Evercore: Epic odds are tilted in Apple’s favor

From a note to clients by analyst Amit Daryanani that landed on my desktop Monday:

ALL YOU NEED TO KNOW: The Epic v. Apple trial is expected to wrap today with each side providing closing arguments. While a decision from Judge Yvonne Gonzalez Rogers is not expected anytime soon (could take a month or longer), we think it’s useful to look at the trial and consider future implications (especially since we have EU/SPOT and potential DOJ moves to factor in). Key points that emerged from the trial include:

    1. Profitability: App Store operating margins were close to 80% in FY18 and FY19. AAPL seems to have been cognizant of the fact that their profitability would be questioned as early as 10+ years ago!
    2. App Review: AAPL rejects under 40% of apps submitted to the App Store each year. In his testimony on Friday, Tim Cook added that it would be easy to imagine the issues that would result should AAPL cease app review process (App Store would become a “toxic mess”).
    3. Competition: Tim Cook also argued against the idea that the App Store has no competition, saying the general prohibition of rival app stores on the iPhone and app review process are in place for the sake of users’ security and that users have choice, i.e. to opt for an Android phone instead of an iPhone (worth noting that while the Judge probed a fair amount on payment/transaction there was no discussion on side-door).
    4. Security: In response to Epic lawyers suggesting that Apple’s security argument for tightly controlling the App Store is not convincing given other Apple devices (Mac) have different systems, Apple’s Craig Federighi countered that Mac security is insufficient and if adopted for iOS would hurt users.
    5. Epic Deal & Financials: Epic CEO noted that he would have taken a “special” deal from AAPL if it were offered. The Epic Game Store is years from profitability.

Net/net: Based on our discussions with legal experts, we think the odds are tilted in Apple’s favor. No matter which way the judge rules, however, this trial will have broad-reaching implications. A win for Epic would likely embolden the DOJ to move more aggressively on anti-trust action. On the other hand, however, a high profile win for Apple may cause the DOJ to think twice before bringing its own antitrust case.

Maintains Outperform rating and $175 target.

My take: Daryanani filed this note before court recessed Monday. But after nearly three hours final debate, I’ve heard nothing that would tilt the odds any other way.


  1. Fred Stein said:
    I listened to a good portion. YGR is tough, takes nothing at face value. I have high respect for her

    At around 9 am pacific, she scolded Epic severely and in good detail, highlighting that Epic seeks to invalidate Apple’s competitive advance of “security, privacy, and safety.”

    She also said, her goal of reaching a verdict by Aug 13, the anniversary of Apple yanking Epic’s store, was ambitious and a ton of work.

    May 24, 2021
  2. Gary Morton said:
    There is an important, and often overlooked accounting issue with Apple’s margins on the APP store. Consider Amazon or Walmart, for example, they report as revenue the total customer receipt for their sales, including those on the kindle store. They then show as a cost of the sale, the supplier cost for that item and add in their direct and fully burdened costs to get their full cost of sale. Apple could do it that way and show dramatically higher revenues and hugely lower margins. But, the company elected to show only the Apple 30% or 15% cut from the App store as revenue. Apple does not include the app developers 70% share as revenue, thus its margins look higher. If Apple’s cost is 10% of the 30%, that is 66% margin, as currently reported. But if the developer’s revenue ( total customer receipts to apple) were included, it would only be 20% margins in the store.

    May 24, 2021
  3. Michael Goldfeder said:
    @ Fred Stein: Thank you for taking the time to listen to the closing arguments and posting the impressions made by YGR. Just another reason this site is invaluable for both the information provided by PED, and all of the insights from well informed subscribers.

    May 24, 2021

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