Hello, and welcome to the Votes and Verdicts podcast hosted by Bloomberg Intelligence, the investment research platform of Bloomberg LP. In this podcast series, we talk about the intersection of business policy and law. My name is Jennifer Ree, and I'm a senior analyst with Bloomberg Intelligence covering US ANTIDRUSS litigation and policy. This is the fourth Votes and Verdicts podcast series focused on anti trust issues, and for this
one we did something a little bit different. On January twenty fourth, Bloomberg Intelligence hosted a webinar to discuss anti trust litigation against Apple that was brought by Epic Games over Apple's app store policies and how Apple is responding to an injunction that was issued by the court in that matter. This podcast is a recording of that webinar. My apologies for any references we made to slides we
used in the webinar that aren't available here. For the webinar, we were honored to be joined by Professor Harry First, the Charles L. Denison Professor of Law Emeritus at New York University School of Law. He is also the co director of the law School's Competition, Innovation and Information Law program. From nineteen ninety nine to two thousand and one, Professor first served as the chief of the Anti Trust Bureau of the Office of the Attorney General of the State
of New York. He teaches in the areas of antitrust, regulated industries, international and comparative anti trust, business crime, and innovation policy. He has authored or co authored numerous anti trust casebooks and scholarly works, and is a well known and respected figure in the world of anti trust. Joining Professor first are Bloomberg Intelligence analysts anarag Rana, Tamlin Basin,
and myself. Honorag is a senior analyst covering technology companies and Tamlin is senior legal analyst also for technology matters. Anurk served as the moderator for the webinar, so with that, please enjoy this Boats and Verdicts podcast as usual. Feel free to reach out to me if you have any questions or comments, or would like to discuss this topic in further detail.
Good morning, everyone, Welcome to Bloomberg Intelligence's webinar that looks at Apple's new AFT fee structure and some of the other legal battles it's facing right now. I'm very glad that we have Professor Harry First as one of our guests today. He is joined by my colleague Jennifer Ree as well as Hamlin Basin, and the four of us are going to brainstorm about of what exactly is happening.
So we have an agenda today and the agenda is talking a lot about what's happening with the epic game and the Apple injection and other antitrust risks, what could be some of the financial impacts, and then you know, ending with d m A as well as the watchband options that Apple's facing. So you know, just a couple of comments about Bloomberg Intelligence. You know, we have a team of over four hundred people at this time, a lot of analysts across the world Singapore, Hong Kong, London, Princeton,
New York. And then talking a lot about almost everything that's under the belt, such as credit equity easy as she and it's so you know, important for us to have experts like Jenry within the group because she helps us to understand a lot of what's happening. And in fact, every time I talk to her, I feel I've learned something. And today we even have even a bit you know, I would say a bigger guest that has is an anti trust expert. So it's this is something that we
do fairly often. So, you know, perhaps to start off with laying the ground of what we are talking today, and let me ask a professor had a little bit about the Epic game versus Apple, what were kind of the terms of injunction issued against Apple? Now that the you know, litigation has concluded, what exactly would the trial court found finding against Apple.
Well, of course we have to set this in a general anti trust attack on how both Apple and Google control their app stores. So as you point out this, this part of the litigation was Epics attack on we could say Epic litigation, Epics attack, sorry, Epics attack on Apple and the way it handles the app store. And although they attacked a number of things, two things in
particular were important to the litigation. One is not allowing out sort of in app purchases but out of off of Apple onto Epic's own website or through its own stores.
And I'm not being able to communicate to consumers, to those who were using Epic games, particularly Fortnite, that that there were other options available where they could make in app purchases in that purchases, as I'm sure all of you will tell me, very important to the business model for Epic and Key, I'm sure from Epic's point of view, is the huge commission that Apple takes on everything forever,
which is a thirty percent commission. Now. Actually, Epic lost the anti trust litigation in the District Court and also on appeal. What they did win was a claim under California unfair competition law that the anti steering provision was and was unfair competition, in other words, not being able to tell consumers or steer them to Epics alternative purchase
system and payment system. So that that is where Epic one and the Supreme Court just recently, Apple tried to take that case of the Supreme Court, not surprisingly was unsuccessful, and that's why we are where we are now. Now.
The District Court had entered an injunction, very simple injunction that was to simply pro Apple had to stop prohibiting developers from including in their apps any read it metadata, buttons, external links, and so forth that could direct consumers to purchasing mechanisms other than Apples in a purchasing or communicating to customers. So that's the injunction, Apple can no longer do that, and they claim right now that they are actually in compliance with that injunction.
