The App Store and antitrust: Lofty statements by Apple executive and academic friendly to Apple’s views don’t do the trick

On 16 June 2020, the European Commission opened formal antitrust investigations to assess whether Apple’s rules for app developers on the distribution of apps via the App Store violate EU competition rules. 

The Commission’s press release states that the Commission will investigate in particular two restrictions imposed by Apple in its agreements with companies that wish to distribute apps to users of Apple devices:

(i)   The mandatory use of Apple’s own proprietary in-app purchase system “IAP” for the distribution of paid digital content. Apple charges app developers a 30% commission on all subscription fees through IAP.

(ii)  Restrictions on the ability of developers to inform users of alternative purchasing possibilities outside of apps. While Apple allows users to consume content such as music, e-books and audiobooks purchased elsewhere (e.g., on the website of the app developer) also in the app, its rules prevent developers from informing users about such purchasing possibilities, which are usually cheaper.

In response, an Apple’s spokesperson made a terse statement: “It’s disappointing the European Commission is advancing baseless complaints from a handful of companies who simply want a free ride, and don’t want to play by the same rules as everyone else.”  More recently, however, Daniel Matray, head of Apple’s App Store and Apple Media Services, made several interesting observations to a Forum Europe online event that were reported by Reuters. Below I list these observations and lay down some thoughts:

“We compete with a wide variety of companies, Google, Samsung, Huawei, Vivo, LG, Lenovo and many more”.

  • There is no question that Apple competes with these companies on a range of product markets, but this is not the point. The Commission focuses on Apple’s rules for the App Store as they apply to app developers. The fact that Apple competes with Samsung and Huawei on mobile device markets does not inform the debate on whether its App Store rules can produce exclusionary (or exploitative) effects to the detriment of app developers and ultimately app users.

“In fact, Apple does not have a dominant position in any market, and we face strong competition in every category, in tablets, wearables, desktop and notebook computers, maps, music, payments, messaging, and more.”

  • Same remark here; the relevant question is whether the App Store is subject to competition for the distribution of apps on iOS. The answer is no. Apple is a monopolist and therefore dominant.

According to the Reuters article, Matray defended the App Store, saying the same rules apply to all developers, large and small, with 85% of apps not required to pay a 30% fee to the company which is only valid for those which use its in-app payment service.

  • The fact that the same rules apply to all developers is a gross misstatement, which is disproved by Mr. Matray’s own observations that “85% of apps are not required to pay a 30% fee. In fact, Apple has created a discriminatory system based on an artificial distinction between apps providing goods or services that are consumed “inside the app” (or “digital goods or services”) for which app developers have to use Apple’s in-app payment service “IAP” and pay a 30% fee, and apps providing goods or services consumed “outside the app” (or “physical goods or services”), for which app developers do not have to use IAP and don’t pay the 30%. As I explain in a co-authored paper, this distinction does not add up and results in the fact that, while all apps written for iOS are distributed by the App Store, only a small subset (15%) thereof have to pay the 30% fee. It is thus factually wrong to claim that “the same rules apply to all developers”.

Finally, Matray said the App Store has boosted competition, rather than harmed rivals.

  • That is what the Commission will investigate, but in the same co-authored paper noted above, we provide multiple examples of situations where Apple used its dual role as operating the App Store and competing against other apps distributed through the App Store to harm rivals.

One should also not forget that, while the focus has been so far on Apple’s exclusionary conduct, the App Store rules also have significant exploitative features, whereby Apple uses its monopoly power to impose unfair terms on the 15% of apps that have to use IAP and pay the 30% fee, while not necessarily competing with Apple’s own apps.

On another note, Randy Picker of the University of Chicago recently published a post arguing that at the heart of the Commission’s investigation is the question of how Apple should make money. There are two interesting points in this post.

First, Picker made an attempt to justify the distinction between apps offering “digital goods or services” and apps offering “physical goods or services”, arguing that in the former category the “smartphone is really deeply connected to the transaction” while in the latter case “there is nothing particularly intrinsic to this transaction”.

However, why is the iPhone more “deeply connected to the transaction” when I use Spotify to listen to music compared to when I use Uber to find a ride? (note: Uber is considered an app offering a good or service consumed “outside the app” and thus does not have to use IAP) Suggesting that in the first case there is “deeper link” is just not credible.

Second, Picker suggested that “[t]he 30 percent royalty rate has to be understood not just in the context of where a customer adopts the premium service but also as the point of compensation for the large number of Spotify customers who just use the free service and for whom Apple has provided services to Spotify but has never collected anything, even though Spotify is collecting from the advertisers.”

Again, this makes little sense: what about all the apps that monetize their user base exclusively through advertising? Think e.g., of Facebook or Instagram or Google Search. If we followed Picker’s argument, Apple should require a fee from such apps, but it does not (save for an annual $ 99 fee).

The distinction between apps offering “digital goods or services” and apps offering “physical goods or services” is entirely artificial, and as of today remains still inexplicable. Let’s see if the Commission’s investigation will shed light on it.

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