(Bloomberg) -- Fortnite maker Epic Games Inc. alleges Alphabet Inc.’s Google has used its billions to “bribe and block” its Android partners and app developers from using alternatives to its lucrative Play Store. After hearing four weeks of testimony, including from Google Chief Executive Officer Sundar Pichai and Epic CEO Tim Sweeney, a jury is expected to begin deliberating this week over whether the tech giant broke antitrust law.

Google has defended itself by arguing that its partnerships are intended to help it better compete against Apple Inc.’s iPhone, the primary competitor to smartphones that use its Android operating system.

While Android is less integral to Google than its search and advertising business — which is the subject of a different federal antitrust lawsuit by the Justice Department — the Epic trial offered a window into previously unpublicized strategic forays by the world’s fourth-largest company by market cap and deals it has made with Samsung Electronics Co., Activision Blizzard Inc. and Spotify Technology SA.

Android, used in 70% of smartphones around the world according to Statcounter, is given away for free by Google. But in order to use the Play Store — where users can download apps — smartphone makers and carriers must sign on to an all-or-nothing deal to preinstall a bundle of Google programs. The agreement requires the Play Store to be installed on the phone’s Home Screen, and blocks users from deleting it.

To make money, Google charges the app developers who sell digital goods or services between 15% and 30%. Those fees add up: In 2020, the Play Store brought in $14.66 billion in revenue, with gross profits of $11.44 billion. Google contests that profit figure, saying it doesn’t take into account costs associated with improvements to Android.

Project Electra

According to Google, 97% of app developers pay no money to the company since their apps are free. For developers with less than $1 million in sales and companies that offer subscriptions, like streaming service Netflix Inc., it charges 15%.

But the biggest developers pay 30%, and many of them are gaming companies. In 2019, 31% of the money consumers spent within the Play Store came from products created by a handful of game developers, according to Google’s internal documents.

When Epic decided to offer a mobile version of its blockbuster game Fortnite, it opposed paying Google’s 30% fee. Instead of launching on Play, Sweeney informed Google, Epic would let users directly download the game from its website. It also reached a deal with Samsung to offer Fortnite exclusively through its Galaxy Store with a reduced 12% fee on purchases.

Epic’s announcement caused an uproar within Google. The tech giant explored approaching one of Epic’s investors, Chinese gaming giant Tencent Holdings Ltd., to buy out its stake, a strategy code-named “Project Electra” that would have required an investment in the billions of dollars. 

After that plan was scrapped, Google offered Epic $147 million to launch via the Play Store. Google estimated that Fortnite’s absence would lead to a direct revenue loss of $130 million to $250 million. But beyond that, Google employees worried about “contagion to ot

her developers” who might follow Epic in launching games on other app stores. That could cause a loss of as much as $3.6 billion, Google estimated.

Some Android manufacturers also offer their own app stores – a development that Epic alleges Google worried would cut into its revenue from the Play store. 

In 2019, the company developed a strategy to persuade phone makers to exclusively use Play – one similar to what the Justice Department alleged is an illegal scheme by Google to get smartphone makers to use only its search engine. 

For the biggest manufacturers – including China’s Oppo, its subsidiary OnePlus, Vivo, and Xiaomi Corp. – Google offered to pay them 16% of what it made through the Play Store to be the exclusive app store, according to testimony and documents shown in the case. For smaller phone makers, the search giant would pay between 4% and 6% of the revenue.

For example, Google paid Motorola — the mobile device company it once owned that’s now part of Lenovo Corp. Ltd. — $6 million in 2021 to be the exclusive app store, browser and search engine on the phone, according to testimony.

The company says the payments encourage smartphone manufacturers to build Android phones and compete with the iPhone. And not all of a company’s products need be exclusive, Google says; for example, OnePlus decided not to include its phones in India, allowing it to negotiate to preinstall apps from Amazon.com Inc. and Microsoft Corp.

