What can we learn from Apple and Epic Games’ Findings of Facts and Conclusions of Law in their US litigation?

With the bench trial in the Epic Games’ lawsuit against Apple starting on 3 May 2021 and in the broader context of the various investigations launched against Apple by the European Commission, the Dutch ACM and the UK CMA, the purpose of this blog post is to discuss some of the most interesting aspects (at least from an EU competition law perspective) of the Findings of Facts and Conclusions of Law filed by Epic Games and Apple on 8 April 2021 as part of the ongoing US litigation (see here and here).

In its lawsuit against Apple, Epic Games alleges that Apple would have monopolised both the market for iOS app distribution and the market for iOS in-app payment processing through a variety of anticompetitive means. These claims are not necessarily the same as those investigated by the Commission, the ACM and the CMA, but most of the Findings of Facts and Conclusions of Law filed by Epic Games and Apple are nevertheless relevant to these investigations.

Against this background, the analysis which follows focuses on three issues, which are at the core of the investigations pursued by the European (and the UK) competition authorities: (i) the relevant market for the distribution of apps; (ii) the nature of the 30% (reduced in some cases to 15%) commission charged by Apple on app developers whose apps sell digital goods or services; and (iii) the justifications advanced by Apple for obliging app developers whose apps sell digital goods or services to use its in-app payment solution (“IAP”) to accept user payments.

Market definition

The market definitions proposed by Epic Games and Apple will be of interest to the European authorities. While Epic Games considers that there is a market for “iOS app distribution”, Apple argues that the relevant market is the one for “(digital) game app transactions”. In a co-authored paper that is soon to be published by the Journal of Competition Law & Economics (but which is already available here), Dimitrios and I took the view that, as argued by Epic Games, the relevant market is the one of app distribution on iOS devices, and none of the arguments made by Apple in its Findings of Facts and Conclusions of Law convince me otherwise.

It seems that both parties agree that as the App Store enables two distinct customer groups to transact, the market in question exhibits the characteristics of a “two-sided transaction market.” In our paper, we took the view that to determine whether there were alternatives to the App Store, it was necessary to assess whether in the event of a small but significant non-transitory increase in Apple’s distribution fees (“SSNIP”), a sufficiently large number of customers (app users and app developers) would switch to another channel (say, Google Play) so as to render the increase unprofitable. We also considered that this question needed to be addressed separately for each customer group connected by the App Store, namely app users and app developers. On that basis, we reached the preliminary conclusion that there was no realistic alternative to the App Store for app users and/or app developers.

In his expert testimony on behalf of Epic Games, Dr. Evans followed the same analytical approach and reached the same conclusion. As Epic Games observes in its Findings of Facts and Conclusions of Law, “having applied the SSNIP test to both sides of the iOS App Distribution Market — consumers and developers — and showing that neither would leave the platform if their cost of using the platform increased by 10%, Dr. Evans demonstrated that a hypothetical monopolist in the iOS App Distribution Market could profitably increase its prices by a small but significant and non-transitory amount.” (§162 of the Findings of Facts). On this base, Dr. Evans reached the correct conclusion that the correct antitrust market is the one for the distribution of apps on the iOS platform.

Apple’s claim that the relevant market is one for “game app transactions” is based on a qualitative approach, relying on the specific characteristics of game apps and the way they are distributed compared to other categories of apps. But, as correctly observed by Epic Games in its Findings of Facts and Conclusions of Law, such an approach to market definition, which “does not focus on the conduct at issue in this case, but on the identity of the plaintiff, Epic” (§166 of the Findings of Facts) is unappealing for the reason that “if Apple’s market definition were correct, two lawsuits challenging the same conduct by the same defendant could result in different product markets and different findings about the defendant’s liability.” (Id.) In other words, there could be as many market definitions as categories of apps and any decision by a court or a competition authority related to the App Store would have limited precedential value. In this respect, in his expert testimony on behalf of Apple, Dr. Schmalensee would have conceded that “if the Department of Justice brought a lawsuit challenging the same conduct as Epic, it would be of interest to see whether it made sense to consider relevant markets within the broad app market.” (Id.) That is exactly the position in which competition authorities investigating Apple’s App Store practices will be in.

