New York Times Reporter Jack Nicas On Apple Vs. Epic Games and Apple In China

Jack Nicas joins Big Technology Podcast fresh out of the Epic v. Apple trial, where the Fortnight maker is suing Apple over the 30% cut it takes out of every dollar we spend on apps downloaded from the App Store. Nicas takes us inside the courtroom, explains what’s at stake, and makes a prediction for where things net out. In the second half, Nicas breaks down his reporting on Apple’s questionable privacy practices in China, where the company stores user data in servers all but owned by the Chinese government. Jack's stories On Epic vs. Apple: https://www.nytimes.com/2021/05/24/technology/apple-epic-antitrust-trial.html On Apple in China: https://www.nytimes.com/2021/05/17/technology/apple-china-censorship-data.html Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Alex Kantrowitz?

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• 0:43Alex Kantrowitz?

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• 1:14Alex Kantrowitz?

  Hello and welcome to the Big Technology Podcast, a show for cool headed nuanced conversation of the tech world and beyond. Joining us today is the reporter behind a stunning new New York Times story about Apple's privacy practices in China. He is also fresh out of the Apple epic trial where the Fortnite maker is suing Apple over its App Store practices. So we'll touch on that as well. Jack Niegus, welcome to the show.

• 1:39Speaker 01

  Thanks for having me.

• 1:40Alex Kantrowitz?

  You've been busy, man.

• 1:42Speaker 01

  I have.

• 1:44Alex Kantrowitz?

  It's been a wild run for you the last couple of weeks.

• 1:47Speaker 01

  Yeah, the China one especially. It looks like I just dropped that, but that was literally years in the making, which is painful to say out loud. So it's good to have it out in the world.

• 1:56Alex Kantrowitz?

  Yeah. And so you have that story, you have this trial with Epic. And, you know, correct me if I'm wrong, but usually the Apple beat has been sort of viewed recently at least as a, as kind of a boring beat. Where reporters have been like, all right, well, where's the next iPhone? Where's the next iPhone? But it seems to be heating up right now. Do you share that sentiment?

• 2:19Speaker 01

  Indeed, I mean, I think without a doubt over the past several years. You know, if you look at, let's just compare Apple to Facebook. Uh, you know, I've said that Apple is a little bit more boring of a company to cover because it has tend to have its shit together a little bit more. Um, and it's also the nature of its business. I mean, Facebook and Google, you know, when you run social media, social networks, there's so much more intersection with society, but Apple sells devices and has really been shrewd and really tried to steer clear controversy. And I think that's worked for a long time. But with this trial, um, obviously the antitrust questions are alive and well around Apple and um,

• 3:02Speaker 01

  that's, that's become a big news item just in the past recent weeks.

• 3:05Alex Kantrowitz?

  So Apple is being sued by Epic, which makes Fortnite, which is a very popular game for charging thirty percent fees in the App Store. Basically, if you want to buy credit on Fortnite, you'd have to pay through the App Store and Apple would take thirty percent off the top. And Fortnite is arguing that this harms consumers and forces prices up. Uh, but I, I'd like to hear your perspective. You've been following the case. Can you give us like a quick, a quick description of what you've seen there, uh, you know, the past couple of weeks?

• 3:38Speaker 01

  Sure. So, um, this is a case about kind of an arcane topic. I mean, App Store commissions, but it actually is one of the most important antitrust cases in Silicon Valley history. Um, because the App Store is not just, you know, a little digital marketplace. This is an enormous uh, centers of commerce. It's one of the largest centers of commerce in the world in many ways. I mean, a hundred billion dollars um, is what, uh, you know, some estimates are for just simply iPhone apps. Um, and so this is an issue that has really been at the center of antitrust claims against Apple over the past several years and um, companies like Spotify and Match Group have talked a lot about how they have to send thirty thou- thirty percent of a lot of their

• 4:20Speaker 01

  digital sales to Apple. Um, and Apple rakes in billions and billions of dollars from the App Store. Uh, and so targeting this commission could take a significant chunk out of Apple's earnings. Um, but what we had was, um, you know, a, a trial that was a little unusual during the age of COVID. It wasn't clear if it was going to happen in person, but the federal judge, um, Ivan Gonzalez Rogers did have it in person in Oakland. Um, and we had, uh,

• 4:49Alex Kantrowitz?

  Did you get a chance to go inside the courtroom?

• 4:52Speaker 01

  I never went, but there was, because I had been in New York and traveling a little bit.

• 4:57Alex Kantrowitz?

  Right, right.

• 4:58Speaker 01

  My colleague Aaron Griffith did go.

• 4:59Alex Kantrowitz?

  You could dial.

• 5:00Speaker 01

  Yeah, so it was weird. Usually, we as journalists go in and watch. And it's actually often great because you get to see top executives sit on the stand and squirm a little bit. But most of us journalists were having to listen in on this scratchy phone line.

• 5:15Alex Kantrowitz?

  It was terrible. I dialed in and it did feel like the entire court proceeding was taking place underwater.

• 5:21Speaker 01

  Yeah. And then we also had these pool reports. I don't know if you were on this like email chain. But some reporters were going in and writing these little pool reports. And we were like desperate for any color, like what the Epic CEO was doing during Tim Cook's testimony and things like that. But yeah, it was, it was basically one week of Epic's witnesses, which their start witness was their CEO, Tim Sweeney, who's this billionaire. And he's kind of the man behind Epic Games and the man behind Fortnite. Then we had a week of expert witness testimony, which was pretty boring. Economists talking about the app market. And then we had a week of Apple's witnesses, which included Phil Schiller, who obviously has been a senior deputy at Apple for decades, Craig Federighi, who's there.

• 6:04Speaker 01

  Yep. And then Craig Federighi, who's their software chief. And then finally, the last day of the trial, basically we had Tim Cook on the stand, which is the first time he'd ever took the stand as the chief executive of Apple.