So you know, in terms of the California state laws, what you know in terms of the anti steering stuff they have done or they have talked about some remediation there. How do you you know, how do you I guess what's your judgment on what it's trying to do there?
Well, Apple is trying. Apple has some plausible claims that all the district court said was you you have to give consumers a choice, and that's it. The district court didn't say how to do it or you know, what the consequences were and so forth. Just the consumers have
to be informed. And Apple pointed out in its papers that filed and this was just about a week ago, January sixteenth, they said the district court judge didn't disagree with Apple's business model that it was entitled to charge for all of the intellectual property et cetera, et cetera involved in the app store. So they said, fine, we're doing that. They can they can tell consumers that they can, the consumers can make purchases outside of you know, Apple's system.
They can go to EPIC or any developers system and that's fine. All they have to do is get approval for what Apple calls entitlement links and and put up a little warning on the on the the mobile device before consumer switches. And they have a picture of the warning which says, I'm surprised they don't have a skull and cross bones on the warning. You are about to
you know, you can hear them. Is not voice, but you know you are about to leave the safe space, and god knows what will happen to you out there. Do you agree? So it's you know, in black and white. Sort of reminds me of a cigarette box warning, you know. But and they say that's you know, consumers can then make a choice. And oh, by the way, of course, we're going to charge continue to charge for you know,
what purchases consumers make through other applications. And oh, by the way, since we don't trust you, we're gonna audit you all the time. And uh, you know. So basically, Apple is viewing the injunction in its narrowest form. Addressed to the harm that the judge saw, which was failing to give consumers information so they could make a choice, said here it is.
You know, So I'll go back and you know, when we first heard about the twelve to twenty seven instent of the fifteen to thirty m I mean, my first cut reaction to gen was this is crazy. I mean, this is still too high compared to that. But Jen taught me that, you know, they are not contending if the fee was high or not, but they are just saying that they will charge for these services. So I guess the biggest question in all of this is what is the big deal or where does this thirty percent
come from? Because I've heard, for example, Amazon Marketplaces charges at that amount, or you know, if they have a platform, they're going to charge some fee. You know, who's to decide whether that's ten percent of five or fifteen or thirty.
Well, they're they're they're probably upset that the gaming industry didn't charge higher higher cuts because apparently that's where Steve's jobs got the thirty percent figure. It's not based on anything, I mean, unless you think they're comparable risks in Las Vegas and the app store, So you know that's what they charged that, you know, the cut on whatever, I'm not sure exactly, And this is what Judge Gonzales Rodgers,
who tried the case. This is what she found as one of the findings in the trial, that it wasn't based on cost, and in fact, there was evidence presented that the profits on this are enormous over costs, maybe you know, seventy percent over costs, So it ain't based on anything. Now the fact that others charge it, they probably wish that Steve Jobs had picked forty because then they would all charge forty. So these aren't This is not exactly your competitive market that your duopalist Google also
charges thirty percent. And you know, on the other hand, what is a competitive price. I'll put that out to the business people on this call.
I mean, I'll just throw in here counter age. The question came up internally in Bloomberg Intelligence when all of these decisions were coming down, as to why is Epic so upset about this? Why is Tim Sweeney on what was on Twitter and now is X saying this is awful? And this is part of the reason because even though the judge said the thirty percent fees really not based in anything, and Apple didn't present evidence that that was really the cost of all the security and protection at
IP that goes into its system. They hadn't justified that, and in fact, she said that its ability to continue to charge that fee was from its market power. She didn't find that it had monopoly powered, but she did find that it had some market power. And really, probably, you know, EPIC is left with Apple's continued ability to charge these high fees. Not that a judge is going to regulate price. That's not really what's going to happen
in antitrust. And there was an expert for EPIC that did some calculations and thought that around a fifteen or sixteen percent fee might be competitive. There's some findings that a twelve percent fee might be at you know, at a loss. So that range is sort of bandied around a little bit as to what that competitive fee might be.
But you know, Apple sort of as we all discussed after you heard about that twelve percent and twenty seven percent, and I was questioned by by our boss, acting Glenberg Intelligence, how can they do this? I kind of said, look, I don't. I went back and read the injunction. I went back and looked at the decision. I don't really think Apple doing this. It's it's it's sort of technically aligned with what it was told it had to do, and the judge didn't say you have to bring your
fees down. But on the other hand, it seems really reckless to me as we put in our title to this webinar, because really it doesn't allow for a cheaper option, and that was the whole point.
You know, are there any old cases going back to physical stores, you know, whether that's Walmart using their you know, shelf space, or Visa and Mastercart forcing people to use their network to process transactions. Is there any other precedent that will go back and say that, Okay, if you're going to use my platform, you're going to give me some fee for it. And you know this is kind of the range of the fee that I'm going to charge you for it.
