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

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

"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," U.S. District Judge Yvonne Gonzalez Rogers told Cook.

Updated May 21, 2021 at 6:14 PM ET

It was just one in a series of sharp exchanges with Cook, where Gonzalez Rogers demonstrated her concern over the lack of competition in Apple's App Store. It is at the core of the legal challenge brought by Fortnite maker Epic Games against Apple.

The trial centers on the 30% commission Apple usually charges app makers. While invisible to iPhone and iPad users, 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.

The judge asked Cook if he agrees with the basic proposition that competition is good.

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

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

"So what is the problem with allowing users to have choice, especially in a gaming context, to have a cheaper option for content?" the judge 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, from safety and security to privacy."

Cook had noted earlier Friday 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 small-business program, at least what I've seen so far: that really wasn't the result of competition. That seemed to be a result of the the pressure you were feeling from investigations, from lawsuits, not competition," Gonzalez Rogers said.

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

"OK," Gonzalez 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 being a safe and trusted place, free of malware and other possible unwelcome intrusions.

Yet Epic attorney Gary Bornstein pushed Cook about other 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 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" one developer does not.

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 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 cover costs, not generate profit for 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 the 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 the tech giant'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 sued Apple last year for tacking on the 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 trying to make more money for itself.

Apple's attorneys said the 30% take on purchases has long been the industry standard. Revenue from the fee funds the company's 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 Plexiglas 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 Jobs that was going to be called the Innovator. Mention of this caused some mask-muffled laughter in the mostly sparse courtroom.

The trial has exposed the trove of 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. Subscription fees and other services are key to its continued success.

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

Gonzalez 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.

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

"The lack of competition on the 30% is something that is troubling," the judge said.

Legal scholars say antitrust case law 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. [Copyright 2021 NPR]