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Apple’s Phil Schiller, other execs defend App Store in Fortnite lawsuit

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Epic Games and Apple are battling it out in what’s being called one of the most important tech antitrust cases in years.


Angela Lang/CNET

For the past two weeks, Fortnite maker Epic Games and Apple have been battling in court over how the iPhone and iPad App Store should be run. Epic argues that Apple is acting like a monopoly that’s overly controlling, opportunistic and unfair. Apple says Epic doesn’t want to follow the rules. Together, they could change the way we see antitrust in the age of big tech.

As part of its arguments, Apple called up Phil Schiller, who oversees the App Store. Now an Apple Fellow, Schiller had spent the past 30 years running the company’s worldwide marketing. During his testimony, Schiller said Apple had focused on privacy and security from the App Store’s inception.

Apple’s lawyers cited a 2007 public letter from company co-founder Steve Jobs, in which he outlined Apple’s focus on privacy. “As our phones become more powerful, these malicious programs will become more dangerous,” he wrote at the time. “And since the iPhone is the most advanced phone ever, it will be a highly visible target.”

Schiller said it’s even more so the case now.

He also spoke about Apple’s commission structure for the App Store, which he noted the company has never raised, but did lower for 90% of developers. And he defended Apple’s approach to streaming game services from Xbox, Google and Sony, as opposed to video-streaming apps like Netflix, saying privacy policies and logins typically differ between games, regardless of whether they’re in a catalog. “It isn’t about movies. It’s an Apps and Games Store,” he said. “I do think there’s a difference there.”

As one of the most high-profile executives at Apple, Schiller represented a key part of the company’s defense in the past two weeks Epic and Apple have used the court to air grievances and knock one another’s businesses while promoting their own. Schiller used his time to defend Apple’s moves as reasonable, and to emphasize that despite the iPhone maker’s gigantic size, it doesn’t wield monopolistic power.

What’s unclear is whether his efforts will work. The proceedings are a bench trial, meaning the judge will decide the case, not a jury. And so far, US District Court Judge Yvonne Gonzalez Rogers has made a case of asking tough questions from both sides of the courtroom.

Epic’s hit Fortnite game was kicked from Apple’s App Store in August after Epic CEO Tim Sweeney approved a change to the app, purposely breaking Apple’s rules against using alternative payment processing. Apple says its payment processing and strict app store rules are important to the company, helping it stand out from Google’s competing and more widely used Android software, which allows “side-loading” apps and alternative app stores.

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Fortnite is one of the most popular games in the world.


Epic

The outcome of the lawsuit could change everything we know about how Apple’s App Store works, and Google’s Play store too. Apple could be forced to disregard its concerns over app security, allowing alternative app stores and payment processing into its devices. Legal experts, lawmakers and regulators are closely watching, seeing the case as a first look at how antitrust laws could apply to tech giants.

Apple also called up its head of business development for games in the App Store, Mike Schmid, who likewise described his company’s moves as reasonable and supportive of Epic before lawsuits began flying last August. As the person at Apple who most interacted with Epic, he described a friendly relationship with his counterparts and described how Apple supported Fortnite.

Apple had apparently rushed its review process so often for Fortnite that Apple’s own app review team had begun to push back. “I truly understand the plight of game developers especially that are operating at this speed,” Schmid said during testimony, in which he praised Epic’s speed of delivering updates to users.

Below are some of the things we learned during the court trial:

Opening salvos and Sweeney’s testimony. When Katherine Forrest began her opening statement for Epic Games in its battle against Apple in a California courtroom on May 3, she blasted the iPhone maker as a monopolist, holding app makers hostage to its onerous licensing terms and commission structure, taking up to 30% off subscriptions and other sales without explicitly telling users. But when she asked a seemingly benign question of Sweeney on May 4, she revealed potential hypocrisy on her side too.

In the summer of 2020, Sweeney sent emails to Apple executives, asking them to allow his company to offer its own app store for iPhones, effectively an alternative to the system Apple’s used since 2008. Apple has only allowed app developers to offer programs to iPhone and iPad users by submitting apps to its store where they go under review before being offered for sale or for free. Apple also requires all app developers to use its payment processing service if they want to sell subscriptions or in-app items, like a new look for a character or a power-up for their next turn.

