Monday, March 28, 2022

Has anyone ever seen an ANALOG mobile gaming transaction? Asking for the Epic Games v. Apple judge...

While Judge Yvonne Gonzalez Rogers ("YGR") of the United States District Court for the Northern District of California had some great moments during the Epic Games v. Apple bench trial she was presiding over (especially when grilling Tim Cook), and while one must respect some of her findings and holdings even if one disagrees with the result, the market definition part of her ruling does not deserve any deference. I do respect her, but in one of the most important cases for innovation and competition, she made some unbelievably bad mistakes. The closer one looks at it, the worse that pivotal part of the ruling looks.

It was actually because of a Freudian slip by Apple's lawyers (who inadvertently conceded that iOS does compete with Android, which means Epic has a point that there is such a thing as a smartphone operating system market even though iOS is not licensed or sold separately from iPhones) that I took another look at the market definition part of Epic v. Apple at this stage. I had previously read the judgment twice, but when I re-read it with the right focus, I discovered flaws that are beyond imagination.

I previously identified one sentence as factually and legally nonsensical, and I actually think that's a semi-diplomatic way to put it. To my own surprise, I only now realized that there was an elephant in the room I had failed to notice before. That gem is called digital mobile gaming transactions. The word "digital" is nonsensical here. It's not just one term of many. It's the central term because it's the judge's misguided market definition.

All mobile gaming transactions are digital.

All smartphones are digital. All mobile phones sold today are digital.

30 years ago I bought an analog mobile phone (from Philips if I recall correctly) and had it installed in my Pontiac GTA. The analog mobile phone standard was 1G. Starting with 2G (GSM), it all went digital a few years later.

There were no games for analog mobile phones. You could place and receive calls.

There are, however, non-digital games. Playing chess on a physical chessboard is not digital. That's why Apple proposed a market definition of "digital game transactions." But the moment you insert "mobile" (to exclude consoles), "digital" becomes superfluous.

Why is a redundancy so bad?

In the end, a redundancy is just a waste. I have redundancies in my blog posts all the time. So do other writers. But a judge presiding over an antitrust case and making the single most crucial determination--identifying the relevant market--would normally strive to get it right. She'd normally try to be precise and concise, asking herself why a particular word is part of the definition and why other words would be left out.

Market definition in antitrust is like claim construction in patent cases. It's where you define a pattern you later have to match (or prove that the other party fails to match). It's central.

The sentence in which the determination of the relevant market is stated is this--and it comes with another major flaw:

"Ultimately, after evaluating the trial evidence, the Court finds that the relevant market here is digital mobile gaming transactions, not gaming generally and not Apple's own internal operating systems related to the App Store." (emphasis in original)

I only hope the United States Court of Appeals for the Ninth Circuit will see that something is fundamentally wrong with the market definition part of the Epic Games v. Apple decision, and will then exercise its powers as an appeals court and fix the problem. Should the Ninth Circuit not do so, I hope Epic will petition the Supreme Court.

The second fundamental flaw in that sentence is the part "and not Apple's own internal operating systems related to the App Store." It starts with the fact that iOS is an operating system, it's Apple's iPhone operating system, and the plural makes no sense. Epic nowhere argued that there was a second Apple-developed operating system (like a secret cloud OS developed by Apple).

Let me quote this from yesterday's post (right, that is a redundancy, too):

Maybe she thought that what Epic meant to be a competitive foremarket (the judge herself wrote that "[c]onsumers should be able to choose between the type of ecosystems," i.e., she acknowledges users may choose between iOS and Android phones) was already an aftermarket: she might have suspected Epic of focusing on smartphone operating systems because then Apple has a 100% market share among operating systems for iPhones. In that case, phones would have been the foremarket, operating systems the aftermarket, and app distribution and in-app payments would have been aftermarkets of the operating system market, i.e., second-degree aftermarkets.

That impression is reinforced by the passage I quoted. That's where she says this:

  • The court finds the market is "digital [sic] mobile operating systems];

  • disagrees with Apple that it's all (digital) games; and

  • equally disagrees with Epic that it's "Apple's own internal operating systems related to the App Store."

