Good morning,
On yesterday’s Sharp Tech we talked about Google Gemini and Google’s seeming lack of a killer instinct; we also talked about college football and Mark Cuban’s sale of the NBA’s Dallas Mavericks.
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On to the Update:
Google Loses Antitrust Case to Epic
From the Wall Street Journal:
Google lost an antitrust case over the market power of its app store on Monday, a blow to the search giant as it faces other legal challenges to its search dominance and ad tech business. Videogame maker Epic Games sued the search giant in 2020, alleging it used its dominant position to squeeze excess profits from app developers. The San Francisco jury reached a unanimous verdict after deliberating for less than four hours…
“Today’s verdict is a win for all app developers and consumers around the world,” Epic, the maker of the popular game Fortnite, wrote in a blog post Monday after the verdict. “It proves that Google’s app store practices are illegal and they abuse their monopoly to extract exorbitant fees, stifle competition and reduce innovation.”
Google said it would appeal the decision. “Android and Google Play provide more choice and openness than any other major mobile platform,” said Wilson White, a Google vice president for government affairs and public policy. “We will continue to defend the Android business model and remain deeply committed to our users, partners and the broader Android ecosystem.”
U.S. District Judge James Donato will decide next year what remedies Epic will be awarded. The parties will reconvene in January.
I have seen a lot of confusion about how it is that Google lost this case to Epic given that Apple prevailed against Epic, particularly given the fact that Android already allows side-loading. The answer a lot of folks are reaching for is that this case was decided by a jury, whereas the Apple case was decided from the bench; that certainly does make things more confusing, given the decision comes in the form of a hand-written jury report, not a legal opinion.
In fact, these cases are very different, and because of that Stratechery readers should not be surprised by this decision: it’s what I predicted back in 2021.
The Differences Between Apple and Google, Revisited
First, in App Store Arguments I explained why Apple would not lose the Epic case (which they did not):
First, while it is possible to define the App Store for iPhones as a distinct aftermarket (see Kodak v. Image Technical Services), appellate courts have significantly narrowed that decision to limit its application to situations where the company selling the product that leads to an aftermarket is only barred from changing the rules after-the-fact to foreclose competition in the aftermarket; if the rules foreclosing competition are consistent, however, then there is no harm, because customers know what they are getting into. In the case of the iPhone, this means that Apple can control the market for iPhone apps, because customers already know that Apple controls the app market; if they don’t like it they can buy a different phone. This is why Apple spent time in the trial establishing that its control of the App Store was in fact a selling point of the iPhone, and a reason why customers chose to enter iOS’s more restrictive ecosystem.
Second, Apple also made the case that there is a competitive market for developers. This was an especially effective line of reasoning with regard to Fortnite, which makes more money from other platforms than it does from iOS; moreover, those platforms have rules that are similar to iOS, including exclusive payment platforms, no-steering provisions, and 30% commissions…
The most important case for Apple’s defense, though, is 2004’s Verizon v. Trinko, which established and/or reiterated several important precedents that support Apple’s position, even if Apple were held to be a monopolist. First, a monopolist has a right to monetize its intellectual property…Second, a monopolist has no duty to deal with any other company…There is a very limited exception to this provision (see Aspen Skiing v. Aspen Highlands Skiing), but like Kodak, it only applies to situations where the monopolist changes the rules; Epic, on the other hand, has always operated under the same set of in-app purchase rules. Third, the Court stressed that judges should carefully weigh the costs of enforcement with the benefits of an injunction…
The situation with Google and Play Store was fundamentally different, because Google isn’t selling an integrated product: rather it is entering into contractual relationships with phone makers. From that 2021 Update:
These arguments look different in the context of the Play Store. First off, consumers are buying phones from Samsung et al, not Google. Secondly, the complaint — like the European Commission’s case against Android, which I supported — alleges that Google used contractual arrangements to effectively deny those OEMs a choice as far as access to both the Play Store and, critically, core functionality in Google Play Services is concerned. Third, the complaint argues that Google has been deceptive with both OEMs and consumers both in terms of its rhetoric about Android’s openness and its degree of lock-in, and has ratcheted up its control as it has gained control of the market. The net of these arguments is that consumers are not and can not make informed choices about the smartphones they are buying and the conditions implicit in those purchases.
In short, Apple’s best defense is that it has been clear about its lock-in from the very beginning, and can plausibly argue that not only are consumers informed about said lock-in when they make their purchase decisions, but in fact choose Apple products because of said lock-in. Google, on the other hand, has tried to have its cake and eat it too: after initially competing on being open and unencumbered, the company has since changed the rules, as it were, to lock-in its advantages through a combination of revenue-sharing carrots and contractual sticks.
This is where the third objection — why now? — potentially looms large.
The third objection was that Google was serially changing the rules to limit competition, and the trial clearly established that this was happening. This Verge article provides an excellent overview of the trial; it explains:
- Discovery showed extensive evidence that Google was purposely acting to limit not just Epic but other developers from launching (or joining) alternative game stores.
- One way that Google limited developers was by buying them off, i.e. investing in them directly.
- Google similarly effectively paid off OEMs to stop them from shipping with alternative stores; this payment usually took the form of Google Play revenue shares.