• 6:15Alex Kantrowitz?

  Right. And it didn't go so well for Tim Cook.

• 6:18Speaker 01

  I mean, Apple wouldn't argue that. They certainly obviously spun it as a, you know, as amazing testimony. But I, what, absolutely, I think, listen, Tim is really, he's, he's a sophisticated politician and executive. He knows, he knows his stuff and he sticks to his talking points. But I will say that he seemed a little bit, you know. A little bit uncomfortable when the judge actually started questioning him. And that was a little bit of surprise at the end of his testimony. After the Epic lawyers had cross-examined, after the Apple lawyers had kind of giving all his leading questions. Then the judge stepped in and the judge is super important in this case because she alone is going to decide who wins. This is not a jury trial.

• 7:02Speaker 01

  And so the judge, Yvonne Gonzalez Rogers, she had been stepping in in some cases and asking pretty pointed questions of witnesses. And with Tim Cook, she said to him, you know. So one of the things Apple's been pointing to with this case is that its App Store fees have only gone down. So we talk about a 30% commission, but they had did, they did change that commission to 15% for apps that make less than $1 million per year. They changed that last year. And Tim Cook said on the stand, well, we did that because we saw COVID was hurting small businesses. We wanted to help small businesses. And the judge was like, give me a break. You did this because of all this scrutiny.

• 7:45Speaker 01

  And she was, she was basically pretty matter of fact, which we all knew as journalists and kind of, I think outside observers knew that this was obviously in response to pressure. And he didn't really have a good response to that. And then she also said to him, you know, one of the things that she really has been clear about that she feels is very unfair that Apple does is this thing called an anti-steering rule in apps. And that basically is Spotify, for instance, they don't want to let you sign up for a Spotify premium account in your Spotify iPhone app. Because then you have, they have to share 30% of your revenue with Apple. So instead Spotify makes you go to spotify.com, sign up there. They don't have to send the money to Apple. But Apple doesn't let Spotify tell iPhone app users to do that.

• 8:29Speaker 01

  So it's actually leads to this bad experience where like you're trying to sign up on Spotify app and it's confusing and all this kind of stuff. And it's kind of like that on Netflix as well. And that's called anti-steering. So Apple basically prohibiting apps from telling people they can go out and sign up elsewhere. And so she, she was pushing on that a little bit. And she was like, well, why don't you give consumers the choice of where they want to pay? And Tim basically said, because then we wouldn't get the full return on our IP. You know, then we wouldn't be able to maximize our profits essentially.

• 9:01Alex Kantrowitz?

  Yeah, that stood out to me where he basically just admitted that, well, we're making life more difficult for our customers. So we're able to make more money. It sort of pokes a hole through this narrative that all these companies are only out there for their customers.

• 9:14Speaker 01

  Totally, and especially from him. I mean, in some ways it was refreshing. It was like, wow.

• 9:20Alex Kantrowitz?

  It's good that they're telling the truth. I want to take a court case.

• 9:22Speaker 01

  Yeah, and it's also like, to some degree, listen, you're a business. We know this is, but, but I think with Apple and this goes to the China story as well, we'll talk about is, he especially and Apple itself has branded Apple as not just any company. This is a company that is about these principles and we do this for the customer. We're not here to make money. It's like, oh, you just happen to make more money than any other company in the history of the world. You're also damn good businessmen and, you know, people respect that and like it. But I think what I think sometimes throws people the wrong way is when there's not a full level of honesty or candor about the fact that you're a businessman.

• 10:01Alex Kantrowitz?

  Right. And yeah, and then they end up putting people and companies through hoops in order to get, you know, things like signing up for an app for a premium service.

• 10:12Speaker 01

  Yeah, which is not good for the user.

• 10:14Alex Kantrowitz?

  Yeah, exactly. So if Fortnite wins, what happens?

• 10:19Speaker 01

  Well, it depends on how they win. You know, obviously.

• 10:22Alex Kantrowitz?

  Well, let's get that. Let's go to the best case scenario. The best case scenario for Fortnite.

• 10:25Speaker 01

  Sure, sure. So best case scenario is they can create their own app store, essentially that, that now there's no longer just the iPhone app store, but you can download from maybe just the web, the Epic Games app store, or the Epic, you know, and so you can go get any game there. And Epic charges 12% commission. So therefore, prices on apps would theoretically potentially be cheaper, right? So then you suddenly start to have competition, apps could become cheaper than what you're going to find on Apple. And this is great for Epic because they could even charge their own commissions on that kind of stuff. They wouldn't have to pay Apple the commission. It would also be great for companies like Spotify. They

• 11:10Speaker 01

  were like, listen, you can only find us in the Epic store. We're going to have our own store or whatever it is. It would be a little bit more of a free for all. So that's great for app, some app developers that want to do that. But then Apple says that that's

• 11:25Speaker 01

  That's not good for iPhone usually because they said it's going to introduce all sorts of risk in terms of security and all that kind of stuff.

• 11:32Alex Kantrowitz?

  Right, because part of that 30% fee that you're paying for is them reviewing and making sure there aren't scams.

• 11:38Speaker 01

  Correct.

• 11:39Alex Kantrowitz?

  Doing their best job of trying, because scams get through inevitably.

• 11:42Speaker 01

  Yes.

• 11:42Alex Kantrowitz?

  But that's what you're getting for that 30% fee.

• 11:44Speaker 01

  That's, that's what Apple argues, that they do sort of security reviews and they, you know, they curate it so it's a safe place for kids and all that kind of stuff, right? So, and that was a huge debate at trial. Epic was trying to poke holes in that the whole time and Apple was really trying to sort of present that as the main defense of the 30% commission.

• 12:04Alex Kantrowitz?