The nature of the commission charged by Apple to app developers whose apps sell digital goods or services

Pursuant to the App Store Review Guidelines, developers whose apps sell digital goods or services consumed inside the app have an obligation to use IAP to accept user payments and bear a commission of 30% (or 15% in certain circumstances) on in-app sales. Apps that do not sell digital goods or services must use other payment solutions, hence they do not pay the 30%/15% commission, although they are also distributed in the App Store. The determination of whether an app sells digital (versus physical) goods or services is left at Apple’s entire discretion and has been a regular source of dispute between app developers and Apple.

One hotly debated issue relates to the nature of the service(s) provided by Apple in return for its 30%/15% commission. Apple has always rejected the view that this commission was owed for payment processing. The reason is that the fees typically charged by firms providing payment processing services are between 2 and 5%. In its Findings of Facts and Conclusions of Law, Apple confirms that IAP does not perform payment-processing functions, “[r]ather, it outsources that function to a third-party payment processor, such as Chase for the U.S. storefront.” (§55 of the Findings of Facts).

Instead, Apple seeks to justify its commission on three grounds.

First, it claims that “in exchange for its commission, Apple provides developers a marketplace to transact with more than a billion consumers who trust the App Store and trust the content it offers” (§235 of the Conclusions of Law) But this argument creates a challenge for Apple, which is that access to the same “marketplace” and billion iOS users is provided to all apps contained in the App Store, while according to Apple’s own statistics, only 16% of such apps pay the 30%/15% commission.

Second, “IAP supplies multiple services to both developers and users that are inseparable from the transactions facilitated by the App Store.” (§652 of the Findings of Facts) These services include “centralized and secure payment processing, bandwidth, customer service, programming, online stores, the platform (including security protections and operation of on-device functionality), development tools, constant marketing, reviews and curation of apps, tools for testing, campaign management, anti-fraud measures, and more.” (§235 of the Conclusions of Law) Now, the question remains why only 16% of the apps need to pay for such services, whereas all apps benefit from them. Moreover, given the scale of the App Store and the fact that these services are largely automated, it is not clear why they require the payment of such a high commission. In any event, in its Findings of Facts and Conclusions of Law, Epic Games cites the deposition of Apple’s executive Eddy Cue according to whom “[t]he 30% commission structure was never based on any analysis of Apple costs to run the store or provide services to app developers.” (§115 of the Findings of Facts and Conclusions of Law)

Third, Apple seeks to justify the use of IAP and the payment of its commission on the ground that it “ensures Apple is able to prevent developers from free-riding on Apple’s intellectual property.” (§682 of the Findings of Facts) I return to this argument below, simply observing here that it is hard to understand why only a subset of the apps distributed on the App Store (16% of the apps in the App Store) should be prevented from freeriding on Apple’s IP, while all the other apps (84% of the apps in the App Store) would be free to do so. In fact, Apple’s payment structure allows 84% of the apps to freeride on the payments made by 16% of them.

Justifications for the obligations imposed on app developers whose apps sell digital goods or services to use IAP.

In its Findings of Facts and Conclusions of Law, Apple invokes a variety of justifications for the mandatory use of IAP. In fact, these justifications were already rebutted in my co-authored paper referred to above, but I provide hereafter an overview thereof and why there are flawed.

First, Apple claims that without IAP it “would have enormous difficulty in identifying the commissions to which it is entitled, and incur substantial costs in collecting the commissions from each developer.” (§§59 and 680 et seq. of the Findings of Facts) I am sceptical about this argument as I believe there are less restrictive alternatives which Apple could use to ensure it receives its commission, regardless of the exact payment solution used by developers to accept user payments. For example, apps could inform Apple through APIs in near real-time each time a user payment is made, so that Apple can calculate its commission. This would not be a novel solution, since already today Apple relies on APIs to inform developers each time a user payment is made through IAP (so that they can unlock the feature for which payment was made); I do not see how the reverse could not happen.

Second, IAP “ensures Apple is able to prevent developers from free-riding on Apple’s intellectual property”. (§682 of the Findings of Facts) Apple further states that “[b]asic principles of economics state that this would chill Apple’s incentives to make similar investments and undertake the risk of similar innovations in the future—to the detriment of consumers and developers” (Id.) This line of argument is not convincing. Apple ignores the significant value that it derives from the presence of a large variety of apps on its devices. But for the presence of such apps, Apple’s devices would have significantly less value to smartphone users, which spend the great majority of their time on apps. The only reason why Apple is able to collect a commission from certain categories of apps is that it holds a gatekeeper position. For the same reason it is farcical to argue that but for the commissions that Apple manages to extract from app developers through the mandatory use of IAP, Apple would lose its incentives to invest in the App Store, as no user would buy a device that does not include an app store from which she can download her favourite apps.

