Epic expert claims Apple's App Store profit margins were as high as 78% in 2019

Apple Inc.’s App Store had operating margins of almost 78% in fiscal year 2019, according to testimony from an Epic Games Inc. expert witness based on documents obtained from the iPhone maker.

The figure comes from Ned Barnes, a financial and economics researcher, who said he obtained documents “prepared by Apple’s Corporate Financial Planning and Analysis group and produced from the files of Apple CEO Tim Cook.”

Apple is disputing the accuracy of Barnes’s calculations -- and urging a judge to restrict public discussion of App Store profit -- as the companies head into a high-stakes trial Monday in Oakland, California.

Epic, maker of the blockbuster game Fortnite, is trying to show that the App Store is run like a monopoly with its commission on developers of as much as 30%, while Apple insists it doesn’t abuse its market power.

Epic is also suing Apple in the U.K. and Australia while Apple faces scrutiny from antitrust regulators in the U.S. and abroad.

Also read: Apple rolls out App Store ‘Search Suggestions’ for more refined search results

The companies are relying heavily on dueling economists as they make their case to U.S. District Judge Yvonne Gonzalez Rogers, who is conducting the three-week trial without a jury.

As part of the pretrial information-sharing process, Barnes said that an Apple employee told him that the numbers from the company’s internal documents don’t show the full picture. Barnes said he then made additional calculations, which resulted in higher margin estimates of 79.6% for both 2018 and 2019.

In a statement Saturday, the Cupertino, California-based technology giant said Epic experts’ “calculations of the operating margins for the App Store are simply wrong and we look forward to refuting them in court.”

Barnes said he also obtained documents prepared inside Apple that show profit and loss estimates for fiscal year 2020. He said Apple had been tracking App Store profits for years and that he also obtained such statements for 2013 through 2015.

Apple generates revenue from the App Store by charging either a 15% or 30% commission to developers for paid app downloads, in-app-purchases and subscriptions.

Analysts believe that Apple’s margins on the App Store may have grown since 2019. Sensor Tower estimates the App Store generated $22 billion in commissions last year for Apple, while Bernstein analyst Toni Sacconaghi believes Apple will run the App Store this year with a gross profit of 88%.

Apple executives have said the company doesn’t track such profit and loss statements for individual business units.

“When we look at the App Store, it’s not a separate standalone business for us,” Kyle Andeer, Apple’s chief compliance officer, said at a congressional hearing last month. “It’s an integrated feature of our devices.”

Read more: EU accuses Apple of antitrust breach over App Store rules

Cook said the same in his pretrial testimony. “Apple’s business is not structured that way that allows a person to push a button and obtain an App Store” profit and loss statement, he said.

Apple says it doesn’t allocate costs for the App Store, and that internal documents discussing revenue for the marketplace typically don’t include expenses. That means, according to the company, any margins or profits don’t show the entire picture.

In an expert witness testimony on behalf of Apple, Richard Schmalensee, a Massachusetts Institute of Technology economics expert, said that Barnes’s “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.” He added that “any accounting measure of the App Store’s stand-alone profitability is also arbitrary and thus unreliable as an indicator of anything.”

In a request to the judge to bar Epic from referring to App Store financial data in open court, Apple said the information may “unduly confuse the securities markets and participants in those markets, including the many pension funds, mutual funds, and other ordinary investors who own Apple stock.”