  Yeah, and how important is winning this case for Apple? I did a little research before we hopped on the phone, looked at their Q1 numbers. In Q1, they made $111.4 billion total and 15 billion of that was from services and services includes the App Store. So you might look at that and say, well, you know, you know, this would only cut into a small line item of Apple's business, but maybe Apple sees that differently. What do you think?

• 12:32Speaker 01

  I think so. I think that service has been a huge growth area. I mean, I will say that that was the case for a long time. Now all their businesses are growing like bonkers. iPhone sales grew 65% last quarter, which is incredible considering it's like a $50 billion quarter segment.

• 12:54Alex Kantrowitz?

  Right, but that might be somewhat pandemic related.

• 12:57Speaker 01

  A little bit, a little bit.

• 12:59Alex Kantrowitz?

  Where people didn't buy anything Q1 2020 and then they bumped up.

• 13:02Speaker 01

  Totally. And I mean, services is still a huge growth driver for them. And I think it's been baked into the stock for a long time that like, this is something that as the market for devices becomes really saturated and people hold on to devices or whatever it is, services is a great growing business because, you know, the more the world grows, goes digital. The more that number is going to continue to grow, the more we we continue to spend money on digital items versus physical goods, et cetera. But also, the App Store, I mean, we don't know, but all the analysts suggest that it's a very, very, very high margin business. Because, you know, they're not putting, they're really just getting 30%. God says gravy, I mean, right?

• 13:47Speaker 01

  They didn't, they've already created the iPhone. Pretty minimal investment.

• 13:51Alex Kantrowitz?

  It is a nice, I mean, when you have a monopoly, it's a nice way to make high margins.

• 13:55Speaker 01

  No comment.

• 13:56Alex Kantrowitz?

  I know, you can't say anything about it.

• 13:59Speaker 01

  But I mean, yeah, so they certainly don't want that. And then I think more so, when you just step away from the financials for a moment, it it it also, I think even more crucially, that how Apple feels is that the entire Apple ecosystem has been built around this Waldgar, our garden concept, right? You know, as we all know, you have the iPhone and it's all Apple software. It's the App Store. They they're the gatekeeper for everything. They have full control. They've always liked it that way. And once you have new App Stores on there, it changes that calculus and it affects how they can control their software and control the experience. And that's that's something I think that scares them more than anything.

• 14:41Alex Kantrowitz?

  Right. And and I think, you know, I, you know, we joked about it, but this percent, this, the money that they make from the App Store is just, everything they say about the future of their business is that it's completely going to be services related, that eventually people won't need to app upgrade their iPhone every couple of years. I've held on to the one that I have now for the longest ever. I think I have it for three years now and I'm not in a hurry to upgrade.

• 15:05Speaker 01

  Wow, good for you.

• 15:06Alex Kantrowitz?

  So the money that they're going to end up making from services, things like the App Store, becomes central to their business that they're going to be able to maintain their $2 trillion valuation.

• 15:16Speaker 01

  Completely, absolutely, absolutely. Yeah, so it's it's it's could be a very big deal, but it also could not matter. I mean, I think that there's, listen, I I do want to hedge a little bit here is that there's a chance that this is. A, what we do know is it's gonna, it's gonna go to appeal. I mean, this is the nature of these court cases.

• 15:35Alex Kantrowitz?

  Yeah.

• 15:36Speaker 01

  No matter who loses, they're gonna appeal it to the Ninth Circuit. There's gonna be an appeals court, there'll be an appellate review, and the effects of any decision may get stayed until the appellate court rules on it. And then it could go up to the Supreme Court and get stayed again. And then on top of that, there's a very high likelihood that the judge rules in a way that is like neither side wins, that she makes some sort of, like, they can't do this anti-steering thing. So there's this workaround that Epic could use to try to get around the commission, but it's not wholesale. So I think that, you know, I'm really interested to see what she rules. The other thing I will say is that at the beginning of the trial, everyone was said, "Apple really has a, has a strong hand.

• 16:18Speaker 01

  The precedent really supports the defendants in these sort of antitrust cases." But she seemed pretty sympathetic to Epic's arguments and cases as the trial wore on. And so, again, it's up to one woman.

• 16:31Alex Kantrowitz?

  Right.

• 16:32Speaker 01

  And she may, may have been convinced.

• 16:35Alex Kantrowitz?

  Yeah, I highlighted that part of your story that you wrote for The Times about, about how long it will take for any of the effects to actually go into, into place. And it's gonna be a while. You know, I find it interesting that she did find some merit in the Fortnite or Epic argument. Because, look, I, I'll say on this show, I've definitely been quick to criticize Apple, but you could, you know, look at Apple's side and say, "There's a lot of merit to it." Which is that Apple could argue, "You don't like the App Store? Build on the web." And, and, and even then, you know, how could you argue that we're a monopoly if the money you're making from Fortnite

• 17:16Alex Kantrowitz?

  via the App Store on the iPhone is only like, what, eight to 15% of your total revenue, Epic? So I don't really understand how, like, well, I'm, yeah. I mean, I don't really understand how Fortnite comes back to that. Like, what does Fortnite say in response to that?

• 17:31Speaker 01

  Yeah, no, I think, I mean, that's why I think the trial is, was really interesting, is that there's really good arguments on both sides. It's a super nuanced issue. And I think you're right. I think Apple has some strong arguments that also, "We built this, we don't, like, you just want a complete free ride?" You know, I think that that's, I don't think anyone really thinks that makes a ton of sense. And then I think on top of that as well, is Apple has been really good to point out that, Everybody else charges thirty percent too. This is not a egregious number. And they also point out that like if you had to go sell your software in Best Buy, you know, like you used to with the CD-ROMs, you're the percent that you ended up paying in commissions and all that kind of stuff was much higher.

