Further thoughts on the Commission’s Statement of Objections to Apple on App Store rules for music streaming providers

One of the great features of competition law as a discipline is that reasonable people can have different views on the application of the law to the same set of facts. There is therefore scope for discussion and, especially in the digital sector, passionate debates.

In this respect, my reaction to the news that the Commission had sent a statement of objections (“SO”) to Apple on 30 April is very different from the reaction of Pablo Ibanez Colomo on his Chillin’ Competition Blog. I was pleased with the issuance of this SO (and the fact it was issued in a timely manner, i.e., less than a year after the Commission opened proceedings), even though the Commission perhaps lacked ambition in focusing on a narrow case (i.e., music streaming apps). Pablo, on the other hand, portrays this SO as a rather reckless move at odds with the effects-based approach supported in the EU case-law.

While Pablo’s observations are (as always) thoughtful, I disagree with his assessment for various reasons.

First, Pablo’s description of the facts focuses only on part of the case. According to him, the case “traces its origins back to the complaint brought by Spotify, which concerned the 30% commission Apple ask on sales taking place via its app store.” If that is your understanding of the case, then that pushes your assessment of the Commission’s SO wrongly down the path of either excessive pricing or a form of margin squeeze. Now, to Pablo’s defence, we are all just working off the short press statements at this stage and the quote of Commissioner Vestager that appears on the press release is somewhat misleading as it reduces the case to only one of its parts, the 30% commission charged by Apple. But the rest of the press release shows that the case is broader, its main component being the obligation imposed by Apple on developers of apps that sell digital goods or services to use its proprietary in-app purchase system (“IAP”) for the distribution of paid digital content.

As I have explained elsewhere, the mandatory use of IAP harms consumers in multiple ways. It, for instance, disintermediates app developers from their users, deprives them of the data they could use to improve their products and services, but it also deprives app developers from the innovation and tailor-made solutions that could be brought by providers of other in-app payment solutions.  Consumers clearly lose out from this situation – being unable to get a refund directly from the app developer or alter their subscription, and not benefiting from lower cost or higher quality payment solutions. The mandatory use of IAP also gives Apple perfect intelligence about the users an app has, including their name, credit card details, their location, their purchase history, etc. While access to this information is problematic in that it informs Apple as to when it might be profitable to develop its own app (often copying existing apps in the process), it is even more troublesome when Apple has that type of information over direct rivals. And, in any event, the charging of a hefty commission on rivals that has no relationship with costs can have anti-competitive effects.

Second, Pablo is in my view too quick in dismissing that in this case – although he suggests that this may be part of a broader trend – the Commission would ignore anti-competitive effects. The reason why the Commission tends to pursue narrow cases is precisely because it makes it easier to show (at least likely) effects, and I would be surprised if the notoriously risk-averse Commission Legal Service would have allowed a statement of objections to go through if it blatantly failed to address the issue of (likely) effects, hence I would first wait to read the decision of the Commission (if one is ever issued).

According to Pablo, the press release “suggests the Commission believes that it can establish an abuse of an exclusionary nature without showing that the practice is likely to have anticompetitive effects,” which would be incompatible with settled case law of the CJEU (he refers to judgments in Deutsche Telekom, TeliaSonera, Post Danmark, Intel, and MEO). Relatedly, he considers that an effects analysis would be challenging in the present case, since Spotify is doing well. Interestingly, Pablo argues that losing customers to the dominant undertaking (referred to as “some diversion to Apple Music” in this case) is not sufficient to show effects – he suggests that this is a mere competitive disadvantage.

The case law indeed requires showing at least potential anticompetitive effects – that should be uncontroversial. But beyond that, the case law of the CJEU on effects under Article 102 TFEU is less clear cut than Pablo suggests, with the Court using a variety of (not always clear) formulations, which are subject to interpretation. I do not find any support for the view that losing customers to the dominant undertaking as a result of the latter’s conduct cannot be an effect for the purposes of Article 102 TFEU. And I do not think that the case law can be interpreted as suggesting that anticompetitive effects should be equated with absolute “exclusion” (understood as the elimination of rivals), and if that were the case, the Commission should be commended for trying to move the needle as otherwise platform owners would be allowed to engage in a variety of tactics to impede the growth of rival apps, provided the latter were not eliminated.