Well, I you know, it's a great question. I think at the heart of a lot of this litigation, at least on the private side, is motivated by the feeling that the plaintiffs are just paying two damn much. Now, in the payments litigation, what they did have was fees charge in other countries and how things were done in other countries. So you did have sort of a yardstick approach, so you could look at Canada and see how things were managed. You know, if you're a Visa fan, you
know this probably better than I do. But you know, fees for interchange are much different in other countries we have we have this problem in a lot of industries when you know, so when it comes to any and frankly,
here's where the patent part comes in. In patent cases, people litigate all the time over whether the fees in licensing cases are reasonable because lots of licensing agreements don't set them out, so they bring in experts and you know, as we're talking about what what the fees are that Apple's charging, I think of Qualcomm's fees, which as a percentage based are not as high, but which handset makers feel are exorbitant for what Qualcom provides in in your
current handset. But they've got a choke hold and they've been you know, litigation that's brought against Qualcomm always brings up these fees. The interesting legal aspect from any trust point of view is that high prices are not a violation any trust laws. They may be in any trust harm, they may show the party has monopoly power, but they're
not directly a violation. And the reason why courts and commentators, except frankly for a few like me, want to stay away from this is they say, we don't want to become we don't want to be like a public agility commission, we don't want to regulate rates. And both Judge Gonzales Rogers and the judge in the Google case now has said, I don't want to micromanage this industry. And you know, I don't want to sit and say, okay, twenty four percent might be okay, but not twenty seven, So I'm
not going to do that. On the other hand, it's actually not so impossible if they wanted to know, if the judge wanted to stretch this injunction and say, to wipe out the effects over time of this not being able to make in app you know, purchases outside of Apple, We've got to do something, and this isn't going to do it just putting, you know, saying okay, warning, warning, you can make it, and then making an uneconomic approach to it so that developers are going to say, is
this worth it? Setting up you know, so the judge could take an aggressive view of this. I don't know. I mean, I'm a guest, but I really don't know whether she will, but you know, I assume EPIC is going to come back and say, you know, this is not a cure for you know, a long running violation. It's it's not going to be effective compliance. But you know, judges don't want to regulate rates.
So that's a very good point that you brought up. And again I was surprised that when jen once told me that they don't really regulate prices, and in that particular case, then what does what options does epech have if they're going to say you got to pay me twelve to twenty seven, you got to figure out the way, or you know, go find another platform to sell your product.
You should you should have the lawyers for Epic come on and ask what they're I assume they're going to push and say this is this is not compliance and probably wish they had brought suit for damages treble damages instead of you know, just an injunction. I don't know, this is a you know, it's a conundrum, and it's a look, remedy is a problem in a lot of
any trust cases. They're not unique. And as a guidance, the judge in the Google case is going to be faced with this shortly and is already you know, saying that after we go through the the final motions literally and physically from Google to overturned the jury verdict, where then gonna then gonna have some sort of proceeding to
try to figure what the remedy is going to be. Now, uh, you sort of get from that that the judge that the kind of oh, yes, this is it, fine, we don't have to talk about it anymore, is not what that judge has in mind. So you know, I don't know, I I I guess we'll see what the pushback is from Epic, but I would expect them to push back pretty strongly. This is not effective compliance, and maybe with studies to show that this kind of warning, you know, people aren't gonna switch.
May Yeah, I'll go back, you know, probably fifteen twenty years. And I remember the fight between iOS and I guess Macintosh and Windows at that point, and part of Apple's argument was, you know, my product is very expensive because I'm not opening it up to malware and all that other things. It's a closed system. This is how I run it. And I don't mind losing market share, but I want users to have the most I guess, safest experience possible, but I'm going to charge your premium for it.
And that has been Apple's business model since then. So this opening a bios outside is kinds of contrary to the ethos of the company. You know, do people take that into account that you know, they are not I guess and like Google selling user information and you know, there's a lot of things that go into the Apple ecosystem that's fundamentally different than an open ecosystem.
Well, you know, people, you know, when when when I get involved in these discussions, I think, do I understand
all of this? So? And do users understand all of the extent of whatever these protections is supposed to be maybe in some general sense, and that may lead them not to switch so and particularly if it's not worth it to them, you know, use the original bargain, Steve Jobs bargain was, you know, I'm going to supercharge you, but you're going to get you know, a different sort of very integrated, seamless system, you know, as opposed to
a clone, you know, a less expensive PC. At least you can see the bargain, but here it's hard to even see what the bargain's going to be from a consumer's point of view, why why would you switch? Doesn't sound like it's gonna save you anything, so so, uh, you know, they're making them an offer that they can refuse.
