Big Technology Podcast - New York Times Reporter Jack Nicas On Apple Vs. Epic Games and Apple In China

Episode Date: May 26, 2021

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

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 Niggis, welcome to the show. Thanks for having me. You've been busy, man.

I have. It's been a wild run for you last couple weeks. 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. 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 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? 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, 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. 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, obviously the antitrust questions are alive and well around Apple. And that's become a big news item just in the past recent weeks. So Apple is being sued by Epic, which makes Fortnite, which is a very popular game, for charging 30% 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 30% off the top. And Fortnite is arguing that this harms consumers and forces prices up. but 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, you know, in the past couple weeks? Sure. So 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 because the app store is not just, you know, a little digital marketplace. This is an enormous centers of commerce. It's one of the largest centers of commerce in the world in many ways. I mean, $100 billion is what some estimates are for just simply iPhone apps. And so this is an issue that has really been at the center of antitrust claims against Apple over the past over years. And companies like Spotify and Match Group have talked a lot about how they have to send 30% of a lot of their digital sales to Apple. And Apple rakes in billions and billions of dollars from the app store.

And so targeting this commission could take a significant chunk out of Apple's earnings. But what we had was, you know, 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, Yvonne Gonzalez-Rogers, did have it in person in Oakland. And we had, you got a chance to go inside the courtroom? I never went. But there was, because I had been in New York and traveling a little bit, but my call was Aaron Griffith did go. So it was weird. Usually, we as journalists go in and watch. And it's actually often great because you get to see top executive sit on the stand and squirm a little bit. But most of us journalists were having to listen in on this scratchy phone line.

It was terrible. I dialed in and it did feel like the entire court proceeding was taking place underwater. Yeah. And then we all said these pool reports. I don't know if you were on this email chain, but some reporters were going in and writing these little pool reports. And we were like desperate for any color, we're like what the Epic CEO is doing during Tim Cook's testimony and things like that. But yeah, 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 fortnight. 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 Federigi, who's there. Yep. And then Craig Federigi, 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. Right. And it didn't go so well for Tim Cook. I mean, Apple wouldn't argue that. They certainly obviously spun it as, you know, as amazing testimony. But I, what absolutely I think, listen, Tim is really, 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. 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 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.

And 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 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 them money to Apple. But Apple doesn't let Spotify tell iPhone app users to do that. So it's actually reached this bad experience where like you're trying to sign up on the 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 to sign up elsewhere. And so she was pushing on that a little bit, and she was like, well, why don't you

to give consumers the choice or 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. 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. totally and especially from him i mean in some ways it was refreshing it was like yeah wow it's good that

they're telling the truth i want to the court case 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 in apple itself has branded apple as not just any company this is a company that um 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 a damn good businessman. 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. 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. Yeah, which is not good for the user. Yeah, exactly. So if Fortnite wins, what happens? Well, it depends on how they win. Well, let's get that, let's go to the best case scenario. The best case scenario for four.

Sure, sure. So best case scenario is they can create their own app store, essentially, 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% commissions 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, if they were like, listen, you can only find us in the Epic store or 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 some app developers that want to do that. But then Apple says that that's not good for iPhone users because they said it's going to introduce all sorts of risk in terms of security and all that kind of stuff. Right, because part of that 30% fee that you're paying for is them reviewing and making sure there aren't scams. Correct. We're doing their best job of trying, because scams get through inevitably. Yes.

That's what you're getting for that 30% fee. 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. Yeah. And how important is winning this case for Apple?

I did a little research before we hopped on. on the phone looked at their Q1 numbers. In Q1, they made $11.4 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, this would only cut into a small line item of Apple's business, but maybe Apple sees that differently.

What do you think? I think so. I think that services have done 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.

Right, but that might be somewhat pandemic related. A little bit, a little bit. A little bit. A little bit. I think Q1 2020 and then it bumped up. 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 goes digital, the more that number is going to continue to grow, the more we continue to spend money on digital items versus physical goods, etc.

