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Redacted Version of Document Sought to Be Sealed Case 4:20-cv-05640-YGR Document 777-3 Filed 05/28/21 Page 1 of 644 REDACTED VERSION OF DOCUMENT SOUGHT TO BE SEALED 1 CHRISTINE A. VARNEY (pro hac vice) [email protected] 2 KATHERINE B. FORREST (pro hac vice) [email protected] 3 GARY A. BORNSTEIN (pro hac vice) [email protected] 4 YONATAN EVEN (pro hac vice) [email protected] 5 J. WESLEY EARNHARDT (pro hac vice) [email protected] 6 LAUREN A. MOSKOWITZ (pro hac vice) [email protected] 7 JUSTIN C. CLARKE (pro hac vice) [email protected] 8 M. BRENT BYARS (pro hac vice) [email protected] 9 CRAVATH, SWAINE & MOORE LLP 825 Eighth Avenue 10 New York, New York 10019 Telephone: (212) 474-1000 11 Facsimile: (212) 474-3700 12 PAUL J. RIEHLE (SBN 115199) [email protected] 13 FAEGRE DRINKER BIDDLE & REATH LLP Four Embarcadero Center 14 27th Floor San Francisco, CA 94111 15 Telephone: (415) 591-7500 Facsimile: (415) 591-7510 16 Attorneys for Plaintiff and Counter-defendant 17 Epic Games, Inc. 18 UNITED STATES DISTRICT COURT 19 NORTHERN DISTRICT OF CALIFORNIA 20 OAKLAND DIVISION 21 EPIC GAMES, INC., Case No. 4:20-cv-05640-YGR-TSH 22 Plaintiff, Counter-defendant, 23 FINDINGS OF FACT AND CONCLUSIONS OF LAW 24 v. PROPOSED BY EPIC GAMES, INC. 25 APPLE INC., The Honorable Yvonne Gonzalez Rogers 26 Defendant, Counterclaimant. Trial: May 3, 2021 27 28 Case 4:20-cv-05640-YGR Document 777-3 Filed 05/28/21 Page 2 of 644 1 Epic Games, Inc. respectfully proposes the Findings of Fact and Conclusions of 2 Law submitted herewith. 3 Dated: May 28, 2021 CRAVATH, SWAINE & MOORE LLP 4 Christine Varney 5 Katherine B. Forrest Gary A. Bornstein 6 Yonatan Even J. Wesley Earnhardt 7 Lauren A. Moskowitz Justin C. Clarke 8 M. Brent Byars 9 Respectfully submitted, 10 By: /s/ Katherine B. Forrest 11 Katherine B. Forrest 12 Attorneys for Plaintiff-Counter-defendant Epic Games, Inc. 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Case 4:20-cv-05640-YGR Document 777-3 Filed 05/28/21 Page 3 of 644 Findings of Fact Note: (i) Yellow highlighting quotes or reproduces materials that the Court has ordered sealed in a prior order or that are subject to a sealing request; (ii) blue highlighting indicates materials that are subject to the pending motions at Dkt. Nos. 602, 657 or 721; and (iii) green highlighting reflects materials that are subject to both (i) and (ii). I. INTRODUCTION. ......................................................................................................... 1 II. BACKGROUND – APPLE AND ITS ECOSYSTEM ...................................................16 A. Apple’s Business. ...............................................................................................16 B. Switching Costs Tend To Lock Users into iOS. ..................................................24 C. Because Users Are Locked into iOS, Mobile App Developers Cannot Forgo Developing Apps for iOS. ........................................................................34 D. The Origin of the App Store. ..............................................................................40 E. Apple Recognizes that Having More Developers on Its Platform Enables It to Sell More iPhones. .........................................................................................50 F. iOS App Store Profitability. ...............................................................................54 III. THERE IS AN AFTERMARKET FOR iOS APP DISTRIBUTION. .............................68 A. There Is a Foremarket for Smartphone Operating Systems. ................................68 B. The Geographic Market for Smartphone OSs Is Global Excluding China. ..........73 C. Consumers Do Not View Other Electronic Devices as Substitutes for Smartphones. .....................................................................................................75 D. Developers Do Not View Other Electronic Devices as Substitutes for Smartphones. .....................................................................................................88 E. Apple and Google Are the Only Significant Participants in the Foremarket for Mobile OSs. .................................................................................................90 F. Apple Has Market Power in the Smartphone Operating System Foremarket. ........................................................................................................92 i Case 4:20-cv-05640-YGR Document 777-3 Filed 05/28/21 Page 4 of 644 G. There Is an Aftermarket for iOS App Distribution. .............................................95 H. Apple Incorrectly Defined the Relevant Market as the Market for Digital Games Transactions. ........................................................................................ 