A Federal Judge Takes On CEO Tim Cook Over Apple's Practices

Tim Cook, chief executive officer of Apple Inc., center, arrives at U.S. district court in Oakland, California, U.S., on Friday, May 21, 2021.
Tim Cook, chief executive officer of Apple Inc., center, arrives at U.S. district court in Oakland, California, U.S., on Friday, May 21, 2021.
Bloomberg/Bloomberg via Getty Images

Updated May 21, 2021 at 4:55 PM ET

Hours into Apple CEO Tim Cook's testimony on Friday in a lawsuit challenging how his company wields its immense power over mobile devices, it was the federal judge who created the most dramatic moment of the three-week trial brought by the maker of the hit video game Fortnite.

In a series of sharp exchanges with Cook, U.S. District Judge Yvonne Gonzalez Rogers demonstrated her concern over the lack of competition in Apple's App Store, which is at the core of the Epic Games' legal battle with the tech giant.

The trial centers on the 30% commission Apple usually charges app makers. While invisible to iPhone and iPad users, the developers typically must pay that fee whenever someone buys their apps or makes purchases inside of their apps. There is no other way to obtain those items on Apple devices, unlike on other smartphones such as Google's Androids.

"It doesn't seem to me you feel any pressure or competition to actually change the manner in which you act to address the concerns of the developers," Rogers told Cook.

She then asked Cook if he agrees with the basic proposition that competition is good.

"I think it's great," Cook said.

Rogers replied: "You don't have competition in IAP though," referring to in-app purchases.

"What is the problem with allowing users to have choice," Rogers asked.

"I think they have a choice today," Cook said. "They have a choice between many different Android models, or an iPhone. That iPhone has a certain set of principles behind it."

Cook had noted earlier in the day that Apple recently cut in half its commission for small developers – those who earn less than $1 million a year. The judge did not seem impressed.

"The issue with the $1-million-dollar small-business program, at least what I've seen so far, that really wasn't the result of competition – the pressure you were feeling," Rogers said.

"Of course we had lawsuits and all the rest of the stuff in our head," Cook said.

"Ok," Rogers said. "But it wasn't competition."

Cook: Apple commission necessary to avoid 'a toxic kind of mess'

Cook, in his first-ever courtroom testimony, said customers demand a level of safety, security and privacy on iPhones. Providing that service depends on the money Apple earns from the commission, he said.

"If you were to turn app review off, you can imagine how long it would take the App Store to become a toxic kind of mess," Cook testified.

Both users and app makers, Cook said, depend on the App Store's being a safe and trusted place, free of malware and other possible unwelcome intrusions.

Yet Epic lawyer Gary Bornstein pushed Cook about other possible motivations for its commission: juicing Apple's profits.

Cook: Fortnite skirting Apple's rules was 'malicious'

Cook said he was personally involved in the decision to kick the video game Fortnite out of the App Store last year after Epic Games' skirted Apple's rules and violated the company's contract. Cook viewed the actions as "malicious."

In his testimony, Cook said Apple would later invite Fortnite back onto the App Store, but the gesture was not related to juicing Apple profits.

"It's not about the money at all. It's about the users," Cook said from the witness stand.

"We felt it was the right thing to do," Cook said. "The user was being put in the middle of a business dispute."

Apple officials have testified that iPhone Fortnite sales have generated more than $100 million for Apple, though the lucrative arrangement remains on hold for now.

Customers, Cook said, like the safety, security and privacy of iPhones. Some developers, too, he said prefer the current system.

Cook said "obviously" there is one developer that does not.

Epic lawyer Gary Bornstein pushed back, asking: Just one?

"Maybe a few," Cook responded.

Bornstein asked Cook how many developers had testified on Apple's behalf over the course of the three-week trial. Cook said he did not know.

"Would it surprise you to know the answer is zero?" Bornstein said.

"No, it wouldn't surprise me," Cook said.

How much does Apple make from its App Store?

Exactly how much Apple earns from its fees remains a mystery. Cook's predecessor, Steve Jobs, who died in 2011, said the App Store fees would only ever cover costs, not generate profit the the company.

Yet an Epic expert estimated that Apple made an 80% profit on the App store commission. Apple officials have called that inaccurate. But Cook said the company does not view the App Store's profits in isolation, so he would not say how much Apple makes.

Still, Epic's legal team on Friday walked Cook through internal Apple documents that were produced as evidence. They contained projections about Apple's App Store profits, but the figures were never read aloud in court, since Apple has claimed the number is a confidential business record.

Breaking open Apple's 'walled garden'

Cook's testimony caps a three-week trial that centers on Apple's immense power over transactions in its App Store.

The fees, known by critics as "the Apple tax," have emerged as a key flashpoint in growing scrutiny over Apple's business practices. Questions are swirling inside and outside the courtroom about whether the famously guarded company should be considered an abusive monopoly and forced to break open what Epic lawyers have described as a multibillion-dollar "walled garden."

Epic Games, the maker of the popular video game Fortnite, sued Apple last year for tacking on a 30% commission to purchases made through the App store. Epic accuses Apple of levying the fee to enrich itself at the expense of small developers.

Epic's lawyers have said that developers should be able to sell subscriptions or items within their apps directly to consumers, even if those consumers downloaded the apps through Apple's store. As Epic sees it, that competition would force Apple to lower its fees and developers would collect more cash.

Apple's legal team has countered that, while Epic has portrayed itself as sticking up for all developers, the game maker is actually trying to make more money for itself.

Apple's attorneys say the 30% take on purchases has long been the industry standard. Revenue from the fee funds Apple staffers to vet apps to ensure Apple's privacy and security safeguards are met.

The trial has been unfolding in person in Oakland, Calif. with pandemic precautions. Company executives and expert witnesses took the stand behind Plexiglass, as lawyers peppered them with largely technical questions while wearing face shields.

Yet there has been levity, too. A tuxedo-clad Banana named Peely, which is an outfit in Fortnite, came up a few times in the courtroom, as did an idea that Epic officials said almost happened: A Fortnite outfit inspired by Steve Jobs that was going to be called the Innovator. Mention of this caused some mask-muffled laughter in the mostly sparse courtroom.

The trial exposed the trove of trial evidence known as discovery to the public, providing a rare glimpse into private conversations Apple officials have had over the years with each other and clients about their business practices.

Much is at stake for Apple. The commission is critical to Apple's bottom line. As iPhone sales peaked years ago, Apple — the world's most valuable company — sought new ways to grow and make money. Subscriptions fees and other "services" are key to its continued success.

The trial is expected to wrap up early next week. Then Rogers could take weeks, if not months, to arrive at a ruling.

Rogers will be weighing whether, as Epic argues, the App Store is large enough to represent its own market, or if she sees the world as Apple does: that the App Store is but a small slice of a much larger market for e-commerce and video game sales happening across the Internet and major consoles.

Cook said that Apple faces "fierce" competition in distributing Fortnite, hinting at a key difference between the sides over just how broadly or narrowly the judge should consider the market the fight is over.

Rogers, who has asked sharp questions of both sides, indicated on Friday that she is taking a hard look at Epic's accusations.

"The lack of competition on the 30 percent is something that is troubling," Rogers said.

Legal scholars say antitrust caselaw tends to favor corporations and has a high bar for considering a company's behavior anti-competitive, which is against the law, rather than just hyper-competitive, actions that are perfectly legal.

Editor's note: Apple is among NPR's financial supporters.

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