At its heart, the legal battle between Apple and ‘Fortnite’ maker Epic Games is about whether or not the iPhone is a computer

Fortnite 1984 Apple ad parody
  • Apple and “Fortnite” maker Epic Games are fighting in court over how the App Store works.
  • The three-week trial began wrapping up on Friday, with Apple CEO Tim Cook taking the stand.
  • At the heart of the fight is a fundamental disagreement on whether or not the iPhone is a computer.
  • Visit the Business section of Insider for more stories.

Apple and “Fortnite” maker Epic Games are nearing the end of a protracted legal battle that could have major implications for the future of the App Store.

If Epic were to win the trial, Apple could be forced to allow alternative app stores on the iPhone and iPad – a result that could cost Apple billions of dollars in the long term.

At the heart of the fight is a disagreement on the nature of the iPhone: Epic argues it’s a computer, while Apple argues it’s fundamentally distinct. That argument is critical because of how the App Store operates, with Apple acting as the sole arbiter of what can and cannot be published on the iPhone.

If the iPhone is a computer, then the App Store is a monopoly, Epic’s lawyers argued. If it isn’t, and it’s a distinct category of device, then Apple says it is protecting its users by keeping alternative digital storefronts off the iPhone.

Read more: Big Tech has a new battleground: self-driving cars. Here’s how Jeff Bezos, Tim Cook, and Sundar Pichai hope to capture the $290 billion market.

“Epic is here, demanding that this court force Apple to let into its App Store untested and untrusted apps and app stores,” one of Apple’s lawyers, Karen Dunn, said in opening remarks. “Apple’s unwavering commitment to safety, security, reliability and quality does not allow that – and the antitrust laws do not require it.”

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Both Apple CEO Tim Cook, left, and Epic Games CEO Tim Sweeney, right, will appear as witnesses during the trial.

On the contrary, Epic’s lawyer argued, the “walled garden” of the App Store isn’t intended for security: “It’s about business,” Katherine Forrest of law firm Cravath, Swaine, and Moore said. An expert witness interviewed by Forrest estimated Apple’s App Store margins in 2018 and 2019 to be around 75%.

Another major point of contention between the two companies: the 30% cut Apple takes from transactions on its App Store.

By refusing to open the iPhone to other app stores, Epic’s lawyers argued, the company is engaging in anticompetitive behavior. They compared Apple to a car dealership that takes a cut from gas stations every time you refuel.

Apple’s lawyers pointed to other digital storefronts, like the wildly popular Steam, as having established the 30% precedent.

“Apple did not establish the 30%,” Apple’s lawyer Karen Dunn said. “It was Steam, another game platform, that set the 30% in 2003, and by the time Apple entered the market in 2008 the 30% was, as Epic’s internal documents will show, industry standard.”

With Apple CEO Tim Cook taking the stand on Friday, witness testimonies are officially wrapped up. Lawyers for both companies are expected to deliver closing remarks on Monday.

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Apple and Epic Games are revealing a ton of industry secrets in court filings – from untold billions in ‘Fortnite’ profits to private email exchanges, these are the 5 juiciest bits

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Apple CEO Tim Cook, left, and Epic Games CEO Tim Sweeney, right.

  • “Fortnite” maker Epic Games is suing Apple, and the bench trial started this week in California.
  • Epic says Apple’s App Store is a monopoly. Apple says Epic broke its developer contract.
  • Through court filings, major secrets from Apple, Epic, Microsoft, and more have been revealed.
  • Visit the Business section of Insider for more stories.

Apple and the maker of “Fortnite” are currently at war in a California courtroom – the culmination of a yearlong spat between the two American business giants.

Epic Games filed suit against Apple last summer after its hit game, “Fortnite,” was pulled from Apple’s App Store.

Apple says it pulled the game because Epic violated the terms of its developer agreement when Epic implemented a payment system in the game that enabled players to circumvent Apple’s App Store. Epic says the App Store is a monopoly, and argues that iPhones and iPads are no different from computers.

The in-person trial began Monday at the US District Court for the Northern District of California in Oakland, California. Judge Yvonne Gonzalez Rogers is scheduled to oversee approximately three weeks of hearings before a verdict is rendered, according to court filings.

After just one week, we’ve already learned a lot: Between major financial disclosures, company secrets, and private emails between executives made public, evidence in the trial is a treasure trove of information.

1. Xbox console sales aren’t profitable, according to Microsoft, and they never have been.

Xbox Series X and Xbox Series S
The Xbox Series X, left, and the Xbox Series S, right.

After nearly two decades of sales, Xbox consoles have never been a profitable product for Microsoft.

The Washington-based tech giant sells every Xbox at a loss, according to sworn testimony from Microsoft’s VP of Xbox business development Lori Wright.

“Has Microsoft ever earned a profit on the sale of an Xbox console?” she was asked on Wednesday, May 5. “No,” she said.