Sweeney at the time appeared to be seeking a separate and special deal with Apple, something that didn’t fit with the company’s blustery lawsuit in which Forrest had claimed, “Epic is suing for change, not just for itself, but for all developers.”

“The market will not self-correct,” she added. “That requires the intervention of force, more powerful than even the largest company in the world has ever seen: our justice system.”

The next day, on May 4, she asked the soft-spoken Sweeney whether he’d have accepted a side deal with Apple, effectively getting special treatment while other app developers continue losing out. “Yes, I would have,” he said.

Sweeney prefers an iPhone. When Apple’s lawyer asked if part of the reason Sweeney prefers the device is Apple’s treatment of customer data, privacy and security, he responded, “correct.” He’d been handed Android devices but confirmed he gave them away.

Epic argues app scams undermine App Store. One way Epic’s lawyers and executives attacked Apple’s App Store was to highlight scam apps, stories from upset developers who complained that Apple played favorites and who gave instances where Apple generally didn’t deliver on its promises.

While Epic saw that as a symptom of Apple’s problems, the iPhone maker tried to frame it as a strength.

“The mistakes that I’ve been shown originated from customer and developer complaints,” Trystan Kosmynka, a senior director of marketing at Apple, said in court on May 7. Rather than seeing these messages as signs the App Store team is struggling to do its job, he said, the activity shows people trust the store and want to help keep it safe. “I’m glad they’re passionate and email our executives reporting the concerns and that we investigate them quickly and improve on it,” he said.

There were some notable concerns Epic raised, though, including a copycat app of its Fortnite game.

Rogers asked tough questions of Apple too. When Kosmynka described Apple’s review process, he added that the App Store team told developers it would approve 50% of apps in 24 hours and 90% within 48 hours, depending on the app. So Rogers asked if Apple delivered on those promises. “Absolutely,” Kosmynka said, revealing that Apple currently approves 96% of apps within 24 hours.

She also challenged Apple’s argument that restricting the app distribution to just the App Store is a worthwhile tradeoff. “One of the problems with limiting competition is that you don’t get innovation, or at least that’s one of the concerns,” Rogers said. She also asked if Apple had an outside party independently review what’s on the App Store and pay bounties, similar to how tech companies do for security researchers who find vulnerabilities in their products.

Epic says Apple isn’t as invested in its partner’s success. During his testimony, Epic marketing director Matthew Weissinger said Apple doesn’t help market Fortnite as much as MicrosoftSony and Nintendo do for their Xbox, PlayStation and Switch. “We create all sorts of engagement, hours of engagement inside of Fortnite,” Weissinger testified on May 10. “And then, at the last minute, Apple kind of injects themselves and says, ‘We require 30% on this as well.'”

Epic executives said they didn’t mind similar commissions they pay to Microsoft, Sony and Nintendo on their stores because their devices are typically sold at a loss, making up the difference with video game royalties. (This is often called the “razor-and-razor-blades” business model, in which the razor is sold for next to nothing, while the sales of blades provide companies with their profit.) Apple, meanwhile, makes a profit off every iPhone sold.

Epic argued that profit models in the video game industry incentivize hardware makers to partner with developers because royalties from those game sales help make up the cost on the console. As a result, Epic said, the video game console makers have sponsored in-person and in-game events as part of their marketing. That’s something Apple doesn’t really do.

But Rogers didn’t appear convinced. The console makers, the judge said, “were promoting their product whenever you did a collaboration with them.” So how was it different from Apple?

Weissinger said it came down to the types of people Apple funneled to Fortnite too. Console gamers are there to play a video game. The App Store has a lot more people who might be looking for more than a Fortnite fix. “It’s not necessarily people making the purchase, it also is, like, all sorts of random folks who are going through that experience. It might be somebody looking for a fitness app or something like that,” he said. The App Store, he argued, “just provides a less qualified audience or less qualified consumer.”

