Case 4:20-Cv-05640-YGR Document 407 Filed 04/08/21 Page 1 of 365
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Case 4:20-cv-05640-YGR Document 407 Filed 04/08/21 Page 1 of 365 REDACTED VERSION OF DOCUMENT SOUGHT TO BE SEALED 1 CHRISTINE A. VARNEY (pro hac vice) 2 [email protected] KATHERINE B. FORREST (pro hac vice) 3 [email protected] GARY A. BORNSTEIN (pro hac vice) 4 [email protected] YONATAN EVEN (pro hac vice) 5 [email protected] LAUREN A. MOSKOWITZ (pro hac vice) 6 [email protected] JUSTIN C. CLARKE (pro hac vice) 7 [email protected] M. BRENT BYARS (pro hac vice) 8 [email protected] CRAVATH, SWAINE & MOORE LLP 9 825 Eighth Avenue New York, New York 10019 10 Telephone: (212) 474-1000 Facsimile: (212) 474-3700 11 PAUL J. RIEHLE (SBN 115199) 12 [email protected] FAEGRE DRINKER BIDDLE & REATH LLP 13 Four Embarcadero Center 27th Floor San Francisco, CA 94111 14 Telephone: (415) 591-7500 Facsimile: (415) 591-7510 15 Attorneys for Plaintiff and Counter-defendant 16 Epic Games, Inc. 17 UNITED STATES DISTRICT COURT 18 NORTHERN DISTRICT OF CALIFORNIA 19 OAKLAND DIVISION 20 21 EPIC GAMES, INC., Case No. 4:20-cv-05640-YGR-TSH 22 Plaintiff, Counter-defendant, FINDINGS OF FACT AND CONCLUSIONS OF LAW 23 PROPOSED BY EPIC GAMES, INC. v. 24 APPLE INC., 25 The Honorable Yvonne Gonzalez Rogers Defendant, Counterclaimant. 26 Trial: May 3, 2021 27 28 FINDINGS OF FACT AND CONCLUSIONS OF LAW PROPOSED BY EPIC GAMES, INC. Case No. 4:20-cv-05640-YGR-TSH Case 4:20-cv-05640-YGR Document 407 Filed 04/08/21 Page 2 of 365 1 Epic Games, Inc. respectfully proposes the Findings of Fact and Conclusions of 2 Law submitted herewith. 3 4 Dated: April 7, 2021 CRAVATH, SWAINE & MOORE LLP 5 Christine Varney 6 Katherine B. Forrest Gary A. Bornstein 7 Yonatan Even Lauren A. Moskowitz 8 Justin C. Clarke M. Brent Byars 9 10 Respectfully submitted, 11 By: /s/ Katherine B. Forrest Katherine B. Forrest 12 Attorneys for Plaintiff-Counter-defendant 13 Epic Games, Inc. 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -2- FINDINGS OF FACT AND CONCLUSIONS OF LAW PROPOSED BY EPIC GAMES, INC. Case No. 4:20-cv-05640-YGR-TSH Case 4:20-cv-05640-YGR Document 407 Filed 04/08/21 Page 3 of 365 Findings of Fact I. INTRODUCTION. ......................................................................................................... 1 II. BACKGROUND – APPLE AND ITS ECOSYSTEM ...................................................12 A. Apple’s Business. ...............................................................................................12 B. Switching Costs Tend To Lock Users into iOS. ..................................................18 C. Because Users Are Locked into iOS, Mobile App Developers Cannot Forgo Developing Apps for iOS. ........................................................................22 D. The Origin of the App Store. ..............................................................................25 E. Apple Recognizes that Having More Developers on Its Platform Enables It to Sell More iPhones. .........................................................................................31 F. iOS App Store Profitability. ...............................................................................33 III. THERE IS AN AFTERMARKET FOR IOS APP DISTRIBUTION. .............................40 A. There Is a Foremarket for Smartphone Operating Systems. ................................40 B. The Geographic Market for Smartphone OSs Is Global Excluding China. ..........43 C. Consumers Do Not View Other Electronic Devices as Substitutes for Smartphones. .....................................................................................................44 D. Developers Do Not View Other Electronic Devices as Substitutes for Smartphones. .....................................................................................................47 E. Apple and Google Are the Only Significant Participants in the Foremarket for Mobile OSs. .................................................................................................48 F. Apple Has Market Power in the Smartphone Operating System Foremarket. ........................................................................................................49 G. There Is an Aftermarket for iOS App Distribution. .............................................51 H. The Geographic Market for iOS App Distribution Is Global Excluding China. ................................................................................................................54 I. The iOS App Distribution Market Is a Properly Defined Aftermarket. ................55 J. App Stores on Other Mobile Operating Systems Are Not Substitutes for the App