More from Epic v. Google: everything we learned in Fortnite court
Google’s attorney suggested that eBay — which employed Prof. Tadelis at one point — needs to have an anti-steering provision because otherwise the buyer and seller could connect outside eBay’s platform and eBay would not get paid.
Tadelis agreed.
Out of the blue, Google’s attorney Kyle Mach asked this question: “You don’t think a case of this magnitude should be decided on back of the envelope calculations, do you?”
Incredibly, Tadelis seemed to know what he was talking about: “That is one of many pieces of evidence in my reports.”
I checked the live transcript, and this exchange seemed to be a complete non sequitur. What... were they talking about? It came right after a statement about how much Tadelis is getting paid.
Tadelis’ replies are getting amusingly snippy, by the way. Mach asked if Google “might have to charge fees for the other services it doesn’t charge for today.”
“It might not,” Tadelis replied. Then Mach and Tadelis went back and forth with “it might?” and “it might not” several times.
Epic’s economist Steve Tadelis concedes that Google would get paid nothing to distribute apps if developers choose alternative payment processors — all other things staying the same.
(Historically and currently, Google only charges when a developer charges for an app or an in-app purchase, something it’s brought up repeatedly during the trial — it’s the “we only get paid when you get paid” argument, and I personally find it moderately compelling.)
Google’s making a host of other little points right now, alleging that Braintree is only available in a handful of countries, Square isn’t available in some big countries like Germany and India, PayPal fees vary across countries, and Tadelis gets paid $1,200 an hour plus a revenue share of his own. (Yes, another paid-to-be-here card played by Google, though Tadelis tells me afterward he wasn’t paid by Google to present his research but, rather, to testify. I’ll try to figure out the nuance later, but he’s not contesting he was paid for his work.)
“Square would charge more than Google would charge for that transaction, right?” asks Google attorney Kyle Mach.
We’re looking at a chart from Tadelis’ report that shows that for a 99 cent in-app purchase, the second most common price set by developers, there are definitely worse options than Google.
Braintree and PayPal would eat 52.1 percent of that transaction, and Stripe and Square would take 33.2 percent — unless you went with one of their micropayment rates instead, which work out to low as 14.1 percent for a 99 cent transaction via PayPal and 10.1 percent for Stripe. (Tadelis admits he couldn’t find a micropayment rate for Square.)
At $4.99, the most common in-app purchase price, the highest effective rates of alternative payment processors are 13.3 for PayPal (or 6.8 for its micropayment fee) or 12.4 percent for Braintree. Others are quite a bit lower.
Google’s lawyer asks: “Had you included the Samsung Galaxy Store in this chart, it would look quite different, right?”
We’re now looking at Tadelis’ bar graph again — the one that unfavorably compared Google’s nearly 30 percent fee to the 6–10 percent fees of payment processors — but now with Apple and Samsung’s stores added. Those bars reach much higher than Stripe and PayPal’s, of course, making Google’s look more normal.
Google once again makes its point: stores aren’t just payment processors. They have additional value. Tadelis concedes they’re not exactly the same but says it depends on what you’re using them for.
We just saw an internal document where Google attempted to use game theory to figure out what would happen if it decoupled Google Play Billing from Google Play app distribution and decided to compete with other payment processors itself.
It included a graph that suggested many developers would change to a rival payment processor right away — “some large developers would take advantage of billing optionality no matter the price,” wrote Google — but that most others wouldn’t pick Google until or unless it offered a substantial discount.
Tadelis showed us that Google’s User Choice Billing, which nominally offers a mere 4 percent discount (though secretly goes far lower), wouldn’t come close to the place on the graph where it would convince developers to pick Google.
Tadelis says User Choice Billing is not a good deal, and Google knows it.
I wish I could show you a picture of the graph since it’s difficult to describe. No cameras in the courtroom; we should get a copy after the trial concludes.
It’s Google’s turn to question Tadelis now.
We’re looking at a demonstrative slide titled “Web Browser Payment Solutions Services Are Not Substitutes,” showing the many steps it can take to buy digital goods on the web instead of through an app.
He says internet companies know “very well” that any amount of friction in this payment process leads to serious drop-off and that he’s seen it firsthand: “Both at the times when I was at eBay and at Amazon, there were many projects that dealt directly with friction.”
Epic asks if app developers could use links in their apps to speed things up. Sure, says Tadelis, but Google doesn’t allow that. Epic puts Google’s anti-steering provision on-screen:
“In-app user interfaced flows, including account creation or sign-up flows, that lead users from an app to a payment method other than Google Play’s billing system as part of those flows.”