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%. That says gravy. I mean, right? They've already created the iPhone. It's pretty minimal investment. It is a nice.

I mean, when you have a monopoly, it's a nice way to make high margins. No comment from you. I know. You can't say anything about it. 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 also, I think even more crucially, how Apple feels is that the entire Apple ecosystem has been built around this walled 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'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 something I think that scares them more than anything. Right.

And I think, you know, we joked about it. But 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 upgrade their iPhone every couple 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. Wow. Good for you. The money that they're going to end up making from services, things like the App Store,

become central to their business that they're going to be able to maintain their $2 trillion valuation or whatever. Absolutely. Absolutely. Yeah. So it could be a very big deal. But it also could not matter. I mean, I think that there's, listen, 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 going to, it's going to, it's going to go to appeal. I mean, this is the nature of these court cases. No matter who loses, they're going

to appeal it to the Ninth Circuit. There's going to be an appeals court. There'll be an appellate review. And the effects of any decision may get stayed until the appeal appellate court rules on it. And then it could go up to the Supreme Court and get state again. And then on top of that, there's a very high likelihood that the judge rules in a way that it's like neither side wins, that she makes some sort of like, they can't do this anti-steering thing. So there's this work around 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 strong hand. The precedent really supports the defendants in these sort of antitrust cases, but she seemed pretty sympathetic to Epic's arguments in case as the trial wore on. And so, again, it's up to one woman. and she may have been convinced. Yeah, I highlighted that part of your story that you wrote for the times about how long it will take for any of the effects to actually go into place and it's going to be a while. You know, I find it interesting that she did find some merit in the Fortnite or epic argument

because, look, I'll say on this show, I've definitely been quick to criticize Apple, but you could, you know, look at Apple's side. 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 even then, you know, how could you argue that we're a monopoly if the money you're making from Fortnite via the app store and the iPhone is only like, what, 8 to 15% of your total revenue epic. So I don't really understand how, like, well, yeah, I mean, I don't really understand how Fortnite comes back to that, like, what is Fortnite saying in response to that?

Yeah, no, I think, I mean, that's why I think the trial 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 I think on top of that as well is Apple has been really eager to point out that everybody else charges 30% 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, the percent that you ended up paying in commissions and all that kind of stuff was much higher. 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. That's not a normal business. There's a certain domination of the market.

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, leaving the smaller players out to dry. And it has gotten to the point where somebody like Tim Sweetie from Epic, who's a billionaire can feel sympathetic unlike the little guy, which is a wild commentary of where we stand today. Indeed, indeed.

And I think I did point out in today's story, 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 a lot of money. Yeah, so millions of dollars on lawyers and economists and expert witnesses. He also, he sacrificed the 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 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 um opponent uh to take this on um 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 um it only ties their hands and strengthens apple's position yeah which is a perfect

segue into my next question do you have a prediction for where this goes i think that it's going to be one of these, I don't think either side's going to win outright. I think that, I just think that she, the judge seemed too 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. Right. 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. Yeah, I like what she said in the trial that courts don't run companies, which I think there's a pretty good thing to, pretty good value for a court to have. Yeah. 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.

Right. 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? Oh, I think the clear answer is that because. is 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, maybe I'm going to 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 what their practices and change the app store market.

And in fact, 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 may be like, okay, 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. 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. You said this could drag

out until August when we're talking. Yeah, she's saying she's going to, her prediction was she's going to deliver a ruling by August. Yeah. Great. All right. Well, after the break, I want to talk with you about Apple and 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 Niggis. Hey, everyone, let me tell you about The Hustle Daily Show, a podcast filled with business,

tech news, and original stories to keep you in the loop on what's trending. More than 2 million professionals read The Hustle's daily email for its irreverent and informative takes on business and tech news. Now, they have a daily podcast called The Hustle Daily Show, where their team of writers break down the biggest business headlines in 15 minutes or less and explain why you should care about them. So search for The Hustle Daily Show and your favorite podcast app like the one you're using right now. And we're back here for the second segment of the big technology podcast with Jack Nikes 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? 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 it, 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 $55 billion worth of goods there every year. And it's the company's number two market. And then, as I mentioned, the supply chain there, the manufacturing presence is so enormous and so sophisticated and complex 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. Um, and that is what has created, uh, essentially a predicament for Tim Cook

