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Apple trial threatens to reveal App Store’s Commission Bounty

(Bloomberg) – Apple Inc.’s App Store has long been hailed as a growth engine. Now the world’s most valuable business is fighting in US court not to disclose how lucrative it is.

In a lawsuit scheduled to begin Monday, Epic Games Inc. claims that the iPhone maker’s 30% commission on app sales is a violation of the antitrust law that cheats developers and consumers. Epic’s long-odds gambit for free access to the App Store, backed by mother-and-pop developers and giants like Microsoft Corp., comes amid growing global regulatory control over Apple’s dominance of software on its ubiquitous phones. On Friday, the European Union issued a warning over the App Store, saying it believes Apple is abusing its power.

Apple has asked the California judge to close the courtroom when Epic calls on an expert witness to discuss “the alleged”

; profitability “in the App Store on a stand-alone basis.” Apple said in a statement late Wednesday that it does not oppose the court considering such evidence from Epic, but is “concerned that analysts, investors, journalists and others in the market could misinterpret the publication of non-public, not. -audited financial information. “

Until now, the legal argument that the App Store constitutes a monopoly has been partly based on numerical guesswork. Apple says it can not quantify the store’s profit margins, which Epic, the maker of the Fortnite game, has called “extraordinarily high.” One of Apple’s executives testified while grilling in Congress this month that the company does not report sales of individual business units, but instead discloses the company’s total revenue figures in accordance with accounting rules.

“As a result of Apple’s general philosophy that its products and services are part of an ecosystem, Apple sees the value of all its products and services as a whole,” CEO Tim Cook said in a court submission. “Apple’s business is thus not structured in the way that allows a person to press a button and get an App Store” income statement.

U.S. District Judge Yvonne Gonzalez Rogers of Oakland is expected to hear nearly three weeks of testimony from executives and economists without a jury. Epic is pursuing similar lawsuits against Apple in the UK and Australia.

Epic said in a court case Friday that it wants to discuss in open court what happened to Apple co-founder Steve Jobs’s pledge in 2008 that “we do not intend to monetize the App Store.” Sealing the courtroom would “hide from the public facts and evidence showing whether Apple lived up to Mr. Jobs’ promise or instead earned sustained and extraordinary profit margins from its App Store commissions,” Epic said.

Read more: Apple Probed by UK as App Store Payments Scrutiny Mounts

Analysts say the loss of the lawsuit would be a major setback for Apple because the store has become a driver in Cupertino, the California-based company’s service segment. Sensor Tower estimates that the App Store generated $ 22 billion in commissions last year for Apple, while Bernstein analyst Toni Sacconaghi believes Apple will run the App Store this year with a 88% gross profit. Apple said its total profit in 2020 of more than 57 billion. The dollar posted a margin of 20.9%, adding that “despite its significant profits, it is subject to competition in all of its industries.” Last year, the company reduced half of the fees it charges to smaller developers who sells software and services in the App Store, which lowers 30% to 15% for developers who generate as much as $ 1 million in annual revenue from their apps and those new to the store, Apple says many apps do not pay fees in return for the company’s efforts to host and maintain store security.

If Epic were to win a decision that forced Apple to reverse its commission on the Fortnite app, other developers would demand similar concessions. Meanwhile, Epic is also challenging Google’s app marketplace, Google Play.

“If Epic wins, the result could be to open not only the Apple app store, but also Google’s, reducing prices and making it harder for Apple to block or disrupt apps that compete with its own products, such as Spotify or Google Stadium,” he said. Professor Stanford University in Law Mark Lemley.

Epic has calculated App Store sales and profit margins for fiscal years 2018 and 2019 based on internal data taken from Apple presentations – all edited by the public in court filings – only to be told by Apple that the estimate is “deficient.”

Apple said it does not allocate costs to the App Store, and that internal documents discussing App Store revenue typically do not include costs. This means, according to the company, that margins or profits do not show the whole picture.

“With antitrust defendants, it’s remarkable what they say they do not know,” said Joshua Davis, a professor at the University of San Francisco Law School. “There’s a game being played by incredibly talented companies who suddenly find themselves unable to perform basic tasks, and this could be an example of that.” In its request to the judge to prevent Epic from referring to App Store financial data in open court, Apple said that the information “could unreasonably confuse the securities markets and participants in those markets, including the many pension funds, mutual funds and other ordinary investors, who owns Apple shares. ” Epic responded that Apple should not be allowed to “manipulate the public. register by publicly denying its ability to calculate App Store profits – as Apple experts have done in unsealed archiving – while Epic’s evidence of these claims is based on internal Apple documents. ”

If Epic makes its antitrust claim by providing evidence of Apple’s market power, the evasive data would be “extraordinarily important” to show that the iPhone maker could not achieve these profits in a competitive market, according to Davis.

Lemley says the trial does not necessarily turn on the mystery figures. What matters is whether the judge believes apps for iOS mobile devices are a separate market, and if so, whether Apple has only a legitimate reason to process payments through its App Store, the professor said.

“Charging a high price is not in itself illegal; Epic must show behavior designed to acquire or maintain the monopoly, ”Lemley said. “And that can certainly point to the 30% tax, which is well known.”

Read more: Apple accused of ‘Power Grab’ in hearing of Senate App Store

Apple’s secrecy surrounding App Store financial data has also shaken U.S. lawmakers, pushing the company to be more transparent.

At a April 21 Capitol Hill hearing examining Apple’s business practices, Senator Amy Klobuchar asked Chief Compliance Officer Kyle Andeer about App Store revenue – to no avail.

“OK, but then you have no numbers that I definitely exist,” the Minnesota Democrat said. “We’re trying to ask you in writing.”

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