• 18:14Speaker 01

  So they make all sorts of arguments that I think can be compelling to some degree. But the nature of software today and app distribution is just so different that I think it's difficult to make those sort of comparisons. And the numbers of the amount of money that Apple makes is so enormous. It's also like something's going on there. It's that's not a normal business. There's a certain domination of the market.

• 18:41Alex Kantrowitz?

  Well, that's definitely a theme with big tech, right? Which is that they have consolidated a lot of the revenue, a lot of the growth in the economy.

• 18:48Speaker 01

  Right.

• 18:49Alex Kantrowitz?

  Leaving the smaller players out to dry. And it has gotten to the point where somebody like, you know, Tim Sweeney from Epic, who's a billionaire, can feel sympathetic and like the little guy, which is wild commentary of where we stand.

• 19:04Speaker 01

  Indeed, indeed. And I think I did point out in today's story, or that, you know, I did point out in our story about the wrap up of the trial was that you only could get Tim Sweeney to pursue this kind of case because he spent-

• 19:22Alex Kantrowitz?

  Took a lot of money.

• 19:23Speaker 01

  Yeah, millions of dollars on lawyers and economists and expert witnesses. He also, he sacrificed a Fortnite app in the iPhone store. I mean, he had like the world's biggest game and pulled it out of the iPhone store, basically sacrificed it in order to sue. And he also, one reason is because he's essentially the controlling shareholder of the company. He was the one who wanted to do this. There's no way you'd have a public company, you know, that would be, the board of directors are all going to do something crazy like this for the long shot and to some degree for a principled stance on this issue. And so it kind of was a perfect opponent to take this on.

• 20:04Speaker 01

  And in some ways, I think a lot of app developers are thankful that Epic tried, but they're also worried that if Epic screws it up, it only ties their hands and strengthens Apple's position.

• 20:16Alex Kantrowitz?

  Yeah, which is a perfect segue into my next question. Do you have a prediction for where this goes?

• 20:22Speaker 01

  I think that it's going to be one of these, I don't think either side is going to win outright. I think that, I just think that she, the judge seemed too

• 20:37Speaker 01

  convinced that something was amiss in the market, that something needed fixing. But she also seemed very hesitant to completely, to significantly alter or to force Apple to transform its business.

• 20:52Alex Kantrowitz?

  Right.

• 20:53Speaker 01

  So I think she's going to try to do something that's a little bit more around the edges. Like telling Apple, you've got to let companies tell consumers that they can go buy elsewhere. So I think it's probably going to be something like that, and she has a ton of discretion. I mean, Epic put forth what they want her to do, but she can really do whatever she wants. And so I think we're probably going to get one of these piecemeal decisions.

• 21:18Alex Kantrowitz?

  Yeah, I like what she said in the trial, that courts don't run companies, which I think is a pretty good thing to, pretty good value for a court to have.

• 21:26Speaker 01

  Yeah.

• 21:26Alex Kantrowitz?

  And yeah, and I think for everybody involved, it would be great for companies to be able to tell people that they could buy services for cheaper on the web. That makes a lot of sense to me.

• 21:39Speaker 01

  Right.

• 21:39Alex Kantrowitz?

  Last question of this segment, why not settle? A lot of people said, okay, you know, these, these companies are going at it. You know, before they get to trial, maybe they'll settle. Why do you think we've seen a settlement?

• 21:50Speaker 01

  Oh, I think the clear answer is because, going back to Tim Sweeney is, he's not in for money in this situation. He's actually willing to take an enormous financial risk in order to do something that is, to him, I think, principled. I think that he wants to kind of be a champion of developers. And then I think B, he's making a long-term financial bet that he's saying, listen, I'm gonna, maybe I'm gonna take the short-term hit, but if I can get out of paying 30% to Apple, that's enormous for my business long-term. And so I'm not going to get paid off even a billion bucks from Apple. Because I'm already a billionaire. My company's already hugely successful. I'd rather try to change.

• 22:32Speaker 01

  What their their practices and change the App Store market. And in fact, you know, a good sign of that is when Epic went to trial, they waived any damages. They said, we don't want any money from Apple. We want them to change their business. And that actually helped get the case go along, move it along a little bit quicker than it would have. So it was pretty clear from the beginning that this was something that wasn't going to be settled. Now, that said, that's the case now. There's a chance this drags on for three, four years. Tim Sweeney, they'd be like, okay, I'm I'm done paying millions and millions of dollars for lawyers. Like, get me out of this thing like I've already lost too much or something. Who knows? But I think right now we're certainly going to see decision.

• 23:15Alex Kantrowitz?

  Okay. Well, it's a fascinating case. We'll be looking forward to seeing where it goes. And it's not going to resolve, at least for another month or so. So you said this could drag out till August when we were talking.

• 23:26Speaker 01

  Yeah, she's she's saying she's gonna. Her prediction was she's going to deliver a ruling by August. Yeah.

• 23:34Alex Kantrowitz?

  Great. All right, well, after the break, I want to talk with you about Apple in China. We've talked about Apple in the App Store, but you published an astonishing story about how Apple treats customer data in China, which I think is fascinating. And again, goes a little bit more in contrast with how Apple portrays itself publicly. So let's do that after the break. We'll be right back here with Jack Niegus. This episode is brought to you by App Point. Everyone's racing to roll out AI right now. Copilots, chatbots, agents doing real work. But here's the part nobody loves talking about. All that AI runs on your data and most teams have no single way to see it, secure it and prove it's under control. That's exactly what App Point does.

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• 25:00Alex Kantrowitz?

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• 26:00Alex Kantrowitz?

  And we're back here for the second segment of the Big Technology Podcast with Jack Nikis from The New York Times. Jack, you published a really fascinating story about Apple in China. And I think for a long time, we've known that Apple has a set of rules that it uses in China and a set of rules that it uses in the rest of the world. But I think it was astonishing just to see how far the company is willing to bend in order to satisfy Chinese government demands. Or at least, that's what we think it is. So before we get into the details and the nitty-gritty of what actually happened, can you give us a picture of how reliant Apple is on China, on the China market in particular?