Wright appeared as a witness in the ongoing trial, where she answered a variety of questions about Microsoft, Xbox, and digital storefronts. Microsoft has openly supported Epic’s suit against Apple.

The subject of Xbox profitability came up in questioning because of how Microsoft’s console business works: Instead of making money on the console itself, the company makes money from games sales through its digital storefront, from subscription services like Xbox Game Pass, and from sales of accessories like gamepads.

Microsoft, like other console makers, takes a cut of every sale on its digital storefront. That cut is usually about 30%, which has become a standard in the video game distribution market. Apple takes a similar cut from games sold on its iOS App Store, which is part of what Epic is contesting in its court case against Apple.

2. Apple’s reportedly making huge margins on the App Store.

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Apple CEO Tim Cook.

One of Epic’s expert witnesses, Berkeley Research Group managing director Ned Barnes, said that Apple is enjoying enormous margins on the App Store: In the high 70s for the last two years at least, according to Barnes.

“In my expert report dated February 16, 2021,” Barnes writes, “using Apple testimony and financial information available to me at that time, I calculated the App Store’s operating margin percentage to be 79.6% for each of FY2019 and FY2018.”

He also said that Apple “produced additional documents” for the trial that demonstrate slightly lower percentages for the two years, but that the numbers are “consistent with and confirm the reasonableness of the calculations presented in my expert report.”

Apple, however, disputes Barnes’ report. “Epic’s experts calculations of the operating margins for the App Store are simply wrong,” an Apple representative told The Verge.

Core to Epic’s argument in the trial is that Apple operates a monopoly with the App Store by refusing to allow competing app stores on the iOS platform, in addition to not allowing third-party payment systems. High profit margins from the App Store, Epic argued, is part of the reason for Apple won’t allow either.

3. “Fortnite” is making Epic billions of dollars every year, especially on the PlayStation 4.

Fortnite (loot chest)

In one of the less surprising secrets unearthed from evidence presented during the trial, “Fortnite” is making a huge amount of money – to the tune of several billion dollars every year for the last several years.

In 2020 alone, Epic made over $5 billion in revenue according to sworn testimony from Epic Games CEO Tim Sweeney. Between 2018 and 2019, “Fortnite” brought in over $9 billion.

Epic makes more than “Fortnite” – the gaming giant produces the Unreal Engine, operates the Epic Games Store, and owns and publishes several other big games (“Rocket League” and “Fall Guys”). Data from Epic presented during the trial shows that those projects, while moneymakers in the hundreds of millions, don’t generate anywhere near as much revenue as “Fortnite.”

4. Epic CEO Tim Sweeney sent Apple CEO Tim Cook a 2 a.m. email declaring war.

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Epic Games cofounder and CEO Tim Sweeney.

At 2 a.m. PT on August 13, 2020, Epic Games CEO Tim Sweeney sent an email to Apple CEO Tim Cook and several other Apple executives that laid out Epic’s plan to cut Apple out of payments in “Fortnite” on iPhone and iPad.

It was intended as a declaration of war.

“I’m writing to tell you that Epic will no longer adhere to Apple’s payment processing restrictions,” Sweeney wrote. “Today, Epic is launching Epic direct payments in ‘Fortnite’ on iOS, offering customers the choice of paying in-app through Epic direct payments or through Apple payments, and passing on the savings of Epic direct payments to customers in the form of lower prices.”

In response, Apple pulled “Fortnite” from its iPhone and iPad store, and the game has been unplayable on both ever since. Epic sued Apple on the same day, and this email was one of many private messages between the companies that was uncovered as evidence.

5. “Fortnite” was such a big deal on the PlayStation 4 that Epic was able to force Sony to overturn a longstanding precedent in gaming.

Fortnite

In September 2018, after months spent fighting a losing battle in the court of public opinion, Sony gave in: “Fortnite,” the company announced, would be playable on the PlayStation 4 with friends on other platforms.

“Fortnite” was the first-ever game to allow players on all platforms to play together. “This represents a major policy change for Sony Interactive Entertainment,” Sony said in its announcement. It was clear at the time that, with the game playable across all other platforms, Sony was almost certain to give in: Tens of millions of people were playing “Fortnite,” and they were earning the most from players on Sony’s PlayStation 4, according to documents from Epic presented as evidence in the trial.

Between January 2019 and July 2020, just before “Fortnite” was removed from the App Store, Epic was earning just shy of $150 million each month on average from PlayStation players, according to Epic. By comparison, the company was earning about $23 million per month on average from iOS players, Epic said.

Got a tip? Contact Insider senior correspondent Ben Gilbert via email (bgilbert@insider.com), or Twitter DM (@realbengilbert). We can keep sources anonymous. Use a non-work device to reach out. PR pitches by email only, please.

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