So once again she alleges that Epic's single-brand market definition was about iOS. But a single-brand market has a foremarket and an aftermarket, and it is actually the power in the aftermarket that matters (but it depends on whether an abuse of that power comes with a cost in the foremarket). The foremarket is competitive, and that's why Epic said it's smartphone operating systems: instead of an iPhone with iOS, you can buy some other phone with Android.

The more I look at this, the more it seems Judge YGR seriously thought that Epic's foremarket definition came down to saying that Apple has market power in the operating system market because if you buy an iPhone, you get iOS. But that was never the idea. The idea was that when you get an iOS phone (i.e., the iPhone) instead of an Android phone, you can transact only via the App Store in the relevant context.

The first sentence of the passage of the judgment dealing with Epic's foremarket already gets it wrong:

"Before reviewing each of the proposed markets, the Court considers whether Apple's operating system should be viewed as a foremarket." (emphasis added)

A single product is never an antitrust market unless it is an aftermarket.

Elsewhere, the decision actually states correctly what Epic meant to be the foremarket:

"Epic Games constructs a framework to argue that there are three separate product markets at issue. In the foremarket, Epic Games identifies the product market as one for 'Smartphone Operating Systems.' Epic Games contends in turn that there are two derivative and relevant aftermarkets that flow from this initial foremarket, including the 'iOS App Distribution' market and 'iOS In-App Payment Solutions.' Epic Games logic flows as follows: the iOS in-app payment solutions market is an aftermarket of the iOS app distribution market which is further an aftermarket of the smartphone operating systems foremarket."

That part is spot-on. But if Judge YGR accurately summarized Epic's position as there being a Smartphone Operating Systems foremarket, why does she then--in the most critical contexts--argue that Epic meant only iOS, not iOS plus Android?

It's unbelievable what went wrong here. The court accurately portrayed Epic's position, only to then mischaracterize it where the actual decision is made.

Yes, there is no competition between Apple's iOS and someone else's iOS. There's only Apple's iOS. There's no other operating system for iPhones than iOS. All of that is true, but has nothing to do with what Epic meant. Epic meant that consumers can choose between Android and iOS devices, but once they've made the choice, they're locked in with respect to in-app transactions. There's competition before the device is bought; there's no competition in app distribution subsequently to that purchase.

Right before the factually and legally nonsensical sentence I discussed in the previous post, the decision says the following:

"Competition exists for smartphones which are more than just the operating system. Features such as battery life, durability, ease of use, cameras, and performance factor into the market. Consumers should be able to choose between the type of ecosystems and antitrust law should not artificially eliminate them."(emphasis added)

It's now clearer what she must have meant by "artificially eliminate": not in the sense of the court eliminating competition between smartphones (Epic's case never had the potential to do so), but of ignoring that the foremarket is competitive. Artificial elimination in terms of analyzing the issue as if something didn't exist. But a foremarket is always somewhat competitive. That's what Kodak says. For the sake of having yet another redundancy here, let me quote the Supreme Court's Kodak syllabus once again: "Kodak's theory that its lack of market power in the primary equipment market precludes-as a matter of law-the possibility of market power in the derivative aftermarkets rests on the factual assumption that if it raised its parts or service prices above competitive levels, potential customers would simply stop buying its equipment. Kodak's theory does not accurately describe actual market behavior [...]" (emphasis added)

Note that Kodak was not about Kodak's potential market power (at the relevant time) in cameras. It was about Kodak copiers. In that market, Kodak was much smaller than at the peak of its success in the camera market.

It's pretty clear now that Judge YGR thought Epic claimed Apple had market power in the foremarket because iOS is the only iPhone OS.

An antitrust plaintiff doesn't need a foremarket-aftermarket approach if there already is a monopoly in the foremarket...

What a terribly wrong basis to wrongly decide the most important question in the most important U.S. antitrust case in decades. And it could have been avoided by reading and understanding Kodak.

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