Sean Hollister

“Yes, I think some of them should be,” Skinner finally replies. But then Epic’s attorney shows he replied differently in an old deposition: “I’m not necessarily opining that these Android costs should be allocated.”

Epic gets him to admit that he has not determined which costs should be allocated. “Well, I think I’ve made clear that at least the portion of the costs of these for the ecosystem,” he begins, before getting cut off.

Both point out that the other’s expert basically has a business giving testimony in court. “About 15-20 times, yes?” asks Epic of Google’s witness. Skinner says that sounds about right.

And, like Google, Epic is attacking what the expert was hired to calculate and what they did not. This time, Epic is pointing out that Google’s expert didn’t bother trying to actually calculate Google Play’s app store profit margins — only that of Google’s larger platforms and ecosystems group, which includes Android.

“The other reason is these costs benefit the whole ecosystem... we call this a joint cost instead of a shared cost because it benefits all the different products simultaneously,” says Skinner.

He says it’s not unusual for companies to allocate their costs this way. He believes the operating margin of Google’s platforms and ecosystems group in 2020 would be 19 percent if you account for this — not the 66 percent that Epic’s expert calculated for Google Play specifically.

But “R&D costs are now tracked in a separate cost center,” Skinner explains.

You could track $200K worth of R&D costs on the original P&L, or you could split out a new P&L for an “R&D cost center.” If you did, it would look like the camera company only had $400K in costs and, thus, had a 600K operating profit for a 60 percent operating margin, while another part of the company had costs of $200K and made no profit at all.

(But is this what Google actually did? We haven’t gotten there yet — Google’s just educating the jury. In fact, Google is literally asking Skinner to tell the jury what this means.)

“This structure provides the context within which we can understand how Google Play operates,” says Skinner.

Now, Google is pointing to CEO Sundar Pichai’s simple quotes about how Play wouldn’t be possible without the investment in Android.

Google spent a good bit of time talking up his credibility before submitting him as a witness. He was a professor at the Roth School of Business from 1989 through 2005 before joining the University of Chicago and says he chairs an investment group that manages around $45 billion in assets.

He’s talking about how he teaches “managerial accounting,” a field which, I assume, will help Google make its case that it didn’t need to include Android costs in Play’s P&L.

“Those costs were not allocated to Google Play based on the decisionmaking that Google determined,” says Barnes.

Google’s last point before passing the witness back to Epic: Google also generated $92 billion for app developers as of 2020 — something that also shows up on different financial statements than Google’s. Barnes supposes yes, that money would show up on the financial statements of the developers that Google supports.

Epic’s final question for Barnes was basically: “Is it safe to assume costs on one P&L can just be moved to another P&L?” Barnes says no, it would be improper.

It sounds impressive, but it’s also not quite relevant to what Barnes found. “I see what you put on the slide, but you haven’t compared it to revenue,” he said, nodding to the fact that it doesn’t speak to Google’s profit margin at all.

And now we’re in virgin territory: we’re seeing an “Alternative Profit Calculation” where Google Play would have lost money from 2011 through 2017 if it charged just a 12 percent revenue share — roughly $3 billion in aggregate before turning profits in 2018 and beyond — assuming Google still spent as much as it did and everything else stayed the same. Barnes is visibly skeptical it would.

“That’s just math, that’s not proper financial analysis,” says Barnes.

“That was the result of my inquiry, yes,” says Barnes.

Now, Google is trying to justify its high profit margins, pointing out Barnes isn’t aware if Google has higher profit margins than any other app store — and even if it did, getting him to admit that companies with strong brands and strong products could have higher profit margins than others.

Barnes is definitely on the back foot! But how relevant is this? I guess we’ll find out after Epic’s lawyer gets another chance with him.