103 I. The Geographic Market for iOS App Distribution Is Global Excluding China. .............................................................................................................. 125 J. The iOS App Distribution Market Is a Properly Defined Aftermarket. .............. 126 K. App Stores on Other Smartphone Operating Systems Are Not Substitutes for the App Store. ............................................................................................. 131 L. Web App Distribution is Not a Substitute for Native App Distribution. ............ 132 M. Streaming Services Are Not Substitutes for Downloading Games Locally as Native Apps. ................................................................................................ 146 IV. APPLE HAS MONOPOLY POWER IN THE iOS APP DISTRIBUTION MARKET. ................................................................................................................... 159 A. Apple Uses Its Control over iOS to Monopolize App Distribution Through Contractual Restrictions. .................................................................................. 159 B. Apple Has 100% Market Share in the Market for iOS App Distribution. .......... 167 C. The App Store’s Profit Margins Are Extraordinarily High. ............................... 170 D. Apple Does Not Track Relative Pricing of Apps on Non-iOS Platforms. .......... 203 V. APPLE’S CONDUCT CAUSES ANTI-COMPETITIVE EFFECTS IN THE iOS APP DISTRIBUTION MARKET. ............................................................................... 206 A. Apple’s Conduct Foreclosed All Manners of Distribution of Apps on iOS by Third Parties. ............................................................................................... 206 B. Apple’s Conduct Increases the Price of Apps to Consumers. ............................ 211 C. Apple’s Conduct Harms Innovation. ................................................................ 215 D. Apple Self-Preferences Its Own Apps. ............................................................. 224 ii Case 4:20-cv-05640-YGR Document 777-3 Filed 05/28/21 Page 5 of 644 E. Apple Has Rejected ‘Store Within a Store’ Apps for Anti-competitive Reasons, Not Because of Security Concerns. .................................................... 228 F. Apple’s Conduct Increases Barriers to Switching by Preventing the Development of Effective Middleware. ............................................................ 233 VI. APPLE HAS AND EXERCISES MONOPOLY POWER IN THE MARKET FOR PAYMENT SOLUTIONS FOR ACCEPTING AND PROCESSING PAYMENTS FOR DIGITAL CONTENT PURCHASED WITHIN AN iOS APP. ...... 236 A. There Is a Separate Aftermarket for Payment Solutions for Accepting and Processing Payments for Digital Content Purchased Within an iOS App (“iOS In-App Payment Solutions Market”). ..................................................... 236 B. There Is Separate Demand for In-App Payment Solutions. ............................... 245 C. IAP and the App Store Are Not Integrated. ...................................................... 254 D. Apple Has and Exercises Monopoly Power in the iOS In-App Payment Solutions Market. ............................................................................................. 255 VII. APPLE HAS TIED TOGETHER TWO DISTINCT PRODUCTS—ITS APP DISTRIBUTION SERVICES AND ITS IN-APP PAYMENT SOLUTIONS. .............. 263 VIII. APPLE’S CONDUCT CAUSES ANTI-COMPETITIVE EFFECTS IN THE MARKET FOR iOS IN-APP PAYMENT SOLUTIONS. ............................................ 268 A. Apple’s Conduct Raises the Price of In-App Purchases of Digital Goods Within iOS apps. .............................................................................................. 268 B. Many Developers Cannot Afford to Pay Apple’s 30% Commission for In-App Purchases of Digital Content. ............................................................... 269 C. By Standing as a Middleman in Every In-App Purchase of Digital Content, Apple Interferes with Developers’ Ability to Provide Effective Customer Service. ............................................................................................ 270 D. Apple’s Management of IAP Refunds Increases Risk of Fraud. ........................ 274 E. Apple Does Not Provide Developers Access to Key Analytics About Their Customers, Which They Could Use to Improve Their Offerings. ...................... 275 F. Apple’s Price Tiers Interfere with Developers’ Pricing in Foreign Markets. ..... 278 iii Case 4:20-cv-05640-YGR Document 777-3 Filed 05/28/21 Page 6 of 644 G. By Requiring Apple’s In-App Payment Solution, Apple Deprives Consumers of Innovative Payment Options that Would Offer More Flexibility and Convenience. ............................................................................ 279 H. Through Its Anti-Steering Provisions, Apple
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