• 26:44Speaker 01

  Sure, I think that's a really good place to start because it's crucial to the story. It actually is. It'll help explain why we're seeing Apple do some of the things it's doing in China. But it is safe to say that Apple has literally built its business on top of China. It makes nearly all of its products in the country. It sells at this point about fifty five billion dollars worth of goods there every year. And it's the country, it's the company's number two market. And then, you know, as I mentioned, the supply chain there, the manufacturing presence is so enormous and so sophisticated and complex

• 27:25Speaker 01

  that what Apple has built in China to manufacture Apple's global products could not be replicated in any other country. And so therefore that means that Apple needs China to exist. And that is what has created essentially a predicament for Tim Cook and the company.

• 27:45Alex Kantrowitz?

  Hmm. And so Facebook, not in China. Google tried to operate in China. That didn't work.

• 27:53Speaker 01

  Yeah, they pulled out themselves. Yeah.

• 27:55Alex Kantrowitz?

  Yeah. So why do you think it is that Apple is in while the others are out?

• 28:02Speaker 01

  Well, it's a difference in business to some degree.

• 28:05Speaker 01

  Facebook doesn't need China in that way. If Facebook doesn't, is not a hardware company. And Google, you know, essentially same thing. I mean, Google does manufacture some products in China. But Apple is first and foremost a maker of goods. And they, you know, Tim Cook himself was the spearhead of Apple's entrance into China about two decades ago. And they saw. Yep, he was, he was, he was the operations chief under Steve Jobs. And he saw an opportunity for, you know, cheap, but also well-trained labor to some degree. There was a lot of, and also crucially, a lot of government assistance. The Chinese government was eager to help Apple build a supply chain.

• 28:48Speaker 01

  And the Chinese government spent billions and billions of dollars to build. Power plants and factories and employee housing and paved roads and all this sort of stuff to create this Apple supply chain. And so that has just created a very different relationship between the Chinese government and Apple than any other tech company in the world.

• 29:09Alex Kantrowitz?

  Right, but it's it's supply chain, but it's also products in market. And I think Facebook and Google didn't go because they were uncomfortable with the level of influence that the Chinese government would exert on the products that they ended up delivering to people at the end of the day. Apple seems, you know, did Apple seems much more comfortable having that relationship.

• 29:30Speaker 01

  Yeah, no, you're right. It is it is twofold and, you know, Facebook and Google, the types of products that they operate and offer tend to, again, I had mentioned this earlier, kind of have a little bit more intersection with society and and speech and all these sorts of things that really make the Chinese government uncomfortable. And so Facebook was never able to operate in China because the Chinese government doesn't want a social network like that that's run by an American company where all of its people are, you know, communicating openly and not being surveilled essentially.

• 30:07Alex Kantrowitz?

  Yeah.

• 30:08Speaker 01

  And and again, with Google, they ran-

• 30:10Alex Kantrowitz?

  Zuckerberg, before you go to Google.

• 30:11Speaker 01

  Sure.

• 30:12Alex Kantrowitz?

  Zuckerberg tried real hard to end up-

• 30:14Speaker 01

  Yeah.

• 30:14Alex Kantrowitz?

  -getting Facebook into China. He learned Chinese. And there was a offer where he was going to allow Xi to name his daughter or something like that. But anyway, that ship has obviously sailed. Now he uses China as a foil to show why Congress shouldn't regulate Facebook. Okay.

• 30:31Speaker 01

  Now that he's now that he's out, his his tone has changed. I mean, there's also the famous photo of Zuckerberg-

• 30:36Alex Kantrowitz?

  Running-

• 30:36Speaker 01

  -running through the smog in Tiananmen Square. So, um, so you're right. Zuckerberg certainly tried. Google was the other way, right? Early on, Google went into China. They were kind of a pioneer. Yep. And and it turned out that the Chinese government was saying, we need to censor your search results. Sergey Brin, who had grown up in Soviet Russia, really felt uncomfortable with that and was one of the leading voices inside of Google saying, no, let's get out of here. This is not worth it to us to compromise our values. And actually, that's a good point to remember because it ends up serving as a really interesting counter example to what has happened at Apple, which is- They went into the Chinese market, began selling iPhones and Macs and things like that. Obviously, it's an enormous growing country. People bought a lot of their products.

• 31:20Speaker 01

  It turned out to be very lucrative for Apple. And Apple was able to get around, you know, for some time, some of these censorship requests because it didn't operate a social network. It didn't operate YouTube. It didn't operate a search engine. But what we've instead seen is it does operate an App Store. And this goes back to what we just were talking about with Epic. You know, this is an area of Apple's business that is continuing to kind of become a thorn for it. And the Chinese government has really cracked down about what kind of apps Apple can offer in its App Store. And it's been something that's been reported on here and there, but we really exposed and

• 31:59Speaker 01

  revealed the level to which Apple proactively censors its own App Store in order to appease the Chinese government.

• 32:07Alex Kantrowitz?

  Yeah, and I want to get to that in a bit, but let's start with the data side of your story first because Apple's big competitive advantage or the way that it positions itself against the other companies is that it's the privacy company. I think you remember they had that big billboard in Vegas during CES that said, what happens on your iPhone stays on your iPhone. And now let's talk about some of the details we found out, you know, from your story. And I don't want to get too much in the weeds. It seems like the core of the news that you broke is that Apple is storing Chinese customers' data and data centers owned by the Chinese government. That raises some eyebrows.

• 32:48Alex Kantrowitz?

  So can you tell us a little bit about what you found there and why it's significant?