Yeah, it's it sort of blocks out small developers too, from even being able to provide options because the limitation that Apple's putting is that the payment outside the app store has to be made in a website owned by the developer or managed and controlled by the developer, And there are probably just loads of small, sort of mom and pop developers out there that aren't going to want the costs or or have the resources to run into their own website and do this, and you know, prevents
some third party coming in and providing a hub on the on the web. And so it also really limits the extent to which users actually have that choice and developers have a choice.
Oh interesting, Yeah, yeah, one of it.
One of the things I've noted again, you know, and just studying into change over the post twenty years is even you know, go back thirty forty years, I think interchange was as north as seven percent in those days. Now it's come down to somewhere around two percent. For processing.
You know, if do you have an idea of what have been the forces other than the merchants just getting stronger and stronger, and in this case, it doesn't look like the overall population is going to be you know, I guess that powerful that that can depress this fifteen to thirty percent commission structure that they have to you know, let's say half of that. I'm trying to get to a point as to where it finally ends up in.
Yeah, I don't know. I mean what you're describing is interesting. So there's a whole maybe ecosystem around interchange where you have independent companies who provide processing services, and you have I guess on the visa MasterCards side, the change in ownership from cooperative ownership to a separate company, a lot of market forces, and a lot of money. I mean, there's a lot of money in this industry, as you know, but also money changed to hands, you know, in anti
trust cases. I had a research assistant a number of years ago who I think has spent his whole professional life doing these on the planeiff side, uh these uh, these are MasterCard cases and been very successful at it and on behalf of his clients and he had very big clients. So so I don't know, it's interesting to think that, you know, are there more epics? I don't. I don't know. I mean, market forces are important, but you know they need a little dynamite here.
And you know, you know, Honor, I also when I think about a lot and this is is really early. This is a way down the road thing. But you know, there's there was testimony and just dicussion in trial as to how easy it is to switch between Android and iOS, how often people actually do that?
And what I.
Wonder is if things change more for Google Android than they do for iOS, given the jury verdict against Google down the road, are we actually and let's say it is cheaper, it actually becomes cheaper because of competition for consumers on an Android to buy an app or that make the inn app purchase. Is that going to put downward pressure.
On the That's so I wonder that in the in the video game market, right, multi platform and subscription video games. So I was always skeptical of the switching. Oh yeah, I'll throw over my my iPhone, uh, you know for an Android iPhone. I don't want to talk about the snobbishness of iPhone users, but you know that they're really going to do that because they can make those their kids can buy a sword in app a little less expensively.
It just didn't seem to me to scan. But I wonder with the multi platform video game subscriptions, and one of the things that I'm actually not clear about in the compliances is the fee for subscriptions. So as gaming does move to subscriptions, there's a provision that says something about twelve percent for subscriptions forever, which is, you know,
puts the magazine industry to shame. But I wonder I couldn't tell whether that was just it was in the twenty seven and twelve part, but it didn't seem to be limited to small users. I couldn't quite figure that out.
And it seems to me that as that business model changes and it's it's gaming that's a that's the real money behind a lot of this problem and issue, whether that may be the market force because that might lead, you know, people who love these games to say, you know, give me an Android phone because you're making me take a subscription out of my allowance, and it's a lot less on you know, if I subscribe on an android phone. So so I don't know, I just that was I quess what I wondered.
About So with him, in my view is people who buy thousand dollars phones are not sensitive to a few you know, dollars of I mean, but that's I mean. But but again, philosophically, this is going to go on for a while. And you know, part of again, as I said, I completely agreed with Jen when this thing came out that this seems a bit odd. But I well, I'll take the counter argument to it is if I look at Apple's business model, they have let's say about
four hundred billion in revenue right now. Out of that, you know, over three hundred or so comes from products, you know, sell stuff that they sell, and their total operating margin is somewhere around thirty percent. That is well below what Visa and MasterCard at around fifty percent is.
So if I was Apple, I would argue that I am, you know, my products are the ones that are let's say three hundred billion in size, and I'm making services, which is all sorts of different things, you know, I Cloud and Apple Care, and we'll talk about the Google fee and all the other things that go into it. Is you know, a portion of it. So I'm subsidizing my products, which I don't think is true. But you know, but there's that argument that holds true that as a whole,
Apple's operating margins are nowhere close to industry high. Their dollar amount is big just because the size of the company.
Well, except in the app store, the margins are somewhere between seventy and eighty percent. It was determined in the trial.
No, that's fair. Again, Again, I'm talking about the whole ecosystem when I would look at the products itself, and you know, all the other things that they put into it.