Anti-steering is the one place Epic won a tentative victory against Apple, BTW.
I haven’t seen enough of the docs myself in court to say for sure — only a taste — but Epic’s economist is telling us about Google documents that show the company feared its Play Billing would be displaced.
“Google was well aware that severing the tie would put price pressure on payment solutions they could provide,” he says. We saw a brief snippet of a document showing a multi-step process where other payment providers would rise up to fill a mandatory Play Billing vacuum.
He says another chunk of the document showed that Google saw benefits in “laddering up,” or using its power to become dominant in a subsequent area — like how Netflix’s DVD business became a launchpad for its streaming business, which became a launchpad for its own TV and movie productions, he says.
“What would you expect to happen to price to consumers if the tie were severed?” asks Epic’s lawyer, referring to a hypothetical world where Google didn’t require its 30 percent Play Billing fee.
Tadelis says that “savings from the reduced fees would naturally be passed onto the users.” As anyone who’s lived through inflation-as-excuse-for-price-gauging will tell you, that seems a little optimistic?
Judge Donato picked up on this instantly, pausing the testimony to ask a question of his own: “Let’s say in a hypothetical world, Google eliminated all fees. Why do you expect a user would see any benefit in that, in the price a user pays for an app?”
Tadelis suggested that if he opened a pancake shop and suddenly the cost of milk and eggs drop, he’d make more profit right away — but if he drops the price a bit, he can sell even more goods and make a wider margin.
“Macroeconomic analysis shows that some of that will optimally be passed on to consumers,” he says. The judge seems satisfied, at least from where I’m sitting.
“Most of the value of the charges happen at 30 percent, not a 15 percent.”
“If the developer that’s charged 30 percent is selling a million dollars of product and the developer charged 15 percent is selling $1 of product,” then the fee is closer to 30 percent on average, he says.
(In 2021, after Epic filed its lawsuit, Google reduced its cut to 15 percent for a developer’s first $1M in annual revenue. Some companies pay far less than 15 percent, though — even as low as zero.)
That’s the second argument from Epic’s second economist, and we’re looking at a slide listing basic “competitive harms”: foreclosure, high prices, and “innovation and quality.”
On the first point, foreclosure: “When Google doesn’t have to compete with other payment solution providers, they lack the incentive to offer the innovations that are needed,” says Tadelis.
On the second, high prices: “If the tie were severed, could they charge 15–30 percent for a payment solution? And the answer to that is no,” he says.
“Anyone who is profit maximizing would not choose to pay a 30 percent fee when they could pay a 9 or 10 or 6 percent fee,” he adds.
We’re looking at a slide showing Google’s average in-app purchase fee (29.4 percent as calculated by Tadelis) versus the 5.5 to 10 percent charged by PayPal, Stripe, Square, and Paddle.
Keep that in mind — he says he was assigned to look into Google’s behavior and concluded that Google “forces developers that wish to use the Google Play Store to use Google Play Billing for all in-app purchases of digital content within their apps (a ‘coercive tie’)” among other findings.
He explains coercive ties simply: if you want product A that I’m selling, you have to buy product B as well. But for it to be impactful, it also requires there to be no viable alternatives, he says. If Nike makes you buy a pair of socks with its sneakers, and you don’t like those socks, you could simply buy sneakers from Adidas instead.
We’re looking at an amusingly simple visual aid: a thick clip art of a physical rope with a prominent knot between Google Play and Google Play Billing.
So, Epic has two economists, including Doug Bernheim, whom we heard from yesterday; expect Google to have two as well.
He says he focuses on the economics of e-commerce and the internet, spent many years teaching at Stanford before Berkeley, and has studied antitrust economics as well. He’s also worked for eBay Research and Amazon for brief stints... and even Google, who retained him as an expert for a patent case in Canada and paid him to share some of his research.
We’re covering the trial live here:
Epic’s economist has been dismissed — but we’ll be back with multiple economists tomorrow, Google’s attorneys tell the judge.
Google’s Project Hug agreements didn’t keep Samsung from preloading another app store, nor does an RSA 3.0 deal, nor is it being restricted by a Google MADA, nor Unknown Sources, nor did the Project Banyan deal happen, according to an app store comparison chart from Bernheim that Google added big red “X” marks to while we were watching.