and the company. Hmm. And so Facebook, not in China. Google tried to operate in China. That didn't work. Yeah, they pulled out themselves. Yeah. Yeah. So why do you think it is that Apple is in while the others are out? Well, it's a difference in business to some degree. Um, Facebook doesn't need China in that way. If Facebook doesn't, is not a hard work 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 to China about two decades ago. And they saw, right, when you were in operations. Yep. He was, he was the operation chief under Steve Jobs. And he's, and he was, he was, he was the operation

cheap under Steve Jobs, and he saw an opportunity for 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. 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. Right. But 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. You're right. You know, did Apple seems much more comfortable having that relationship? Yeah. No, you're right. It is, it is too. 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 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. Yeah. And again, with Google, they ran.

Before you go to Google, Zuckerberg tried real hard to end up getting Facebook into China. He learned Chinese. And there was an offer where he was going to allow Xi to name his daughter or something like that. But anyway, that ship is obviously sailed. Now he uses China as a foil to show why Congress shouldn't regulate Facebook. Okay.

Now that he's out, he is his, his, has changed. I mean, there's also the famous photo of Zuckerberg running, running through the smog in Tiananmen Square. So you're right. Zuckerberg certainly tried. Google was the other way. Early on Google went into China. They were kind of a pioneer. Yep. And it turned out that the Chinese government was saying, we need to sense 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. It turned out to be very lucrative for Apple. And Apple was able to get around 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 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. This is an area of Apple's business that it's 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 revealed the level to which Apple proactively censors its own app store in order to appease the Chinese government. Yeah, and I want to get to that in a bit, but let's start with the data side of the 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 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. So can you tell us a little bit about what you found there and why it's significant? 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 to understand that 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 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 to the 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. Wait, did you say that the Chinese government owns the data? Yes, so that's another... That's unbelievable. Okay, sorry, yeah, let's... 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. 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 I cloud terms and conditions in China. and those terms and conditions list GCBD, we'll call that, that's a 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

of conditions in other countries. And what I learned, you know, by comparing the two documents is that there was new, there was a new addition to the Chinese document that said, quote, Apple and G. CBD will have access to all data that you store in the service. And then it says, and share that data, quote, 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 tanned it over. And Apple did this in part because American law prohibits Apple

from turning over data to foreign law enforcement in the Chinese government and Chinese authorities. So I said, no worries. Just allow them to own the data. The data. Yeah, exactly. Apple believed that essentially this created a legal shield for him. Yeah. That's crazy. That was, that was pretty, yeah, that was pretty interesting. Partly because some of this was just all in the terms of conditions. Right. And but then we were able to get from internal sources that this was designed in a way to get around American law. 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? So it's a good question. There's two main ways to access the data, right? Let's talk first about kind of not going to 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. Yeah, that's the one I want to focus on. Yeah, okay. So talking.

Ask and get it that, you know, so be it. Yeah. Well, the asking get it is kind of what I was just talking about with this legal ownership. And again, asking get it just real quick, they just have to ask their own. they don't company for the data. Although we do, I will say, Apple does report cases in which Apple, the Chinese government's came, come and ask for it. And it's far fewer times than what the U.S. government asked for.

But one reason that may be fewer is because they have the keys. Yeah, exactly. So let's talk about that. So basically, I mean, what's very different here is in the U.S., for instance, the U.S. 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 has access to. And so what's very different in China, again, as I noted, is that, again,

these are, these are 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 it's designed this data center in a way 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. But security experts basically say that, listen, 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. Yeah. When you've willingly gone in and set it up this way and you have a government with a propensity to Snoop.