• 32:53Speaker 01

  Indeed. So, you know, Apple had actually, you know, said itself a few years ago that it was going to start storing its Chinese customers' iCloud data on a Chinese data center. You know, if you really read through the lines and you understood a little bit, you'd kind of see that this was a state-owned company that was going to be operating the data center. And so that was what kind of made me and some of my colleagues, Ray Zhang and Dai Wakabayashi at The Times, start digging into this. And we, you know, through documents, internal Apple documents that we were able to review, and also interviews with a number of internal Apple employees and security experts, came

• 33:38Speaker 01

  to understand that

• 33:41Speaker 01

  Basically, Apple was making serious compromises with these data centers. And this was amid Tim Cook saying that, no, no, no, you have nothing to worry about this Chinese data. It's all very safe. It's encrypted. We have the keys. But what we revealed and what we learned was the way Apple has set this up is that basically Chinese government employees physically manage and operate the computer servers inside these data centers. The Chinese government legally owns the data. Apple is using completely different encryption technology in China than it's using elsewhere in the world because China wouldn't allow Apple to use its typical encryption technology. And the digital encryption keys that unlock the Chinese customers' private information

• 34:24Speaker 01

  on these computer servers are stored in the very data centers that they're intended to secure. So all of these compromises together, you know, when we talked with security experts and internal Apple employees, kind of combined to create a situation that essentially means that it would be nearly impossible for Apple to stop the Chinese government from accessing the emails and photos and contacts, calendars, and even locations of millions of Chinese residents if the government wanted to.

• 34:53Alex Kantrowitz?

  Wait, did you say that the Chinese government owns the data?

• 34:56Speaker 01

  Yes, so that's another-

• 34:59Alex Kantrowitz?

  That's unbelievable. Okay, sorry. Yeah, let's hear what happened.

• 35:02Speaker 01

  Yeah, no, it is. It's, I mean, one of the other revelations from our story was about how Apple has created a very unusual legal arrangement in which the Chinese government is the legal owners of the data or the state-owned company called Guizhou Cloud Big Data Corp.

• 35:21Alex Kantrowitz?

  That name.

• 35:22Speaker 01

  But, yeah, it's actually, so all of this is, in some ways, it's right in the iCloud terms and conditions that, you know, I'm sure everybody reads. And basically, in 2018 or so, Apple required its Chinese customers to accept new iCloud terms and conditions in China. And those terms and conditions list GCBD, we'll call that, that's the state-owned company, they're listed as the service provider and the legal owner of the data, and Apple is listed as, quote, "an additional party to the agreement." And then, what, I did an analysis of the terms and conditions in China versus the terms and conditions in other countries. And what I learned, you know, by comparing the two documents is that there was new, there

• 36:06Speaker 01

  was a new addition to the Chinese document that said- "Apple and GCBD will have access to all data that you store in the service." And then it says, "And share that data between each other under applicable law." And what that meant, and what that was somewhat intended to do, was to essentially allow... So, under this arrangement, the Chinese authorities go to the state-owned company to ask for data. And then this state-owned company goes to Apple to ask for the keys, I guess, to hand it over. And Apple did this in part because American law prohibits Apple from turning over data

• 36:50Speaker 01

  for law enforcement in the Chinese government, the Chinese authorities.

• 36:53Alex Kantrowitz?

  So, they said, "No worries. We'll just allow them to own the data."

• 36:57Speaker 01

  The data. Yeah, exactly. Apple believed that essentially this created a legal shield for it. Yeah.

• 37:04Alex Kantrowitz?

  That's crazy.

• 37:05Speaker 01

  That was pretty interesting, partly because some of this was just all in the terms and conditions. But then we were able to get from internal sources that this was designed in a way to get around American law.

• 37:20Alex Kantrowitz?

  How easy would it be for the Chinese government to access information without... You know, how easy, given the setup? How much easier would it be for the Chinese government to access the data with this type of setup versus governments elsewhere? And why might that be concerning?

• 37:39Speaker 01

  So, it's a good question. There's two main ways to access the data, right? There's... Let's talk first about kind of not going through the legal process, you know, in China, not like going and asking for the data, but just kind of going in and taking it without permission.

• 37:53Alex Kantrowitz?

  Yeah, that's the one I want to focus on.

• 37:55Speaker 01

  Yeah, okay.

• 37:56Alex Kantrowitz?

  There's an ask and get it, so be it, but...

• 37:59Speaker 01

  Yeah, well, the ask and get it is kind of what I was just talking about with this legal ownership. And again, ask and get it, just real quick, they just have to ask their own state-owned company for the data. Although, we do, I will say, Apple does report cases in which Apple, the Chinese governments came, come and ask for it, and it's far fewer times than what the US government asked for. But one of the reasons that may be fewer is because...

• 38:20Alex Kantrowitz?

  Maybe because they have the keys.

• 38:22Speaker 01

  Yeah, exactly. So, let's talk about that. So, basically, I mean, what's very different here is...

• 38:29Speaker 01

  In the US, for instance, the US government does not own the servers that the data is stored on. You know, this is on Apple's own computer servers. Apple has the keys, you know, stored in a way that it only it has access to. And so what's very different in China is, again, as I noted, is that, again, these are, this is a Chinese government building. Chinese government employees managing it, et cetera, et cetera. And the keys are right there in the servers. Now, Apple told me on the record that it has made, how can I say this? That that it's designed this data center in a way that that means that it has retained control of the keys. And I can't really say much more, but that's kind of what Apple will tell us.

• 39:13Speaker 01

  But security experts basically say that, listen,

• 39:18Speaker 01

  no engineer could solve the problem that Apple has created for them. And that is, you have a sophisticated nation state with physical control of your computers. To try to prevent a hack in that environment is essentially impossible. You know, there is no software that is unbreakable or unhackable. And it only becomes far easier when A, you have physical control over the computer. And B, you have unlimited resources and you're the Chinese government.