- Google made special deals with top app makers, including allowing Spotify to not use Google payments at all (in lieu of their own), and Netflix only needing to pay a 10% fee.
- Google offered little evidence to justify its 30% fee.
That last point may seem odd in light of Apple’s victory, but again, Apple was offering an integrated product that it fully controlled and customers were fully aware of, and is thus, under U.S. antitrust law, free to set the price of entry however it chooses. Google, on the other hand, “entered into one or more agreements that unreasonably restrained trade” — that quote is from the jury instructions, and is taken directly from the Sherman Act — by which the jurors mean basically all of them: the Google Play Developer Distribution Agreement, investment agreements under the Games Velocity Program (i.e. Project Hug), and Android’s mobile application distribution agreement and revenue share agreements with OEMs, were all ruled illegal.
This goes back to the point I made above: Google’s fundamental legal challenge with Android is that it sought to have its cake and eat it too: it wanted all of the shine of open source and all of the reach and network effects of being a horizontal operating system provider and all of the control and profits of Apple, but the only way to do that was to pretty clearly (in my opinion) violate antitrust law.
The Tying Question
I think I’ve taken a sufficient victory lap at this point (maybe some of the pot shots from Biden’s antitrust team about my understanding of antitrust law missed the mark, given our relative prognostication record with big tech antitrust cases); the issue with the alternative app store question is that even if Google didn’t pay off developers and OEMs, and they all launched alternatives, it’s not clear they would be successful. The fact of the matter is that there is real consumer benefit and genuine network effects that extend from there being one centralized store. Consumers trust Google, and developers have one place to go where they can be sure to reach everyone (the uncertainty here is similar to the uncertainty around Google’s search deal with Apple).
That is why the most important part of this case was actually Question 10 of the jury questionnaire:
Did Epic prove, by a preponderance of the evidence and in accordance with the instructions given to you, that Google unlawfully tied the use of the Google Play Store to the use of Google Play Billing?
The jury replied yes.
The jury had, according to the jury instructions, little discretion in determining that Google Play Billing was tied to the Google Play Store. The question was legality, and here the judge wrote:
The essential characteristic of an invalid tying arrangement is a seller’s exploitation of its market power over the tying product (app distribution services) to force a buyer to purchase the tied product (in-app billing services) that the buyer might haver preferred to purchase elsewhere.
To do this the jury had to agree that:
- The Google Play Store is distinct from Google Play Billing
- Google will only distribute apps through Google Play if they use Google Play Billing
- Google has sufficient market power in app distribution to effectively get away with tying
- Google’s tying has foreclosed volume for an app billing market
- Google’s tying has had a substantially adverse effect on competition for app billing services
That, though, is still not enough: the jury also had to rule that Google didn’t have a business justification for its tying, and here there is the greatest similarity between the Apple and Google cases. Google’s justification was basically the same as Apple’s; from the jury instructions:
Google contends that the tying arrangement is justified because it enables Google efficiently to collect compensation for the use of its services and intellectual property and ensures that Google can receive compensation for its services and intellectual property.
In determining whether the tying arrangement is justified, you must decide whether it serves a legitimate business purpose of Google. In making this determination, you should consider whether the justification Google offers is the real reason that it imposed the tying arrangement.
You must also consider whether Google’s claimed objective could reasonable have been realized through substantially less restrictive means. Even if some type of constraint is necessary to promote a legitimate business interest, Google must not adopt a constraint that is more restrictive than reasonably necessary to achieve that interest.
This is the part where I think the fact this was a jury trial mattered; we don’t know the jury’s reasoning on this point, or how deeply they delved into the evidence, but there is a compelling case to be made that this tying arrangement is in fact the most efficient way for a platform owner to be compensated for their IP (leaving aside, obviously, the question of whether they deserve to be compensated, given the obvious benefits they get from having a thriving app ecosystem). I noted in the context of Unity’s business model changes:
I suspect that the key factor driving Unity’s implementation was the aforementioned logistics issue: because Unity serves the long tail it doesn’t have or want to build the resources to sign a contract and audit every company that uses its engine like Epic does; a programmatic solution was necessary. At the same time, forcing every Unity game to only use the Unity ad network and in-app purchase capability, which would allow Unity to share in revenue upside programmatically, would be considered even more abusive than this pay-on-install model, which still lets you use the monetization service of your choice (the you-have-no-choice model is, of course, what Apple uses: the company’s argument is that forcing every app to use its in-app purchase is a matter of efficiently collecting its commission, which is true!).
Did the jury actually think through what a “substantially less restrictive means” might look like? It’s not at all obvious, particularly since similarly efficient means (drastically higher developer fees) would likely reduce consumer benefit (there would be fewer apps).
The reason this matters is two-fold. First, as I noted, this is the part of the case that is potentially the most applicable to Apple. Second, if this tying is banned, then Epic and other developers will be able to use alternative billing services without needing to out-compete the network effect and consumer benefits attached to the Google Play Store, because they can be in the Play Store with their own billing system. This is surely what Epic wants the most — remember, the company already has an alternative app store, that isn’t very successful — and the jury may have handed it to them. What price Google exacts in response remains to be seen.
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