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Epic’s expert witness says App Store profit margins approach 80 percent

In context: Testimony begins today in Epic’s lawsuit against Apple. It will be a bench trial in front of Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California. Thanks to the high-profile nature of the case, we’ve already read testimony from several witnesses.

Last week, both sides submitted heavily redacted depositions from expert witnesses who testified on the profitability of Apple’s App Store. Certified Fraud Examiner and CPA Ned Barnes testified for Epic, claiming the App Store’s operating margins in 2018 and 2019 were 79.6 percent for each fiscal year.

Testimony from Apple’s side refuted Barnes’s written report saying that it is impossible to calculate App Store operating margins reliably. However, Barnes claims that Apple has been tracking App Store profitability for years. He points out his figures are close to those provided by Apple’s Corporate Financial Planning and Analysis group, which showed margins close to 78 percent in 2019 and 75 percent in 2018.

Bloomberg notes, Apple’s Chief Compliance Officer Kyle Andeer criticized Barne’s report during a congressional hearing last month. Andeer said that the App Store is not considered or structured as a standalone business, so P&L statements are not generated.

“When we look at the App Store, it’s not a separate standalone business for us,” Andeer testified. “It’s an integrated feature of our devices. Apple’s business is not structured [in a] way that allows a person to push a button and obtain an App Store [profit and loss statement].”

In a separate deposition, Apple’s expert Richard Schmalensee, PhD, says that Barnes’s method of calculating margins does not consider that it is a part of the iOS ecosystem.

“Mr. Barnes’ estimate of the App Store’s operating margin is unreliable because it looks in isolation at one segment of the iOS ecosystem in a way that artificially boosts the apparent operating margin of that segment,” said Schmalensee. “When one looks at Apple’s device and services ecosystem as a whole, the operating margin falls to an unremarkable level.”

He goes on to explain that the App Store is reliant on many other Apple services and that calculating P&L statements without considering the costs of those services is “an unproductive exercise.”

image credit: Ascannio

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