• 39:54Alex Kantrowitz?

  When you've willingly gone in and set this, set it up this way, and you have a government with a propensity to snoop.

• 39:59Speaker 01

  Yeah, and and has shown.

• 40:01Alex Kantrowitz?

  Not that the US government has any less propensity. I mean, we, you know, we have all those Snowden revelations that were not exactly hands off in this country, but.

• 40:09Speaker 01

  And I think that's an important point. Yeah.

• 40:11Alex Kantrowitz?

  Yeah.

• 40:12Speaker 01

  But, I mean, it would be true in both cases. If you were storing iCloud data on FBI servers, I think that would raise a lot of questions. And we would have assumptions that the FBI would be able to get access to the data.

• 40:25Alex Kantrowitz?

  You could do it, you just couldn't position yourself as the privacy first company.

• 40:30Speaker 01

  I think that's part of what the story is all about is that there's, yeah, that there is, there seems to be a disconnect between what Apple has said publicly, including even about this data in China, and what actually is happening.

• 40:43Alex Kantrowitz?

  And what's your, what do you think the disconnect is?

• 40:47Speaker 01

  Well, I mean, we, from a, from a high level, as you pointed out at the beginning, Apple has made its brand about privacy. You know, Tim Cook has continued to repeat the line, privacy is a fundamental human right. And at the same time,

• 41:01Alex Kantrowitz?

  Except for China.

• 41:02Speaker 01

  Yeah, as he's begun to say that, he's also agreed to store his customers' data on Chinese government servers. And then at the same time, I mean, Apple has not been asked about this arrangement in China much, but there was an interview with Vice in 2018 in which they, they did push him on it. And he really was dismissive and said, listen, there's no difference on where the data is and what country. We have the keys. It's all safe. And I think that, speaking to security experts, they disagree with that.

• 41:34Alex Kantrowitz?

  Yeah. And so let's say the Chinese government wanted to get in and did, what, what sort, I mean, I think you ended at this at the beginning, or you mentioned this at the beginning, what sort of access to information would they have of Chinese iPhone users?

• 41:49Speaker 01

  I mean, it's sure.

• 41:50Alex Kantrowitz?

  If they were able to crack this stuff?

• 41:51Speaker 01

  Yeah, yeah. I mean, iCloud is, we all know, we all have our deepest, darkest secrets on our smartphones, right? And, and I, some of us who are, I think, savvy about technology, would be hesitant to back up our whole phones to the iCloud because it's going to be less secure than having it just on your encrypted phone. But yeah, I mean, people who use the iCloud service and are backing up data to Apple servers, that's stuff like your whole address book, your contact book, all your emails, potentially all your text messages, your calendars, your, like, your current location with my Find My iPhone stuff. So there's, there's a lot of sensitive data there, your documents. And

• 42:36Speaker 01

  the other thing, I mean, that

• 42:37Alex Kantrowitz?

  Not something you willingly want to hand over to a government.

• 42:40Speaker 01

  No, of course not. Absolutely not. And there, there is some data that is end-to-end decrypted in iCloud, stuff like your health data, your passwords, and your credit card information. So that stuff would be still potentially at risk, but it's more protected than some of this other data, which actually travels for some time unencrypted based on, on the level of encryption. The other thing I do want to say, though, is, is

• 43:09Speaker 01

  You know, something that we've talked about and some, I think, critics of our story have said is this is all in China. You know, there's a lot of assumptions that the Chinese government's, they already surveil their users. They already surveil their citizens. You know, look at WeChat and other services that I think had been widely reported for the Chinese government has a pretty, you know, inside access to the data on those services. Why is this a big deal? And I think one thing that I do want to say is if you're in China and you're a dissident or a journalist or a democracy activist, you're probably going to use an iPhone.

• 43:50Speaker 01

  It is probably the safest thing you could use there. And there also, you're hearing assurances from the company that your data is safe. And if you had that reassurance, you may be misguided. And that was why these may be very high value targets for the government who have their data on servers that are also owned by the government.

• 44:13Alex Kantrowitz?

  Yeah. And it comes back to, I think, what we were talking about in the first segment, right? Like, go ahead, do what you need to, Apple, but tell the truth about it. And you're, we're for the customer, we're for privacy. Messaging has some serious holes in it and that could end up putting people at risk.

• 44:29Speaker 01

  Indeed. Again, there is that disconnect, I think. And and this is just, it's an uncomfortable reality for Apple. Going back to, you know, the first question you asked is these are not things they want to do, but they're doing them because they have to, because they need China. And the stakes are too high to push back.

• 44:49Alex Kantrowitz?

  And I was about to pull back to that as well, because, you know, we know that now Apple needs China. And this is, you know, it's the, this is one level to push, but what's to, what's to make us believe that China isn't going to push Apple even more, knowing this incredibly, like if China kicked Apple out, that would be seriously bad for Apple's business. So China knows it kind of owns Apple in that way. So what's to stop the government from pushing it even harder?

• 45:21Speaker 01

  I mean,

• 45:24Speaker 01

  It'd be inaccurate to say that Apple doesn't have any leverage. Um, so that I don't, I don't, I think the Chinese government, there, there's a dance that's happening, right? The Chinese government, I think clearly has the upper hand in the relationship. But at the same time, um, the Chinese government doesn't want to destroy the whole Apple supply chain because it, it employs millions of peoples, millions of people. And Chinese government, uh, sorry, and Chinese citizens want iPhones and want Apple products. Um, and so you don't want to piss off your whole populace, um, because they, you know, you don't want to, uh, you, you don't want to let them have certain products. And then at the same time, you're going to piss off, uh,

• 46:04Alex Kantrowitz?

  America. International.

