one of the most powerful men in business, hanging out by himself in silence, would certainly be an unusual sight.
In cross-examination, Cook is grilled on App Store profitability
Epic counsel Gary Bornstein grilled Cook on the profitability of the App Store. Cook stuck to his guns, claiming that Apple doesn’t track profit and loss of its App Store. But Bornstein confronted him with documents showing the Apple does, in fact, discuss this internally.
One document showed that Cook actually had a meeting with Apple CFO Luca Maestri to discuss App Store profitability.
Cook’s big point was that, while the company might do some information calculations, it doesn’t track it carefully enough to know the full cost of running the store. But emails that Bornstein brought up discuss accounting methods used to determine App Store costs. Emails mentioned “method 2” for allocating operating expenses.
“So your corporate planning and financial analysis group does have at least two methods for allocation of operating expenses?” Bornstein asked.
“I think so,” Cook answered.
Cook had a meeting to discuss the numbers referenced in the email, which is sealed from public view due to confidentiality.
“This wasn’t a one-off presentation?” Bornstein asked.
“I don’t remember having this presentation before,” Cook answered.
“How about since?” Bornstein asked.
“I don’t know,” Cook answered.
Cook gives his point of view on App Store profitability
Tim Cook’s own attorneys brought up documents Epic turned up during discovery that showed Apple executives discussing the profitability of the App Store.
Cook explained this away, saying that the documents were basically informal spitballing and that he would not use them to make business decisions.
He did acknowledge, however, that the App Store was profitable. How does he knows this? Well, he just has a “feel” for it.
Cook defends Apple’s ‘anti-steering’ practice
Apple charges as much as a 30 percent commission on all App Store revenue. App developers are not allowed to steer their customers outside of the App Store to collect the payment elsewhere, bypassing the commission.
CEO Tim Cook defended that practice on the stand, saying, “It would be akin to Apple going down to Best Buy and advertising that you can go across the street to the Apple store and get an iPhone.”
Cook contends Apple’s reduced commission for small businesses was all about the pandemic
In November, Apple announced a program that would allow small businesses earning less than $1 million in annual revenue to apply for a reduced commission on their App Store sales, dropping it from 30 percent to 15 percent.
Apple billed it as a way to offer relief to small businesses during the coronavirus pandemic. On Friday, chief executive Tim Cook reiterated that contention.
Epic says it has turned up documents signaling that Apple made that decision, which barely affects its revenue, with antitrust scrutiny in mind and has not found any documents in which the pandemic was discussed. Cook said on Friday that antitrust scrutiny “was in the back of my mind, but the primary reason was covid.”
Cook: The only safe computer is one entirely vetted by Apple
One of the remarkable revelations of this trial is about the way Apple sees security. We knew it marketed its products as secure but, as it turns out, Apple’s vision goes beyond that.
Its security experts and executives have made clear that, in a nutshell, they think the only safe computer is one in which Apple employees personally review every piece of software that’s allowed to be installed.
Craig Federighi, Apple’s senior vice president of software engineering, even criticized the security of Mac computers, calling the level of malware on them “unacceptable.” Why? Because Mac customers can download software that Apple employees don’t review.
On Friday, Cook underscored this argument on the stand. He said he would not trust any company other than Apple to vet software. When asked if he would even allow a third party to analyze apps on the App Store, he said no.
This is an extreme view when it comes to cybersecurity.
Cook touts Apple’s privacy labels, but here’s what our review found
On the witness stand now, Cook is speaking about the importance of the App Store’s privacy “nutrition labels” to protect its customers.
In December 2020, Apple added these disclosures to product page listings in its iPhone and iPad App Store.
But when I checked them in January, many of the labels were false. Here’s a guide on how to read these labels.
Following my investigation, the Chairman of the U.S. House Committee on Energy and Commerce sent a letter to Apple, urging it to improve the labels.
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