Yeah. And it's shown that the U.S. 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. And I think that's an important point. Yeah. Yeah. 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. You could do it. You just couldn't position yourself as the privacy first company. I think that's part of what the story is all about is. That there seems to be a disconnect between what Apple has said publicly, including even about this data in China and what actually is happening. And what do you think the disconnect is? Well, I mean, we've, 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, except for China. 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 Bice in 2018 in which 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. Yeah. And so let's say the Chinese government wanted to get in and did. What sort of, I mean, I think you hinted 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? I mean, it's, sure. Yeah, yeah. I mean, ICloud is, we all know, we all have our deepest, darkest secrets on our smart phones, right?

And 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 current location. with them. I find my iPhone stuff. So there's a lot of sensitive data there, your documents. And the other thing, I mean, that... Not something you willingly want to hand over to a government. No, of course not. Absolutely not. And 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 protection.

than some of this other data, which actually travels for some time unencrypted based on the level of encryption. The other thing I do want to say, though, is something that we've talked about and some I think critics of our story have said is this is all in China. There's a lot of assumptions that the Chinese governments, they already surveil their users, they already surveil their citizens, you know, look at WeChat and other services that I think what 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. It is probably the safest thing you could use there. And they're 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. Yeah. And it comes back to, I think, what we're 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 where for privacy messaging has some serious holes in it. And that could end up putting

people at risk. Indeed. Again, there is that disconnect, I think. 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. 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 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

for pushing it even harder? I mean, it'd be inaccurate to say that Apple doesn't have any leverage. So I don't, I think the Chinese government, 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, the Chinese government doesn't want to destroy the whole Apple supply chain because it employs millions of people's, millions of people. And Chinese government, sorry, and Chinese citizens want iPhones and want Apple products.

And so you don't want to piss off your whole populace because they, you know, you don't want to let them have certain products. And then at the same time, you're going to piss off America. Yeah, exactly. And other companies, right, there's a whole cascade of effects that could happen there. But nevertheless, like, the Chinese government could do it if it wanted to. And it certainly is a, it's an arrow and it's quiver for sure. And it's something that has to make Apple very concerned. Right.

Do you, 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? I mean, I'd love to go to China for a number of reasons because of the fascinating country. 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.

all of the New York Times journalists essentially except one right now. So my colleague, Raymond Jong, who's on the story with me, he had with the beginning, he started reporting on this, he was in China. He went to Guayjo province where the data center is, but now he's in Taipei because he's been, his vibe of visas been revoked. Yeah. What about as a tourist? That's the nature. Would you go as a tourist? I would love to go as a tourist, yeah, but I still think they'd be a little bit, they might get stopped. They may not actually be a tourist visa, too. I don't know. we'll see but it's a good idea 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

it'll be it could it could yeah it may right and but certainly that's not a as as i know you know like well you wrote this never going to stop me yeah yeah yeah no this is um just end of the interview curiosity questions so sure 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 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 not. owned by a subsidiary of the Chinese government. So what do you think about that? And just before you answer, like I'll add to it, 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. I think that that is a very accurate statement. I mean, at the very least, there's a too big to fail feeling about all of this, of course.

I mean, this is a company that makes, and the more money 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. 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 and it's not going away anytime soon. I mean, it has 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, he, this is not, the stuff I'm reporting is not news to him. He, he, I think, knows what he's doing in some ways.

And he's, 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. Yeah. Well, Jack, the Apple beat is no longer boring. It's quite exciting. Pleased to hear it. your stories have definitely played a big part of that. So I appreciate you coming on and speaking

with me about them. Thanks so much for having me, Alex. Really appreciate it. 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? Yeah, they can they can follow me on Twitter at Jack Nickas or Google Jack Nickas and I-C-C-A-S and you'll find my New York Times stories. Okay, great. Let me see. I'm getting better at the technology and so I think I can drop them in the show notes as well. I believe in you. I'm a big technology podcast.

All right, everybody. Well, thank you so much for listening. Thank you to Nate Gwattany 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.

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Thanks again for listening, and we'll see you next week. Take care. I don't know.