Project Banyan

But Google’s biggest worry, Epic alleged, was Samsung, the largest of the Android manufacturers whose phones are the most popular in the US after the iPhone. Samsung in early 2019 began to persuade app developers to distribute through its Galaxy Store rather than Google Play, offering a 20% fee instead of the 30% fee charged by Google. 

In response, Google developed “Project Banyan” and offered Samsung $200 million over four years for the smartphone maker to leave the Galaxy Store off its phones. Samsung didn’t take the deal, instead submitting a counterproposal to “prevent unnecessary competition on Store,” according to documents shown at the trial. 

In the end, the two companies agreed that Google would pay Samsung $8 billion over four years. Some of the money comes from making Google’s search engine the default on Samsung phones – the crux of the Justice Department’s case – and some from a co-marketing initiative. The final deal didn’t include an exclusivity requirement for the Play Store. “This saves us $1 billion over four years,” a document noted.

Project Hug

At the same time it was talking to Samsung, Google also directly approached game developers as part of a strategy code-named “Project Hug.” 

Google offered game makers credits to use on its advertising and cloud, as well as cash incentives to use for marketing. The Play Store team asked Google leaders for $575 million to approach 22 of the largest mobile game developers including Nintendo Co.; Activision Blizzard; Ubisoft Entertainment SA; and Tencent.

In exchange for the money and credits, the developers agreed to offer their games on the Google Play Store at the same time as other platforms. Several Google executives testified that the deals didn’t require developers to scrap plans to create their own app stores or distribute outside Play. But they also acknowledged that several developers, including Riot Games Inc., Activision Blizzard and Supercell Oy, all told Google that they intended to create their own app stores and abandoned efforts after the Project Hug deals.

Google gave Riot $17 million in March 2019 to help develop its popular League of Legends for mobile. In a memo on the deal, Google employees said that with the payment, Riot “agreed to put aside their off-play distribution platform and launch on Play.” The next year, Riot signed a Project Hug deal worth $90 million.

Both Activision Blizzard and its King unit, maker of the popular Candy Crush, also signed deals. King received $20 million in advertising credits. Activision Blizzard separately signed the largest of the Project Hug agreements worth $360 million over three years: $60 million in cloud and $105 million in advertising credits; $135 million for the license to broadcast its Esports leagues on YouTube; and $60 million in marketing funds.

The only one that didn’t accept a Project Hug deal was Supercell, which makes Clash of Clans, one of the top-grossing mobile games of all time. Instead, Supercell, whose majority investor is Tencent, signed a separate deal in which Google paid $24 million for the developer to invest in emerging markets, according to testimony in the case. 

User Choice Billing

One of the most vocal opponents of app store fees has been Spotify, which filed a complaint with European antitrust regulators against Apple over its fees. 

In a document discussed at the trial, Google employees argued they should do a “strategic deal for Spotify” since it was seeking legislation in Europe that would undermine the Google Play Store. The tech company proposed a deal in 2020 in which it would charge Spotify a 6% fee if a user opted for the music company’s payment system, according to testimony and documents in the case. After further negotiation, the companies agreed last year that Spotify pays nothing when users select its payment system or 4% if Google Play processes the transactions.

Google and Spotify announced the deal without indicating the financial terms in March 2022, describing it as an experiment for a new form of “User Choice Billing.” 

As of May 2023, between 75 and 80 developers have started using Google’s new billing option. But in those cases, according to testimony, Google only agreed to give developers a 4% discount for processing their own transactions, meaning they would owe either an 11% or 26% fee to Google. 

Google said the new program was intended to address the developer complaints that they lacked a choice in payment processing options, not complaints about its fees. 

Even Google’s own units had protested the lack of choice on Android. Susan Wojcicki, the former CEO of YouTube, complained to a top Android executive when the video-sharing platform was forced to switch to Google Play’s billing features. “Our team feels it will hurt us competitively to have to use Google Play Billing,” Wojcicki said in a chat shared in the trial. “We need to know how we can innovate on billing.”

--With assistance from Cecilia D'Anastasio.

©2023 Bloomberg L.P.