Not just Project xCloud. Microsoft has been vocally complaining about Apple’s app review process and its rules against game streaming services, like its formerly named Project xCloud Xbox service. In cross-examination with Nvidia’s Aashish Patel, a director of product management who helped oversee its GeForce Now streaming service, Apple’s lawyer said a streaming app from Nvidia had also been denied. In a steady stream, Apple’s lawyer asked, “You’re not a neutral observer in this dispute, correct?” “You want Epic to win this case, correct?” “Just maybe you’re upset that Apple has rejected your app as a native app and you’re not happy about that?” Patel said he was disappointed.

Xbox loses money — kinda. One of Epic’s arguments is that Apple’s business model is to profit from the iPhone at sale. Microsoft’s Xbox and Sony’s PlayStation follow the razor-and-razor-blades model, where they sell the console at a loss (the razor) and then sell the video games and accessories at a profit (razor blades). Though this has been commonly known, a Microsoft representative confirmed during trial that its Xbox itself has never turned a profit.

Apple spends a lot on events. We all knew Apple events are slick and tightly choreographed. But now we’re learning they cost a bundle too. Schiller told the court on May 17 that Apple spends about $50 million each year on its Worldwide Developers Conference, also known as WWDC. Depending on how you see the return on investment there, Schiller said about 25 million people viewed the event before it was made widely public and free amid the coronavirus pandemic. Now it’s about 50 million. And, he added, aside from ticket sales and the $99 annual developer fee, Apple doesn’t charge for WWDC.

Apple spends a lot on research and development. As part of his testimony on May 17, Schiller revealed that Apple’s building a facility on its Apple Park “spaceship” campus specifically for developers. He didn’t say much else about it, but the detail was part of a larger point he was making in testimony about how much Apple spends on research and development for its software, hardware and developer ecosystem, effectively justifying the 30% commission it charges from in-app purchases. He also noted that Apple’s spent $100 billion specifically on R&D in the last 15 years, including for retina displays, its in-house A-series and M-series chips and the software that helps power them.

Apple’s got gamers in its top ranks. There are two types of executives in the entertainment industry: Businessmen who are comfortable running organizations, and people who actually watch, play and regularly experience what their company has to offer. Schiller and Schmid both say they’re in the latter camp. Schiller said he owns a Microsoft Xbox, Sony PlayStation and Nintendo Switch. Schmid meanwhile said he and his family play many games, including Fortnite. “Fortnite was the hottest game at the time. I personally played Fortnite. My family played Fortnite, we connected over it. My son played it on the iPad, my wife played it on PlayStation, I played it on my iPad with the controller,” Schmid said.

Schiller doesn’t run the App Store as a typical store. Amid all the questions Schiller answered, one that Epic’s lawyers focused on were whether and when he knew the App Store was profitable. Schiller described in the beginning of his testimony that when he was brought back to Apple to help co-founder Steve Jobs remake the company, one quick big change was to reorganize all of Apple’s divisions under one profit and loss statement (P&L).

That set him up for when Epic’s lawyers pushed this idea, criticizing Schiller’s testimony. “Apple can do accelerometers, and machine learning, and have some of the most sophisticated technology around, and it can’t figure out if the App Store is profitable,” Epic’s lawyer asked at one point. “Is that what you’re saying?” Indeed, Schiller said, the focus at Apple is to support the larger company, not count individual division profits.

Apple says it’s always been worried about security. Schiller said that even before the iPhone’s launch in 2007, Apple executives were concerned about the sensitive data like the phone’s contacts database somehow leaking onto the internet. And when Apple saw people “jailbreaking” their original iPhones in order to install apps from outside developers, the company decided to announce its first software development kit for the iPhone before it was ready, and to create the App Store as a way to manage what apps were going to the phone. “We were very concerned that this would create unreliable and unstable devices,” Schiller said. “This was our way to quickly say, ‘Hold on just wait, we’re going to address this and we want to do something safe and reliable for you.'”

Marketing isn’t just marketing. Apple’s known for its advertising and marketing, and has won several industry awards for it. Schiller said part of what sets Apple’s product marketing teams apart is that they’re part of the development process almost from the start, giving input to engineers and helping to shape the project. He even noted that he helped come up with the idea for the wheel on the iPod music players. “Apple product marketing is entirely involved in the creation of our products from the very first concept, up to and through when we bring it to market,” Schiller said.

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