So I guess my question is to whom are they making this argument. I mean, this is not it's not a legal argument. It's not any trust argument. It's an argument to investors. It's an argument. I'm not quite sure. I'm not quite sure.
For me, the argument would be whoever wants to I mean, if somebody takes this in front of a judge and say these fees are egregious, and you know, that's that's the picture I would paint that if I look at other platforms or other ecosystems, this to me, you know, if as as an Apple, again Apple speaking in this case, not me. This is fair because my total margin structure is still much lower than what the the rest of the world is enjoying.
Yeah, it's hard for me to see the legal context in which that argument gets made, because usually attacks are you know, by product markets. So the fact I mean, either you're making money or not making money, or it's above cost or not. The fact that you're making and in the end, you mean, this two trillion dollar company is going to come in and say, oh, poor me. I mean, I don't I don't.
Know, you know, in a micro sense. They made that argument in the epic trial, just just as it applies to gaming apps, right, and you know, they said, well, this is what everybody else is charging, and it still didn't really matter. The judge said, no, you haven't justified. You haven't justified your fees, and we think those fees really come from your market power and not be because it's the value, not because of the value provide. So they they didn't really work for them making that argument.
In that matter.
And Professor Harritt's three trillion now.
So three trillion. Sorry, yeah, that's right, you know, I'm sorry. I looked at last year's figures.
No, no, I'm just just taking a joke out of it. Let's switch to the impact of the DOJ lawsuits. Now there's a we've heard there's a potential lawsuits that's going to be brought up by the Department of Justice. We also have the dog's ongoing litigation against Google over the alleged monopolization of search and the search advertising markets. And this is something that we'll love to hit your opinion
on because it's humored. Because we don't have the exact numbers that Google pays Apple somewhere around fifteen to twenty billion some it's a it's a big amount, you know, we don't I don't have the right number, but imagine that fifteen to twenty billion falls straight to the bottom line. If you want to talk margins, it's this has probably I don't know, it has full margins. There is there is no cost to that stuff. So that's a very big fee. I love to get your opinion on what happens next.
So I sometimes say that the god of anti trust is the god of irony. So here you're suing you're suing Google for making these huge payments for default. So if the judge finds, which I think the judge is going to find. My sense of it that this that Google has a monopoly in search, that searches a product market, and Google has monopoly power in it, and that the paying for default is monopolizing conduct, and so the most obvious remedy is they can't do that anymore. So they've
just saved Google. I don't know the figure that came out total, it's not just Apple, was what twenty six billion dollars in one year? I mean Google. They are they saying to their any Trust lawyer, Yes, let's lose this case because we're gonna you know, now, we'll still people. You know, we're we're we're embedded on everyone's phones, but now we don't have to pay for it anymore. Thank you.
And Apple, who they just assumed vanquished if they could, says, oh crap, we're not the defendants, but we don't get the money anymore. And you know what are we going to do? Banish the Google search bar from no and people will just download it anyway. Oh, we love any Trust. So I think that's sort of one of the ironies of what may turn out to be the remedy. And
in the litigation. Now there'll probably be other things, but I do think that the the plaintiff Justice Department and the states in the government's case are going to win. And there's a there's a companion case too, brought by the thirty six forty eight states, I forget how many thirty eight. Maybe that's led by Colorado. That's a little broader, and we'll see how that one goes because it involves
their search advertising tool as well. So there's still a there's still a distance to go, and there's still some open important open legal questions that the judge left when Google had filed a motion for some rejudgment, which the court denied, but left open some questions that the judge had, you know, particularly about what the butt for World might have looked like had there had this you know, they not paid for the full Yeah.
I have a question about that, and I'll have to say I have to say the dj made a believer of me in this case because I recall when the complaint was first file. In my mind, I thought, well, this isn't true foreclosure because Google's not really doing anything technically or contractually that prevents users from changing their default.
But then after listening to some of a trial and reading some trial transcriptsite, I really changed my mind because I felt like there was pretty compelling evidence about how sticky default is, and to the extent it's sticky, then it becomes foreclosure and rivals are being foreclosed, and that's a pretty straightforward and old antitrust claim, one of the simpler ones I think. So I also think that the
DOJ is going to win. But one of the questions I had was whether or not there was testimony in the trial about the fact that having been the default search for so long, Google is better because it was able to collect so much data and get so educated from all the searches being done. And that's why the others haven't been able to approve, because they need to improve by having more searches done using that search engine.
And so one of the remedies I thought could be possible here is some force sharing of that massive collection of data that Googles over the years by being the deep ault search. Do you see that as a possibility.
