Sean Hollister

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.

Barnes continues to say he looked through documents to try to find any missing costs Google would have incurred to operate Google Play but didn’t find them.

“Is there some missing bucket of costs that could be added to Play to reduce its margins?” asked Epic’s lawyer.

“It would surprise me if in fact that were the case,” Barnes said.

It’s Google’s turn with Barnes. Google is beginning by attacking his credibility.

Ned Barnes is a CPA with Berkeley Research Center, and he says that the costs of Google Play were already accounted for in Google’s various internal financial statements.

“How did you know they were not under the direct control of Google Play management?” Epic’s lawyer asked.

“My group found they were under the direct control of Ruth Porat, CFO of Google,” Barnes replied.

Headcount for Google Play was 1,256 in 2020 and was projected to go up to 1,278 employees in 2021.

In a separate 2018 document, we saw revenue of $6.85 billion.

We also saw a financial document for the Android business, not Google Play, that showed Google did at one time at least account for its costs of building Android (including employees, infrastructure, marketing, and the “Google Play service”) separately.

“If Play Store was an independent company you would incur other costs that are not reflected on the Play P&L today and don’t need to because Play is not a standalone company,” he says.

But “Android development costs don’t just benefit Google Play, right?” asks a lawyer.

“I don’t want to speculate...” Cramer begins, “I think it’s fair to say the Android investments, are, yeah, connected to broader ecosystem.”