Defining the market in the Epic Games v. Apple trial

By Daniel Lyons

Early in Epic Games’ antitrust suit against Apple, presiding Judge Yvonne Gonzalez Rogers billed the dispute as a case at the “frontier edges of antitrust law.” But the trial began not with a bang but a whimper. The first several days yielded some embarrassing details about the companies involved — such as the fact that Epic is facing an investigation into child data privacy practices and that Microsoft loses money on Xbox console sales. But there seemed little testimony going to Epic’s core antitrust claims.

All of that changed last week as the expert witnesses took the stand. The dueling economists sharpened the pencil on the most important issue in the case: how the court should define the relevant market. My sense is that Epic still faces an uphill battle to convince the court that the iPhone’s App Store is a market by itself, as opposed to one of many players in a wider market for software and games (which my colleague Mark Jamison has discussed). Either way, the court’s decision will likely cast a long shadow far beyond the present case.

The suit

At base, Epic has challenged the App Store structure that allows Apple to collect a 30 percent commission on app sales and consumers’ in-app purchases. The company alleges that Apple violates antitrust law by requiring iPhone apps to be purchased and downloaded through its App Store rather than allowing consumers to “sideload” apps via other app stores (such as Epic’s own app store). It also accuses Apple of unlawfully tying the App Store to Apple’s own payment processing services, limiting developers’ ability to use other processing services for in-app transactions (and thus avoid Apple’s commission).

Defining the market

As in many antitrust cases, the primary flashpoint is the battle to define the relevant market. Epic’s quixotic quest turns upon proving that Apple has market power, meaning that competitive forces are insufficient to discipline the company’s behavior. To do this, Epic seeks to define the market narrowly as one for the distribution of iOS apps. Epic alleges that Apple has a monopoly over this market and that its restrictions on app distribution and in-app payment processors are abuses of that market power. But if, as Apple alleges, iOS apps are only one part of a larger market for software and games, this claim collapses. At the risk of oversimplification, if Apple is just one of many players in this large market, then its specific actions are less relevant because customers who dislike Apple’s practices can take their business elsewhere.

University of Chicago economist David Evans gamely defended Epic’s position on the stand. He noted that once consumers buy into the Apple ecosystem, they face significant switching costs including purchasing a new mobile device, migrating data, learning a new interface, and repurchasing paid apps. As a result, customers are less likely to consider other platforms as substitutes for the iPhone and its apps. He cited data showing that after Apple ousted Epic’s Fortnite from the App Store, only 16–17 percent of the time spent on iOS-Fortnite migrated over to other platforms.

The Supreme Court recognized a one-firm market in the Kodak case. But it is difficult to establish — particularly where, as here, developers operate across multiple channels. Fortnite and other Epic games are available on not only other mobile devices such as Android but also personal computers and video game consoles — and these players interact with one another. This observation led Judge Rogers to suggest early in the case whether Epic was the right plaintiff for this claim. Apple brought several experts, including the Massachusetts Institute of Technology’s Richard Schmalensee, to show that customers can and do switch among platforms when using many apps, including Fortnite, and that Apple’s commissions are similar to those charged by other platforms.

The battle between Evans and Schmalensee is an interesting subplot. The two are frequent collaborators whose work on two-sided markets was recently acknowledged by the Supreme Court in the American Express case. Like credit cards, app stores are a two-sided market connecting app developers with consumers. Apple argues that even if its App Store regulations are inconvenient to the developer side of the market, consumers benefit from greater reliability and security in payment processing.

Beyond Epic

The question of how to define tech markets is not going away anytime soon. The government’s antitrust suit against Facebook will also turn largely on how to define the social media market in which Mark Zuckerberg’s company competes. There’s a chance that Epic and Apple will settle. But if not, this case at the frontier of antitrust law may significantly shape the path forward in the battle to regulate Big Tech.