• 46:05Speaker 01

  Yeah, exactly. And other companies, right? There, there's a whole cascade of effects that could happen there. But, um, nevertheless, like, Chinese government could do it if it wanted to. And it, and it certainly is a, it's a, it's an arrow in its quiver for sure. And it's something that has to make Apple very, uh, concerned.

• 46:24Alex Kantrowitz?

  Right. Do you, do you, uh, after writing a story like this, do you wonder like, oh, can I still travel to China? Like, did you think about that at all? Would you go on vacation there?

• 46:33Speaker 01

  I mean, I'd love to go to China for a number of reasons because it's a fascinating country. Uh, but I think that, um, I think that'd be difficult for me to get a visa right now, particularly because the Chinese government has expelled all of the New York Times journalists essentially except one right now. So my colleague Raymond Zhang, who's, who's on the story with me, he had, with the beginning, he started reporting on this. He was in China. He went to Guizhou province where the data center is. But now he's in Taipei because, uh, he's been, his visa's been revoked. Yeah.

• 47:04Alex Kantrowitz?

  What about as a tourist? Would you go as a tourist?

• 47:07Speaker 01

  I would, I would love to go as a tourist. Yeah. But I still think they'd be a little bit, uh,

• 47:11Alex Kantrowitz?

  You might get stopped at the border.

• 47:13Speaker 01

  They may not have a tourist visa too. I don't know. Um, we'll see. Uh, but it's a good idea.

• 47:18Alex Kantrowitz?

  Yeah, no, I'm just curious. I'm like, I wonder, yeah, I'm naturally curious like whether writing a story like this will end up sealing off that part of the world for you.

• 47:28Speaker 01

  It could, it could. Yeah, it may. Right. And but certainly, that's not a, as I know you know,

• 47:34Alex Kantrowitz?

  like, well, you wrote this.

• 47:35Speaker 01

  Never gonna stop me.

• 47:36Alex Kantrowitz?

  Yeah, no, this is just end of the interview curiosity question. So.

• 47:41Speaker 01

  Sure, sure.

• 47:41Alex Kantrowitz?

  All right, let's let's wrap with this. So after your story went out, Apple's stock, I checked yesterday, is up. And it's just sort of how it goes, right? That companies do whatever they want. And there doesn't seem to be any recourse. And I doubt that Apple is going to be looked at. And I mean, maybe it's possible, but I doubt that Apple will be looked at in any other way than the way that it wants to be portrayed, which is that it is the privacy first company. People do love their products. They even love them in China, as you mentioned, where their data is now owned by a subsidiary of the Chinese government. So.

• 48:18Speaker 01

  Yeah.

• 48:19Alex Kantrowitz?

  What do you think about that? And you know, just before you answer, like, I'll add to it what something we spoke about in the first part of this discussion, which is even if Fortnite wins, it will be years and years and years until, you know, any of the recourse that the courts will give it end up going into action. So it does seem like we have these big companies that seem to be impervious to any sort of accountability. And I'm curious what you think about that.

• 48:44Speaker 01

  I think that that is a very accurate statement. I mean, there at the very least, there's a too big to fail feeling about all of this, of course. I mean, this is, this is a company that is makes, and the more money than than really any company has ever made in terms of profits. It's the most valuable company in the history of the world. And We wrote a story that yeah, maybe it got a few hundred thousand readers, but this is a really complicated topic. You know, I think it's tough even for lawmakers to sink their teeth into and for them to even do anything with it.

• 49:28Speaker 01

  And I'm just not surprised that it's not going to have any real traction, you know, with the wider public because Apple is perhaps the most iconic brand in the country. Its products really are beloved and it's not going away anytime soon. I mean, it is built this enormous, I hate to use jargon, but this enormous moat. I mean, I think, you know, Apple could be here in 50 years and no one would be terribly surprised. And that's saying something, given how quickly technology changes. And I also think, you know, I will say that it's really run by a number of shrewd people. I mean, I think Tim Cook is a really skilled executive and he, this is not, the stuff I'm

• 50:12Speaker 01

  reporting is not news to him. He, I think, knows what he's doing in some ways and he's pulling it off because he's becoming a very rich man and he's running a very successful company. And so, you know, that is what it is.

• 50:28Alex Kantrowitz?

  Yep. Well, Jack, the Apple beat is no longer boring. It's quite exciting.

• 50:34Speaker 01

  Please do hear it.

• 50:35Alex Kantrowitz?

  And your stories have definitely played a big part of that. So I appreciate you coming on and speaking with me about them.

• 50:40Speaker 01

  Thanks so much for having me, Alex. Really appreciate it.

• 50:43Alex Kantrowitz?

  If people want to find them, they can go to your page on The Times or follow you on Twitter. Where's the best places to find you and get in touch and all that stuff?

• 50:50Speaker 01

  Yeah, they can, they can follow me on Twitter @JackMicas or Google Jack Micas, N-I-C-A-S, and you'll find my New York Times stories.

• 50:58Alex Kantrowitz?

  Okay, great. I, let me see, I'm getting better at the technology and so I think I can drop them in the show notes as well.

• 51:04Speaker 01

  I believe in you.

• 51:05Alex Kantrowitz?

  Still a big technology podcast. All right, everybody, well, thank you so much for listening. Thank you to Nate Quatney for doing the edits on a very tight turnaround. Thanks to Red Circle for selling the ads and hosting the podcast. Thanks to Jack for joining us and thanks to you all for listening. We'll be back next week, next Wednesday, with another interview with a tech insider or an outside agitator. So we hope to see you then. If it's your first time here, please subscribe if you haven't yet. You've made it all the way to the end. We'd love to have you rate the show. That helps a lot. In terms of discovery, so we can get discovered on this,

• 51:44Alex Kantrowitz?

  on the vast domain of the world's largest company app. All right, well, that will do it for us this week. Thanks again for listening and we'll see you next week. Take care.

• 52:03Speaker 02

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