Store. ....................................................................................................59 i Case 4:20-cv-05640-YGR Document 407 Filed 04/08/21 Page 4 of 365 K. Web App Distribution is Not a Substitute for Native App Distribution. ..............60 L. Streaming Services Are Not Substitutes for Downloading Games Locally as Native Apps. ..................................................................................................65 IV. APPLE HAS MONOPOLY POWER IN THE IOS APP DISTRIBUTION MARKET. .....................................................................................................................69 A. Apple Uses Its Control over iOS to Monopolize App Distribution Through Contractual Restrictions. ....................................................................................69 B. Apple Has 100% Market Share in the Market for iOS App Distribution. ............74 C. The App Store’s Profit Margins Are Extraordinarily High. .................................75 D. Apple Does Not Track Relative Pricing of Apps on Non-iOS Platforms. ............81 V. APPLE’S CONDUCT CAUSES ANTI-COMPETITIVE EFFECTS IN THE IOS APP DISTRIBUTION MARKET. .................................................................................83 A. Apple’s Conduct Foreclosed All Manners of Distribution of Apps on iOS by Third Parties. .................................................................................................83 B. Apple’s Conduct Increases the Price of Apps to Consumers. ..............................85 C. Apple’s Conduct Harms Innovation. ..................................................................86 D. Apple’s Self-Preferences. ...................................................................................90 E. Apple’s Conduct Increases Barriers to Switching by Preventing the Development of Effective Middleware. ..............................................................93 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. ........96 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”). .......................................................96 B. There is Separate Demand for In-App Payment Solutions. .................................99 C. IAP and the App Store Are Not Integrated. ...................................................... 104 D. Apple Has and Exercises Monopoly Power in the iOS In-App Payment Solutions Market. ............................................................................................. 105 ii Case 4:20-cv-05640-YGR Document 407 Filed 04/08/21 Page 5 of 365 VII. APPLE HAS TIED TOGETHER TWO DISTINCT PRODUCTS—ITS APP DISTRIBUTION SERVICES AND ITS IN-APP PAYMENT SOLUTIONS. .............. 108 VIII. APPLE’S CONDUCT CAUSES ANTI-COMPETITIVE EFFECTS IN THE MARKET FOR IOS IN-APP PAYMENT SOLUTIONS. ............................................ 111 A. Apple’s Conduct Raises the Price of In-App Purchases of Digital Goods Within iOS apps. .............................................................................................. 111 C. By Standing as a Middleman in Every In-App Purchase of Digital Content, Apple Interferes with Developers’ Ability to Provide Effective Customer Service. ............................................................................................ 112 D. Apple’s Management of IAP Refunds Increases Risk of Fraud. ........................ 114 G. By Requiring Apple’s In-App Payment Solution, Apple Deprives Consumers of Innovative Payment Options that Would Offer More Flexibility and Convenience. ............................................................................ 118 IX. EPIC IS INJURED BY APPLE’S CONDUCT. ........................................................... 119 A. Background. ..................................................................................................... 119 B. Fortnite. ........................................................................................................... 121 C. Fortnite Game Modes. ..................................................................................... 127 D. Fortnite as a Social Space. ............................................................................... 128 E. Cross-Progression Enhances the Complementary, Not Substitutable, Nature of Other Platforms. ............................................................................... 130 F. Epic Games Store (“EGS”). ............................................................................. 131 G. Distribution of EGS. ........................................................................................ 133 H. Epic’s Financial Arrangements with Developers Distributing Through EGS. ...............................................................................................................