He’s Epic’s witness again now, though, and Epic’s lead attorney prompted Bernheim to say that adding those X’s was wrong since Samsung’s Project Hug deal constrains it in other ways — and we’ve seen the Samsung Galaxy Store accounts for so little share of Android downloads (around 1 percent?) that preloading it hasn’t made a huge difference for competition.
I’m SO curious whether the jury thinks Samsung’s Galaxy Store is a good counterexample to some of Epic’s arguments. It’s been a facet of Google’s defense from the beginning.
Google attempted to ask, pointing at Bernheim’s chart: “One reason Google’s margins are going up is because developers are earning more money, right?”
Bernheim said yes — but suggested that in a properly competitive market, Google’s profits wouldn’t simply grow unchecked. “In a competitive market, that would be competed away.”
I expect Epic will come back to this, but Google did get Bernheim to admit that his list of missing top 20 apps includes apps that don’t have exclusive deals with Google to appear on the Play Store.
If these really popular apps wanted to be in the Samsung app store, they could do that, right?” asked Google.
Bernheim says yes, they could.
Google also clarified that developers don’t literally pay 79 cents for every app download, in case that confused anyone. “No, that takes the form of the fees,” says Bernheim.
He might be the most collected and unshakeable witness on the stand all trial, even including Google’s Sundar Pichai. His college course earlier was educational without talking down to anyone, the jury and judge seemed to be listening with the same interest as me, and now Google’s barely getting anywhere with him — he’s anticipating where many of Google’s lines of questioning go before the attorney gets there.
In fact, after I’d already written half this post, Bernheim called out Google’s attorney, live: “Wait, you just changed what you were asking about. You were asking about commission rates, and now we’re talking about price.”
Bernheim says no, he’s sure that Hiroshi Lockheimer and other top Google execs are right that even 12 percent of users switching from Android to iOS would be concerning.
Google’s been trying to argue that because billions of people have smartphones, even a small percentage switching every, say, 2.7 years is a lot of switching (and perhaps evidence of substitution?)
Bernheim admits his firm is paid $1,600 an hour for his work.
“Is it fair to say you’ve been paid north of a million dollars for this case?”
He says his compensation is “much more complicated” because the money doesn’t flow to him directly.
“It’s more complicated because you’re a partner at a consulting firm and you get paid a share of the profits,” says Google’s attorney. Bernheim says yes.
We’ve seen this gambit before, but it cuts both ways. (Not relevant to the case but: I wonder what the lawyers in this courtroom are paid!)
Google’s attorney is pushing Bernheim to admit he didn’t actually reply on any Apple documents when deciding that Apple wasn’t part of the relevant market.
He hasn’t quite admitted it yet, but it definitely looks like he didn’t based on his replies and dodges so far.
(After several “real-world” probes from Google, Judge Donato got a laugh across the courtroom by shutting that specific phrase down. “We’re only talking about the real world here,” he said. Reader, I LOL’d.)
We’re back from a quick break, and Bernheim is still on the stand — but now, Google gets the chance to poke holes in his testimony or point him a different direction.
Google’s attorney is beginning with apps:
“It’s true isn’t it that the quality and variety of apps is an important factor for the device people buy, isn’t it?”
Bornheim won’t go quite that far, but he seems to be admitting that some apps do launch on the iPhone first.
We’ve gotten to the part of Epic’s expert economist testimony where Bernheim is arguing that Google profits from monopoly power. His first big point: Google is making five times more from app downloads than it did in 2015.
78 cents per app download in 2021, he says — compared to 61 cents in 2020, 46 cents in 2019, 35 cents in 2018, 26 cents in 2017, 19 cents in 2016, and 15 cents in 2015.
When Google booted Fortnite off its Google Play app store, Epic’s economics expert attests, Android usage fell off significantly — which suggests Android users didn’t just go find another way to get the game, Bernheim says.
Nor did they just start playing on other platforms like PlayStation, he says. “There’s no indication of substitution of usage to other platforms.” He’s been arguing that the lack of substitutes shows where a company has monopoly power.
(When Google and Apple booted the game off their store, it did keep working, but those players got left behind. I would also point out that Fortnite on mobile didn’t have much retention to begin with, though.)
Bernstein says that because the average consumer only buys a new phone every 2.7 years, any switching that does indeed happen takes a while.
We’re now looking at a slide dramatically presenting a clip art pair of imbalanced scales, with a “small increase in price of Android app distribution” getting significantly tipped by the “absence of low-end iPhones,” “infrequency of phone purchases,” “learning costs” and other conclusions about the costs of switching to an iPhone.