Epic expert witness claims Apple's app store is making big money as a monopoly

This Monday begins an epic trial. Or should we say, the lawsuit between Epic Games and Apple begins this Monday. The latter threw Epic's popular Fortnite game out of the App Store after discovering that the developer allowed users to make payments through the app through Epic's own payment platform.

Epic Games claims Apple's App Store had 78% profit margins in 2019

Epic's action violated Apple's rules that require developers offering in-app purchases to pass them through Apple's integrated payment system. But Epic, like Spotify and Netflix, wanted to avoid having to pay Apple its 30% cut in in-app payments. Some here are calling Apple's role anti-competitive and monopoly, and a class action lawsuit accuses Apple of forcing app prices to be higher than they would be without its rules.

The class action lawsuit alleges that the so-called “Apple Tax” of 30% forces developers to charge higher prices for apps in the iOS app storefront. And since Apple doesn't allow users to download apps from third-party app stores, iOS users have it worse than Android users who, in theory, can shop for lower prices.
With the Epic bench trial against Apple (a bench trial is one where the decision is made by the judge instead of a jury) two days to go, some of Epic's expert testimony has leaked. According to Bloomberg, economics and finance researcher Ned Barnes said App Store operating margins were 78% in 2019. Barnes said he obtained documents "prepared by the planning and analysis group Apple's corporate finance and products from the files of Apple CEO Tim Cook. . " 

Despite Barnes' comments on getting the numbers from Apple and the files from Tim Cook, the company denies the accuracy of its calculations. Apple is also asking the court to order a strict lockdown against the public discussion of App Store profits. While an Apple employee told Barnes that the numbers he got from Apple don't show the whole story, he did the rest of the math himself to determine that the App Store had a 79,6% operating margin for 2018 and 2019.

Apple has its own expert witness that it plans to call to rebut Barnes. Richard Schmalensee, an economics expert at the Massachusetts Institute of Technology (MIT), says that “Barnes' estimate of App Store operating margin is unreliable because it examines a segment of the iOS ecosystem in isolation. 'a way that artificially increases the apparent operating margin of this segment. Schmalensee added that "any accounting measure of the App Store's stand-alone profitability is also arbitrary and therefore unreliable as an indicator of anything."

To reiterate, Apple asked the court not to allow Epic to mention App Store financial data in the courtroom. Apple expressed concern that in doing so the data could "unduly confuse the securities markets and the participants in those markets, including the many pension funds, mutual funds and other mainstream investors who hold Apple shares ”.

Today, Apple released a statement that "Epic's calculations of App Store operating margins are simply wrong and we are eager to rebut them in court." App Store margins - and therefore App Store profits - reportedly continued to increase from 2019. Sensor Tower claims the App Store generated $ 22 billion in commissions for Apple last year , while Bernstein's Toni Sacconaghi claims the App Store has an 88% gross profit margin.

Apple executives say the company doesn't look at P / L numbers for individual units. Cook said in his pre-trial testimony that "Apple's business is not structured in such a way as to allow a person to push a button and get an income statement on the App Store." Apple's chief compliance officer Kyle Andeer said last month during a hearing before Congress: “When we look at the App Store, it's not a separate stand-alone business for us. It is a built-in feature of our devices. "

It is strange to see that the better the expected performance of the App Store, the more the company is considered anti-competitive.

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