Professor, Well, I what what I'm so? I'm uncertain about either what the Justice Department wants or of course what a judge would order. Sharing is a difficult concept from nursery school on. Uh So, and sharing implies also continued supervision. So there's gonna be a reluctance for that. I'm not sure just department is gonna ask for that, and they're presumably technical issues as well. Yeah, so so I don't know.
And there is the problem with all these cases where you know, the firm acquires and retainsment of power through consumer behavior. That doesn't get broken simply by saying, oh my god, that's how you got it. That's the you know, that's power of default. So so giving consumers a choice doesn't mean consumers will choose the other. And I think that's been the result in Europe that went through a
very similar case to the Justice Department's case. And you know, choice screens and so forth have not been shown to be all that effective. So it's a bit of a dilemma. I don't know what they have in mind. And you're right, sharing data would sort of recognize the there's an underlying paradox in the case because if the idea is you need to get more and more searches to get scale, and more and more is better and better, So why
do we want to search engines. So I'm not sure how justice is going to deal with this, and remedy is going to be big issues in all of these cases.
I mean, there's no doubt the most straightforward and simple remedy for exclusive agreements that are legal as to get rid of the exclusive agreements.
Yeah, that's yeah, So you know, no more agreements. You know, there are a lot of That's why contractual cases are the easiest to bring. If the contracts are the restraints of trade. You just say you can't have these contracts anymore. So that's true, but maybe not effective.
Right right, So just I guess we should talk on our for a few minutes about this potential JAY lawsuit against Apple and then we can move on to you know, some of your your discussion on what what Apple can do about all this on the business side. So we've seen the news about the lawsuit, this possible lawsuit. I suspect it's going to get filed. I mean, we know the DEOJ has been investigating Apple for a long time now and focused on Google first, and those cases are
well underway at this point. So I've seen news talk about I message, I've seen them talk about top ties between hardware and software. I mean, what what kind of allegations do you think would be in a lawsuit that the deja.
Well, I'm I'm obviously I'm not sure. I'm I'm always a little skeptical about whether these cases are actually going to go. But look, they you know, they did file it. They see filed against Amazon after no threatening forever. Yesterday I went to look for news articles about the Justice Department's potential suit, you know, against Apple, and I went to the Wall Street Journal. So I came up with the story and then I read the date on the story,
so it was a year ago. So uh, but you know, they better file now because who knows what's going to be now. And thinking about a little further, it seems to me they will not It will not involve the app store, simply because they haven't done it in Google in the Google litigation. They've gone other after other aspects
of Google's business, but not the app store. And you know, you can make a legitimate claim that private parties are are involved with that, and as are the states, and we can put our resources elsewhere, and it muddles the competition stuff because we're not doing that for Google. So so what will they do. I think a lot of the stuff is going to involve some kind of interoperability where they they disadvantage firms that need to work with Apple Apple devices. Now you know what that's you know
what products that's going to be. I don't know. I mean I staw mentioned of tile and the tracking devices, and you know, those cases frankly are not all that easy strike that They're actually hard in today's legal environment to win those cases on monopoly grounds. But maybe they've got some contractual stuff that they can go after. So
so I don't know. I think as a generality, it's going to be disadvantaging competing products that need to interact with the Apple ecosystem in some way, whether it's the watch or you know, the iPhone or you know that sort of thing.
Yeah, okay, yeah, I think about it all the time in terms of the like case. I try to figure out how a case could be brought that similar to that one, and it really I don't. I can't come up with one. Because they were unsuccessful in attempt to monopolize a browser market.
Right.
They were successful in maintaining right, but.
On sort of silly technical grounds. I mean, yes, they were unsuccessful. I mean leveraging a leveraging theory into another market. That's the problem with the tracker thing, as you point out, But the reason the attempt is a different reason for not being successful, and ultimately it didn't matter in the case.
But the problem of which is really a problem of platforms and what you know is commonly referred to as ecosystems, but is not a legal term, which are complements or adjacent markets, which is if you don't have if you're not going to get monopoly in that other market, or
you don't have it, it's not a monopolization offense. The courts really read those out in the United States, not in Europe, but the United States, and you know that that's a roadblock for you know, a lot of these cases where Apple doesn't have a monopoly in that complementary product, but all of it put together keeps everyone in the Apple ecosystem.
Yeah, honor, Actually we moved to the next slide, and.
Yeah, let's you know, let me make a couple of comments on what our research things going to happen. My colleague when they published a note on it about what could happen in the Google and the Apple App Store and we did some math around where it could lead financially, so you know, we are kind of in agreement that the fees are going to go down. I mean, it's
it's it is too it's higher than other marketplaces. You know, let's say you get a ten twelve percent reduction in the way they are doing things, and I mean what it could do is, you know, in our next slide we show, for example, Consensus right now has Apple lap store to be about twenty twenty one billion in sales.