Third, IAP “enables a safe and secure marketplace for private transactions.” (§684 of the Findings of Facts) Apple further adds that it has “legitimate grounds for concern about permitting app developers to handle payment processing themselves, because it exposes consumers to security and privacy risks.” (§686 of the Findings of Facts) These arguments should hold no sway. Even if one accepts that IAP is a safe and secure solution, that does not explain why it should be imposed on apps selling digital goods or services at the exclusion of other payment solutions. Companies specialized in payment processing – think of e.g., PayPal, Adyen or Stripe – offer payment solutions that match IAP in experience, functionalities and security. PayPal also supports Touch ID, Apple’s fingerprint  authentication technology for iPhones. Apple cannot thus seriously argue that IAP  is the only way in which the safety and security of transactions can be safeguarded or that alternative payment solutions are inferior. Indeed, this is confirmed by the fact that apps considered as selling  “physical” goods or services (e.g., Lyft or Airbnb) use their own payment solution to accept user payments. I am not aware of Apple expressing any concerns about the integrity of transactions concerning “physical” goods or services, which – according to an Apple-sponsored  study – make up the vast majority (85%) of the total sales and billings facilitated by the App Store in 2019.

Fourth, Apple claims that “IAP also is very convenient, single point of sale for consumers.” (§687 of the Findings of Facts) In addition “consumers experience a seamless process even when they obtain a new device.” (§ 688) This argument fails to convince. Once again, apps offering “physical” goods or services use their own payment solutions; in this case Apple does not seem particularly concerned about the payment experience. With the significant advancement of modern online payment solutions, many payment solutions provide for an friction-less consumer experience, as they for instance require the user to enter her payment details only once. Once entered, such details are then securely stored and remembered with the permission of the user for future purchases within the same app or even across apps (this is the case for example with PayPal’s One Touch technology).

Moreover, the obligation to use IAP comes with a major downside for users, which is that IAP’s centralized function may also be a source of switching costs. While IAP allows users to share purchases across iOS devices, users cannot purchase a subscription on iOS through IAP and then transfer it to an Android device. Instead, the user must cancel her subscription and wait for it to expire before moving on to an Android device, where she will then have to purchase a new subscription. Considering that users may have multiple subscriptions for different apps with different billing cycles, this may dissuade them from switching to an alternative OS in the first place. On the other hand, if the payment is made through the developer’s own billing solution and the developer has a centralized, platform-agnostic billing system, the user can more easily switch between OSs and immediately access its subscription.

Furthermore, the mandatory use of IAP is also a source of considerably inefficiencies that hurt consumers. When a purchase is made through IAP, Apple becomes the merchant of record and usurps crucial aspects of the customer relationship. Customer support, including the sensitive issue of billing (e.g., refund or cancellation requests) is handled exclusively by Apple, although the latter does not provide the good or service to which the user request relates and cannot verify its delivery or take any action to correct an issue with the good or service. As Basecamp’s CEO explained, the developer cannot help customers with the following requests: “Refunds, credit card changes, discounts, trial extensions, hardship exceptions, comps, partial payments, non- profit discounts, educational discounts, downtime credits, tax exceptions, etc.”

Finally, Apple argues that IAP also benefits developers as “[w]hen consumers enjoy a better customer experience, developers indirectly benefit as well due to increasing demand of their apps, and vice versa.” (§691 of the Findings of Facts) This argument again fails to convince. First, as noted above, the mandatory use of IAP is a major source of frustration for app developers, which certainly do not share the view they would “benefit” from it. App developers oppose the obligation to use IAP for the following reasons: (i) it allows Apple to collect user data (e.g., the name, location, payment details of the users) that Apple refuses to share with them although access to such data would allow them to improve their services; (ii) it deprives them from developing either in-house or with the help of third-party vendors payment solutions that would better fit the needs of their service; and (iii) by handing over the customer relationship to Apple it limits, as noted above, their ability to deliver proper customer care, which oftentimes leads to considerable user frustration.

In other words, none of the justifications provided by Apple for imposing the obligation to use of IAP on app developers whose apps sell digital goods or services should hold any sway.

Photo by Joshua Hoehne on Unsplash

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