In her recent ruling in Epic Games, Inc. (“Epic”) versus Apple, Inc. (“Apple”), Judge Gonzalez Rogers of the Northern District of California (“Court”) disagreed with both parties’ definition of the relevant market. The Court considered market specific facts, survey evidence, and evidence on consumer purchasing and switching patterns in concluding Epic did not prove its alleged relevant markets.
Epic alleged that Apple, through its control of the App Store, has monopoly power over the distribution of apps on iOS devices and over the payment processing for iOS apps. Apple argued that the relevant market is all digital video games.
The Court first noted that Epic’s alleged “aftermarket” relevant markets depend on whether Apple’s operating system should be viewed as a “foremarket.” The Court recognized that Apple’s operating system is not licensed or sold to anyone and that other features also are important considerations – including battery life, ease of use, durability, performance, and cameras. The Court found that Epic ignored these marketplace realities and that it is “illogical” to view Apple’s operating system as a “foremarket.”
In analyzing Epic’s alleged “aftermarket” relevant markets, the Court considered Epic’s evidence concerning switching costs, alleged lock-in, and substitution. Epic presented emails on the use of iTunes discounts to attract and maintain users and the benefits of Apple’s text messaging service, iMessage, as evidence of “lock-in.” However, the Court found that these emails “…suggest that Apple sought to compete by distinguishing their product,” and that “[e]very business seeks to decrease switching away from its products.” In this case, the Court found that the features that create lock-in also make Apple’s products more attractive, and Epic did not provide sufficient evidence on whether consumers’ switching decisions are motivated by product loyalty and satisfaction or by switching costs.
In particular, the Court noted that plaintiff’s expert did not conduct any original surveys, attempt to measure switching costs, analyze any literature on the magnitude of switching costs, consider additional evidence, or conduct any original analyses. The Court contrasted Epic’s lack of data analysis with evidence presented by Apple concerning customer satisfaction. Apple presented consumer surveys that indicated the lack of switching is due to consumer satisfaction with iOS – including a Google survey showing that sixty-four percent of iOS users would not switch to Android because they “prefer iOS.” The Court found this survey evidence significant, because it was created in the ordinary course of business and because Epic Games did not provide its own consumer surveys to show that users fail to switch even when they are dissatisfied with app price, quality, or availability.
The Court also considered evidence concerning substitution. Apple argued that all other game transaction platforms are substitute platforms for the App Store, including those accessed through all mobile, tablet, console, and PC devices. Epic argued, among other things, that economic and survey evidence show little substitution among game transaction platforms.
Epic’s expert argued that the removal of Fortnite from the App Store provided a natural experiment from which to study user substitution in response to a change in quality – in this case, a decrease in quality for the App Store and iOS devices. Epic’s expert evaluated iOS-only users and found they only shifted 16.7 percent of game play minutes to other platforms and 30.7 percent of spending to other platforms. Epic’s expert concluded that this amount of switching was not sufficient for developers to abandon the iOS platform, because spending on other platforms would not make up for the loss in iOS spending. However, Epic’s expert considered iOS-only users, yet evidence showed that between 32 percent and 52 percent of all Fortnite users multi-home. Moreover, Apple presented evidence that suggested users who access Fortnite on iOS spend the majority of their Fortnite time and spending on non-iOS platforms. Thus, the Court concluded that Epic’s expert likely underestimated the substitution among different platforms.
Epic’s experts also conducted a survey to address whether iPhone and iPad users would change their spending if iOS in-app purchases were slightly more expensive. Epic’s experts’ survey asked respondents to think about their in-app purchases from the App Store over the past thirty days and imagine if their spending for these purchases was five percent higher. Based on this question, Epic’s experts found that 81 percent of respondents indicated they would not have changed their purchases.
The Court found this survey to have several methodological flaws. Importantly, the Court found that the survey question did not appropriately convey that the five percent price increase was intended to be in the future and non-transient (permanent). Appropriate survey questions would address whether a hypothetical monopolist could impose a small but significant, non-transitory increase in price (or “SSNIP”), or would enough consumers switch to alternative product offerings. Instead, Epic’s experts’ survey was backward-looking and thus could not determine whether lack of alternatives, instead of customer satisfaction, was the reason for most respondents indicating they would not have changed their purchases.
In addition, the Court expressed concern over Epic’s expert using these survey results in his SSNIP test, since the survey did not indicate that the price increase was intended to be permanent, and Epic’s expert agreed that consumer responses to long-term price changes may be substantially different than responses to short-term price changes.
Finally, the Court noted that there is not an economic consensus on how to undertake the hypothetical monopolist test in two-sided platforms and how to appropriately implement a SSNIP test for such two-sided markets. For example, Epic’s expert conducted his SSNIP test separately for the consumer-side and the developer-side. But this approach does not account for the responses of developers to changes in consumer behavior and vice versa.
The Court thus found that Epic’s experts did not provide evidence and analyses sufficient and reliable to demonstrate the alleged high switching costs, lock-in, and a lack of substitution. The Court also rejected Apple’s alleged relevant market. Instead, the Court used the market specific facts and evidence to define the relevant market as “digital mobile gaming transactions.”