So if you look at a ten percent compression, that's about a two billion dollar head to the to the revenue line, and about let's say if he you know, take that down to twenty percent, that's about four billion, So two to four billion, which is not a small amount, but for Apple with four hundred billion in sales, it's still one percentage points. But it does, you know, have an impact on one particular way they do business. And
I'd love to get Professor Harry's opinion on it. There is no shortage of avenue for them to make money right now. What one area they have not touched on is in app advertising or advertising, you know, targeting you and me at the same time, that's something that they have philosophically stayed away from. But that's a trillion dollar market. I mean, if they want, they can go out and you know, if they'll lose let's say, out of this twenty billion, let's say, sake of arguments, say they lose
ten billion dollars in high margin fee. This is a seventy five percent operating margin business. Let's again assume that they can go out and say, you know what, I'm going to use your data to sell stuff back to you, and I'm going to take market share away from Facebook and Google and others. They can do that, and I mean it will take a few years, but that has been against their philosophy to sell things, so you know
what I mean. But I mean if they do that, that obviously harms their customer and the trust that they have built in. But you know what, would Coats or or somebody in the legal profession say to that that it's actually harming the consumer in the end.
Well, it's hard for any trust people to say that more competition is bad. And you know, it strikes me that's that's the scenario you're saying. If they're going to compete with Google and Facebook, for as a landing spot for advertisers. That means that advertising rates should go down,
which should in some way we'redown to consumer benefit. Now, the fact that your data are being used, you know, means that once again you are paying in a different way, you know, the old I mean, it's it's the old dilemma. If if it's free, you're paying. So you know, whether in the end they would I mean, I assume it's a business proposition for them. Whether that so changes the way consumers perceive Apple products that that consumers would you know, be more willing to buy the Android phone or buy
you know, PC or so forth. So, but from just from an any trust point of view, having them enter the advertising market is a plus.
Quickly jumped to Toamblin with a lot of book that he has done on what's happening in Europe and all the different cases that he follows, and let me post to you Tomblin.
Yeah sure, thanks An. So I'm going to briefly talk about the Digital Markets Act, and this is a broad, sweeping competition package. It's really intended to curb sort of the market power of large tech platforms, especially those that have been identified as gatekeepers by the European Commission. Now, many of the rules contained in the DMA are based at at least in large part on past competition cases that were brought by European regulators, and this does include
an ongoing investigation against Apple's astore policies. This investigation began back in twenty twenty at the urging of Spotify. Now, again, the DMA is really far reaching, so I'm really just going to focus on sort of those app store impacts. So I think it's instructive to really look at the DMNA verse the injunction that came out of the epic
litigation that Professor first went over. So first of all, both the injunction and the DMA do are going to prohibit anti steering or prohibit apples sort of policies against a developer reaching out consumers, against communicating with consumers about offers outside of the app. Where the DMA goes further is it's going to allow users to download apps outside of the app store, so sideloading, which is definitely something
that Apple certainly is pushed back on in the past. However, I think it's it's very important to point out that what DMA does not prohibit, which is Apple or Google or anybody to impose a service fee on third party
payment systems. So what that means is if in Europe, Apple Google sort of adopt a similar twenty seven and fail policy, that's not necessarily prohibited by the d m A. Now, now a little bit about timing is that the DMA takes effect March seventh, and prior to that, these gatekeepers are supposed to meet with the regulators and sort of outline how they intend to comply with this, and I think there were there were news reports recently that Apple has not done that yet, but we do think it's
going to do that in the next few weeks. From March seventh, the European Commission is going to be directly in charge of enforcing the d m A, and I think from there we might see whether or not some investigations developed. Now, to go back to the there's no prohibition on service fees, but I think what's important to note is that there is this this requirement to access two app stores, be fair reasonable and non compliance, and Professor Fir sort of hinted at that standard as it's
applies in patent cases. In patent cases, brand is sort of what is applied to the licensing of standard essential patents. It's very very difficult to their term and what brand is. It's even more difficult to reach an agreement on what brand is. Where I think these where we might see things going in Europe is I think Apple, Google, these parties are going to roll out with their DMA compliance
in the next few weeks. I think regulators are going to look very closely at how these app store policies, at whether or not there is fair, reasonable and non discriminatory access to the app stores. And I think if a regulator thinks they're you know, it's either clearly not brand or maybe even just thinks there might be some morgal room there and to sort of, you know, try to set some precedent, we may see some investigations developed
leading to I think litigation under the dmay so. I think there is a possibility, especially in Europe, which I think is a little bit less squeamish than judges in the US, about potentially setting a frand rate. I think we could see litigation going that way where we're regulars are really forced to weigh all of the evidence and try to reach a determination over whether the name.
