Apple invests billions of dollars in R&D and its legal to charge 30% of commission: Tim Cook

Apple CEO Tim Cook appeared for the first time in the Epic Games v. Apple monopoly trial. Cook was questioned sharply by the presiding judge during the trial, but he avoided many key questions.

On the day of the trial, Cook said in an inquiry from Apple’s lawyers that Apple’s mission is to “make the world’s best products and truly enrich people’s lives” and pointed out that Apple’s investment in research, privacy, and security is as high as tens of billions of dollars. He added: “We care about our users very much.”

The presiding judge Yvonne Gonzalez Rogers asked Cook about the business model of the app store and the relationship between Apple and developers, many of which were quite acute.

However, Cook deliberately avoided many key questions and did not give clear answers to the judge’s questions. Friday was Cook’s first testimony in the Epic Games v. Apple monopoly trial. The three-week trial will end next Monday, but Judge Rogers warned that it may take her several weeks or months to make a verdict. She also said that after that, the dispute may be appealed.

Take 30% commission for granted?

Judge Rogers asked Cook: “You said you want to give users control, so what’s the problem with giving users cheaper content options (especially in games)?” Cook retorted that users can use iPhone or countless Androids. Choose between devices.

Subsequently, Rogers asked whether it was a problem for app developers to bypass the 30% commission charged by Apple and provide users with information through a web browser to obtain the same in-app purchase. She proposed a compromise that would allow companies like Epic Games to link apps to web browsers for transactions, rather than forcing users to use Apple’s in-app purchase mechanism.

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Cook said that Apple’s investment in intellectual property needs to be rewarded, which is why Apple charges a 30% commission for apps and in-app purchases. He explained: “If we allow developers to bypass the rules, it means we have given up monetization efforts. We need to reap the rewards for investing in intellectual property. We have 150,000 APIs to create and maintain, and to provide countless Developer tools.”

Judge Rogers seemed to be dissatisfied with this answer. She said that Apple can reap the rewards in other ways, noting that the gaming industry seems to be “subsidizing” other apps on the app store. She said: “The gaming industry seems to generate a disproportionate amount of revenue relative to the intellectual property you provide. In fact, it’s almost like they are subsidizing everyone else.”

Cook responded that games are traded on the platform, so game developers should pay Apple a commission. When Rogers responded that “people do a lot of things on the Apple platform,” Cook said that “obviously there are other ways to make money, but we chose this way because we think it’s a better way.” Rogers retorted: “It’s also quite profitable.”

Rogers said that she had seen a survey showing that 39% of Apple developers were dissatisfied with the app store. He said: “In my opinion, you don’t seem to feel any pressure or competition, and you don’t need to really change your way of action to address developers’ concerns.” Cook disagrees with this statement, saying that Apple “subverts The environment in which the developer is located”. But he pointed out that there are frictions because Apple refuses to accept 40% of applications.

Rogers asked Cook whether he agreed with the statement that “competition is good.” Cook responded that Apple is facing fierce competition for developers and users. But Rogers believes: “You have no competitors in those in-app purchases.” Cook disagrees with this statement, saying that Apple’s competitors are Xbox or Switch and other game consoles.

Rogers said that this will only happen if consumers know these platforms, and Cook countered that it depends on communication between developers. He said: “My view is different from yours. We create all the commerce on the app store. We do this by focusing on attracting the largest audience there. We do this with a large number of free apps, so These applications bring many benefits.”

Rogers also questioned Apple’s “Small Business Plan”, which cuts app store commissions for small developers in half. Apple said it stemmed from concerns about the impact of the epidemic on small businesses. But Rogers said: “This seems to be caused by the pressure of investigation and litigation.”

Smartphone business faces fierce competition

Before Cook was questioned by Judge Rogers, he testified on Friday that Apple also faced fierce competition in the smartphone field. In the United States, the iPhone’s market share is only 30%. Internationally, the iPhone’s market share is about 15%. The data cited by Cook is a rare example of Apple discussing the market share of its most important product, the iPhone, in an attempt to show that Apple does not dominate the smartphone market. He said: “There are a lot of different mobile phone competitors, the competition is very fierce.”

However, the Apple mobile phone market share data given by Cook is obviously lower than many external estimates. For example, a recent report by Counterpoint Research believes that based on the quarterly situation since 2019, this ratio is between 40% and 65%.

Apple argues that its control of the app store is critical to the security and privacy that the company promises to users, and is key to its ability to gain a foothold in the highly competitive smartphone market. The app store is the only way for consumers to install software on the iPhone.

Cook testified that if Epic Games prevails, “we will no longer be able to make privacy and security commitments.” Cook also said that without Apple’s rules and policies, the app store would become a “toxic mess.” But Epic Games argued that security is just an excuse for Apple to charge high fees and control the behavior of software manufacturers and that Apple can safely open its platform to rival app stores.

Cook mentioned that Samsung, Vivo, OPPO, Huawei, and Google are their mobile phone competitors, and these companies all use a certain version of Google’s Android system. He said that Apple also faces competition from other app stores, including Google Play and game consoles such as Microsoft Xbox and Sony PlayStation.

When questioned by Epic Games’ lawyers, Cook declined to answer questions about whether Apple’s iPhone competed with Google’s Android system in the operating system market. He said: “Customers don’t buy operating systems, they only buy devices.” Cook said that Apple uses surveys to track whether iPhone users switch to Android devices. He said: “It is a very important task for us to work hard to get Android users to switch to iPhone.”

Cook said on Friday that Epic Games’ move to bypass the 30% in-app purchase commission Apple charged on its popular video game Fortnite last year was “malicious”. Apple subsequently removed the app from the App Store.

Avoid app store profits and Google licensing issues

Most of Cook’s testimony on Friday revolved around a non-public Apple internal document. This document describes the profitability trends of Apple’s various departments, including the App Store. Epic Games’ attorneys stated that this shows that the Apple App Store is very profitable and tries to support its argument that Apple uses its control to increase its own profits.

Cook said that this document does not include all the expenses that Apple spends on the App Store, which is a “benchmark” test. He said he “feels” about the profitability of the app store, but did not provide specific figures. An accountant previously hired by Epic Games testified that Apple’s operating profit margin in 2019 was 77.8%.

Cook refuted that this data was wrong. He said that the app store has indeed achieved profitability, but Apple has not tried to determine the level of profitability, partly because it needs to integrate Apple’s cost structure, but it is difficult to achieve this. Epic Games lawyers questioned this claim and showed Cook to Apple’s internal documents, which show that the company can calculate the profitability of the app store. Cook countered that the data shown in these documents were incomplete.

Epic Games’ attorneys also asked Cook about the agreement between Apple and Google that Google will become the default search engine for Apple’s browser. According to a Wall Street research report, the annual revenue of this transaction is 10 billion U.S. dollars. Cook said he did not remember how much Google paid.

When Cook was asked by Epic Games lawyers whether Apple received more than $100 million in commissions from the sale of “Fortnite”, Cook said that Apple focuses on doing the best for users, rather than gaining any financial benefits. He said: “Users are trapped between the two companies, but this has nothing to do with money.”

Cook also accepted inquiries from Apple’s lawyers about iMessage. iMessage is Apple’s built-in messaging program in the iPhone, which is unique to Apple products. Cook said he doesn’t think the lack of iMessage on Android will prevent iPhone users from switching to competitors. Cook disagrees with the concern that people may miss text messages when switching from iPhone to Android devices. He said, “You can easily turn off your iMessage.”