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Apple Trial threatens to reveal the App Store commission

(Bloomberg) – Apple Inc. App Store has long been advertised as an engine of growth. Now the world’s most valuable company is fighting in a US court not to reveal publicly how profitable it is.

In a trial due to begin Monday, Epic Games Inc. claims that 30% commission from the sale of applications from the manufacturer of the iPhone is a violation of antitrust law, fraud of developers and users. Epic’s long chance to gain free access to the App Store, which has received support from cheat and pop developers and giants such as Microsoft Corp., comes amid growing global regulatory scrutiny of Apple̵

7;s dominance of its ubiquitous phones. The European Union issued a warning to the app store on Friday, saying it believed Apple had abused its power.

Apple asked the judge in California to close the courtroom when Epic called an expert witness to discuss “the alleged” profitability “of the App Store on its own.” Apple said in a statement late Wednesday that it did not object to the trial, looking at similar evidence presented by Epic, but was “concerned that analysts, investors, reporters and others in the market could misinterpret public disclosure of non-public, unaudited financial information.” “

Until now, the legal argument that the App Store is a monopoly has been based in part on numerical assumptions. Apple says it can’t quantify the store’s profit margins, which Epic, the maker of Fortnite, called “extremely high.” One of Apple’s executives testified while grilling in Congress this month that the company did not report sales of individual business units, but instead disclosed company-wide revenue figures in accordance with accounting rules.

“As a result of Apple’s overall philosophy that its products and services are part of the ecosystem, Apple is considering the value of all its products and services as a whole,” said CEO Tim Cook in a lawsuit. “Thus, Apple’s business is not structured in such a way that allows a person to press a button and get the App Store” income and expense statement.

U.S. District Judge Yvonne Gonzalez Rodgers is expected to hear testimony from executives and economists in Auckland for nearly three weeks without a hearing. Epic is prosecuting similar legal actions against Apple in the UK and Australia.

Epic said in a court statement Friday that it wanted to discuss in open court what happened to the vow of Apple co-founder Steve Jobs in 2008 that “we do not intend to make money from the App Store.” “Hide from public records facts and evidence showing whether Apple has fulfilled Mr. Jobs’ promise, or instead earns steady and extraordinary profit margins from its App Store commissions,” Epic said.

Read more: Apple has been researched by the UK as a checkpoint for payments in the App Store

Analysts say the loss of the trial period would be a major failure for Apple because the store has become an engine in the company’s service segment in Cupertino, California. Sensor Tower estimates that the App Store generated $ 22 billion in commissions last year for Apple, while Bernstein analyst Toni Sacconaghi believes Apple will launch the App Store this year with a gross profit of 88%. Apple said that the total profit for 2020 of over 57 billion dollars amounts to a 20.9% margin, while adding that “despite its significant profit, it is subject to competition in all its areas. “Last year, the company halved the fees it charges for smaller developers who sell software and services in the app store, reducing 30% to 15% for developers who generate $ 1 million a year in revenue from their apps and those who Apple says many apps pay no fees in exchange for the company ‘s efforts to host and maintain the store’ s security.

If Epic wins a decision forcing Apple to return its commission for the Fortnite app, other developers would ask for similar discounts. Meanwhile, Epic is also challenging the Google app marketplace – Google Play.

“If Epic wins, the result could be the opening of not only Apple’s app store, but also Google’s, lowering prices and making it harder for Apple to block or prevent apps that compete with its own products, such as Spotify or Google Stadia, ”said Mark Lemley, a law professor at Stanford University.

Epic has calculated App Store sales margins and profit margins for fiscal 2018 and 2019 based on internal data collected from Apple presentations – all edited from public view in lawsuits – just to be told by Apple that the assessment was “wrong. ”

Apple said it does not allocate costs to the App Store and that internal documents discussing App Store revenue usually do not include costs. This means that according to the company, no margins or profits show the whole picture.

“With the antitrust defendants, what they say they don’t know is remarkable,” said Joshua Davis, a law professor at the University of San Francisco. “There is a game in which incredibly capable businesses are played, which suddenly prove to be incapable of performing basic tasks, and this could be an example of this.” In his request to the judge to forbid Epic to refer to the financial data of the App Store in an open court hearing, Apple said the information could “unlawfully confuse securities markets and participants in those markets, including the many pension funds, mutual funds and other ordinary investors who own Apple shares.” Epic responded that Apple should not be allowed to “manipulate the public record by publicly denying its ability to calculate profits from the App Store – as Apple experts did in unsealed requests – while hiding Epic’s evidence of these claims based on Apple’s internal documents. .

If Epic made its antitrust claims by providing evidence of Apple’s market power, elusive data would be “extremely important” to show that the iPhone maker can’t make those profits in a competitive market, according to Davis.

Lemley says the process will not necessarily involve secret numbers. What matters is whether the judge considers iOS mobile apps to be a separate market and, if so, whether Apple has a good reason to process payments only through its App Store, the professor said.

“The very charge of a high price is not in itself illegal; Epic must engage in behavior designed to acquire or maintain a monopoly, ”Lemley said. “And it can certainly point to a 30% fee, which is well known.”

Read more: Apple accused of “Power Grab” in the Senate App Store hearing

Apple’s secret over the App Store’s financial data has also puzzled US lawmakers, who are pushing for the company to be more transparent.

At a Capitol Hill hearing on April 21 to review Apple’s business practices, Senator Amy Klobuchar questioned Chief Compliance Officer Kyle Andir about the App Store’s revenue – to no avail.

“Okay, but so you don’t have numbers that I’m sure exist,” said the Minnesota Democrat. “We will try to ask you in writing.”

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