Uh uh, These.
Servicing fees are a fair, reasonable and non discrimination, non discriminatory. You know that said, that's really going to take I think quite some time to develop. So again, first of all, you can have to have compliance. Then you're going to have to have the regulators conducting these these really thorough investigations, and then it is going to go to the courts.
But I think this is where we might see sort of diverging paths in Europe and the US, is that there is this FRAND requirement under the d m A, and I think it's definitely gonna be very interesting to see how that develops.
Simly, can I just ask you a question as to who's going to do the enforcement in the European Commission on frand?
Yeah, Well, well, the European Commission does have an investigator in the sactory branch. They did give themselves direct power under the DMA. They didn't sort of want it to be. I think what they learned with a lot of their long litigations as they are recently trying to enforce competition
rules is that it went on forever and ever. So what they tried to do is give I'm not gonna say bright line rules, but sort of more clear rules under the DMA, and then they are directly going to have a division within the European Commission that's going to try to enforce that. That said, there is the requirement that it's going to go to the courts to determine whether or not the enforcement was in line with the regulations.
So it's not a you know, a the European Commission isn't doesn't have carb blanche to impose its will on it. It is going to be constrained by judicial interpretation of the Digital Markets Act. The europe Condition is going to have first bite out of that. I don't think it's going to be the competition the vesterger.
So I think, yeah, because referring to the regulator, Yeah, yeah, is uh is a difficult term I've fold. Yeah, you know, particularly if it's not competition d G comp and you know, I my I mean, my feeling is this is still going to be a slow slog, because.
Yeah, I think it's it's absolutely definitely going to be a slow slog. And again we're just we're not even at the time when the DNA texts effect that that's not till March seventh, and from there, I do think things are going to develop slowly. I think the European Commission, at least when the rules were being drafted, they had
an idea of where they wanted it to go. But I think if if you even look back to how GDPR was rolled out and in force, it took really four or five years into you really started to see even the first opinions by regulators, and those have not yet made it through sort of the European court system. So I do think we're years and years away from potential branded terminations. But if you squint that that does look like that might be where things are headed here and here.
In the meantime, the part of the reason that that well on, one of the many reasons for the d m A was that the abuse of dominance investigations and challenges took so long, and now you have these somewhat vague aspects of the DMA that are going to take just as long. Yeah, some of it's clear, but then you've got these more subjective brand you know issues, And in the meantime it's going to take another couple of years, and the rates that are being charged are still going to be charged.
Thanks Samblin. Just one final question of both of you, Professor Hattie and Jen, you know, a year from now when we said down and then pick up this discussion again, do you think do you think Apple is going to be in a you know, in a in a better spot than where it is right now, or do you think things are going to be very difficult for them over the next twelve months.
Well, I don't think they're going to be in a better spot, but I'm not sure how much worse it's going to be. I guess that's I wonder if where they are right now is going to make all that much difference to the app store unless the judge doesn't find, you know, Apple's compliance adequate. Whatever the judge finds, I assume the parties are going to appeal to the Ninth Circuit. So there's time some Who is it who said time is money? I mean time is money here I'm listening
to Tamlin. I would think, geez, if it's going to take five years to decide whether our fees are franned, let's not set them too low, because you know, whatever we set them at, the Europeans are going to find they're too high. So if we can collect them for five years, Let's do it. I don't know if that's going to be a strategy or so, you know, it's this is a long game, and we always hope that anti trust or whatever tool we pick will be fast.
It won't be. The thing is to not drop the ball, and um, you know, it's hard for me to predict whether the ball is going to drop in the future if this even if litigation is filed in the current Biden administration.
Yeah, and you know, honor are given all of that, and I totally agree with that. I think, you know, the single thing in the next twelve months that maybe could have some impact on Apple that's negative from a business perspective is the case in which it's not even a defendant that we talked about, the DJ versus Google Search. Because if those payments stop, that's, as you mentioned, the twenty billion or whatever it is, it's a pretty big hit.
And that's you know, that's something that could happen that Apple has No there's nothing Apple can really do about that. But right in terms of these challenges directly to Apple and its fleas and it's app store and its other businesses, I don't I just don't think anything. I think status will from the next moments.
Now, this is great. This has been a very good discussion from all of you. Thank you so much, and we hope to have this you know, if we get new information on any of the cases. So thanks, thanks everybody, and have a good days there.
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