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The bigger battle at stake in the Apple and Epic Games showdown

The high stakes court battle between Apple and Epic Games, the maker of the globally popular video game Fortnite, is nearly over. Apple CEO Tim Cook took the stand Friday to defend the company's app store against monopolization charges. Lisa Desjardins and Reuters reporter Stephen Nellis dive into the antitrust trial that could have big implications for Apple, other smartphones and apps.

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  • Amna Nawaz:

    The high-stakes court battle between Apple and Epic Games, the maker of "Fortnite," one of the world's most popular video games, is nearing an end.

    And today featured an important moment. Apple CEO Tim Cook took the stand to defend the company's App Store against charges that it's grown into an monopoly.

    Lisa Desjardins has a look at the antitrust trial that could have big implications for Apple, other smartphones, and apps.

  • Lisa Desjardins:

    Amna, this was the first time Tim Cook has ever taken the witness stand in a courtroom.

    The battle first started in August of last year, when Epic announced it added a new direct payment plan. That gave "Fortnite" players the option to purchase virtual currency from Epic's payment system, rather than from Apple.

    Apple takes a 30 percent cut of any app sale on its devices. "Fortnite" was soon pulled from the App Store, leaving millions of gamers unable to update the popular video game for new releases on their iPhones.

    Epic alleges that Apple's policies stifle competition and violate antitrust laws. But, in court, Cook said there's plenty of competition from rivals, and he also said allowing developers to use their own in-app payment plans could expose customers' to — quote — "fraud issues."

    To unpack all of this for us, I'm joined by Reuters reporter Stephen Nellis.

    Stephen, we have got two huge factors in American culture, Apple and gamers, going at it. But tell us, what's at stake for Apple, but also for folks who just have regular iPhones?

  • Stephen Nellis:

    What's at stake here is really what makes Apple a $2 billion company.

    If you think back to when the iPhone was released more than 10 years ago, the big difference vs. the P.C.s at the time was what people called the walled garden, this idea that you can only install the software on there that Apple distributes to you through the App Store.

    And, as we know, Android came along a little bit later and followed suit with that same model. So, it's really set the bar for the entire mobile phone industry.

    And one of the features of that for Apple is that, if you want to be inside the walled garden as a software developer, you pay a 30 percent commission. And that is created when it's just the anchor of this $54 billion services business for Apple, a big part of what's powered their profits, and a big part of what's set the expectations for everybody's smartphone today.

  • Lisa Desjardins:

    Hmm, $54 billion for Apple.

    "Fortnite" and Epic Games are leading this rebellion here. Some folks might remember, last year, Epic Games made this move, launching this ad that was sort of mocking or turning around Apple's own iconic 1984 ad. In this case, it was a game character launching a sword at the Apple image itself.

    But beyond this idea of good guys and bad guys, really, the legal case, it seems to me, is coming down to the idea of, what does Apple do? Is it a device company, or is it a games an app company? And is it a monopoly? Can you help us understand those arguments?

  • Stephen Nellis:

    So that's right, Lisa.

    I think it's really important to distinguish two things here. First is the actual trial that's at hand here. And, as you say, that does hinge on actually some fairly arcane and technical legal issues.

    Mainly, the first thing you have to decide, whether you call somebody monopoly or not, is, what is the market that we're talking about? And Epic in this case is making an argument that might sound a little strange to a lot of people.

    Epic is arguing, Apple has such a strong lock on its customers that those one billion iPhone users in the world are basically their own separate market. And, by definition, that means Apple has a monopoly over that market, because it controls all the software that goes onto the phone.

    Now, Apple wants to frame things differently. First off, as Tim Cook said today, they feel that they compete vigorously against Android phones from Samsung, lots of brands in China. Remember, Apple is a global company, so Xiaomi and phones that people might buy there.

    And then, more to the point, Apple is saying, well, wait a minute, this case is about video games, and about where you can pay to play "Fortnite." And they're also trying to make the argument that in this particular case, they face plenty of competition, because gamers can and do go play "Fortnite" on their Xbox, or their PlayStation, on their gaming P.C. rig, and can pay for those payments there.

    So, that's all what this legal case is about. But what I think is important is to remember that that's separate from the larger discussion about antitrust issues and technology platforms.

    So, legal experts have said that Epic has an uphill battle here in the case. But what this is doing is generating a lot of record in the court documents and the testimony that Tim Cook is giving today that U.S. Congress, that lawmakers in Europe are going to look at and decide, wait a minute, maybe what Apple is doing is within the bounds of current antitrust law, but what if we want to change those antitrust laws? What if we want to enact reform?

    And so that's the bigger battle here. It's not just totally encapsulated in the specific case at hand.

  • Lisa Desjardins:

    So, what do you think Tim Cook wanted to do on the stand? Apple called them itself — called him itself.

  • Stephen Nellis:

    That's right.

    So, they very much wanted Tim Cook to get up there and make the case that all these rules and restrictions that Apple places on developers are all in the service of the privacy, security and safety of Apple's customer base.

    Tim Cook said it on the stand many times a day. He said, this is not about money. This is all about the user and the experience. They want a phone that just works. They don't want bugs in software, malware and other bad software that crashes their phone. They want something that's reliable, and that they feel like they can hand to their children and know that all the software that's going to be on there is going to be safe and secure and appropriate for those children.

    And that's important for a couple of reasons. Number one, that's definitely Apple's defense in the broader public sphere.

    And, number two, it's also actually important for a legal reason in this case, because, under current antitrust law, even if you take — even if you have a monopoly, even if you charge high prices, if you can show that some of the restrictions you put on one side of a two-sided marketplace, like developers trying to get to the iPhone customer, if you can show that it has some real benefits for the customers on the other side of it, the courts have said, sometimes, that can be OK.

    So, it had an important rhetorical function and an important legal function as well.

  • Lisa Desjardins:

    I see. OK.

    Reuters' Stephen Nellis, we will keep following this case. Thank you so much.

  • Stephen Nellis:

    Thanks, Lisa.

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