For example, the effects standard in Deutsche Telekom (a margin squeeze case) does not appear that demanding. The Court held that the anticompetitive effect relates to the possible barriers which margin squeeze may create to the growth on the retail market of the services offered to end users (paragraph 252). It is sufficient if the margin squeeze is capable of making market entry of rivals “more difficult” (paragraph 253 – see also paragraph 254, referring to the margin squeeze making more difficult the penetration of competitors in the market concerned). These statements were repeated in TeliaSonera, where the Court also held in paragraph 64 that “the effect does not necessarily have to be concrete, and it is sufficient to demonstrate that there is an anti-competitive effect which may potentially exclude competitors who are at least as efficient as the dominant undertaking.”

As regards MEO (a ruling concerning discrimination within the meaning of Article 102(c) TFEU – and which may therefore not be generally applicable to other cases of abuse of dominance), the Court held that for discriminatory conduct to be abusive, it should tend to lead to a distortion of competition between the business partners of the dominant undertaking, there being no need to adduce proof of an actual, quantifiable deterioration in the competitive position of the business partners taken individually (citing British Airways). This does not seem very demanding a standard either.

More recent case law on Article 102 TFEU has not set the bar any higher for the Commission, at least in my view. In Generics, the Court for example reiterated that if the conduct of a dominant undertaking is to be found abusive, that presupposes that “that conduct was capable of restricting competition and, in particular, producing the alleged exclusionary effects” (citing TeliaSonera and Intel). Even more recently, in Slovak Telekom the Court held that practices whereby the dominant undertaking provides access to rivals but on unfair conditions, “can constitute a form of abuse where they are able to give rise to at least potentially anticompetitive effects, or exclusionary effects, on the markets concerned” (paragraphs 50-51).

When it comes to Apple Music, of course, critics may point out that Spotify is doing well. Besides the fact that this case is broader and not just about Spotify, even in the case of the latter, Apple’s restrictions may have impeded its growth to the detriment of consumers. Would that be captured by the prohibition in Article 102 TFEU? Assume, for example, a scenario where Platform A is great at attracting app developers and users, but mediocre at developing apps (I am not suggesting this is the case of Apple, this is a hypothetical). Platform A develops photo App X, which directly competes with photo App Y and App Z. Platform A imposes a variety of restrictions on App Y and App Z. App Y remains, however, the market leader as it is superior to App X, although – as for instance demonstrated by an econometric study – with a lower market share than it would have had, but for these restrictions which raise its costs. As for App Z, it does not do very well and comes as a distant third and eventually exits the market. Meanwhile, the market share of App X grows. Assume that this situation is not limited to photo apps, but can be observed across a variety of sectors.

Should the Commission ignore this type of scenario? Should it ignore that Platform A steals market share from a superior rival and impedes its ability to grow and innovate simply because it controls a bottleneck and can artificially support its own app by undermining rival apps? In my view, this would be a bad outcome. And what about the Court? Would a Commission decision in such a case withstand judicial scrutiny? I think the effects mentioned (stealing market share away from rivals on the basis of abusive conduct) would probably suffice.

Third, I am not sure that I agree with Pablo when he states that the Apple investigation is a further example of a trend whereby the Commission “is no longer reluctant to challenge firm’s business models.” Is that true and, if yes, is it a bad evolution? What about the Microsoft decision prohibiting Microsoft from tying its media player with Windows and forcing it to grant a licence for its interoperability information? Didn’t that challenge Microsoft’s business model? And what about Intel’s generous financial incentives to customers? But more generally, I do not see why the Commission should refrain from challenging a firm’s business model if it harms competition (and ultimately consumers)?

Finally, Pablo suggests that the Commission would not pay attention to the relevant counterfactual. To be honest, we do not know enough about the case to make that suggestion, and once again I would be surprised if the Commission was willing to do away with a central element of its competitive analysis (even though I should note that it is less clear whether the Court requires the use of counterfactuals in Article 102 TFEU cases). Interestingly, in the present case, even if deprived of its 30% commission (but, as mentioned above, the case it not only or even primarily about that commission, but more about the mandatory use of IAP), it is not clear that Apple would need to compensate elsewhere as suggested by Pablo. First, Apple already charges an annual $99 fee on all app developers, which is probably more than sufficient to cover the costs of developing and maintaining the App Store, plus a reasonable rate of return (note that former Apple executive Philip Shoemaker has estimated Apple’s costs for running the App Store are less than $100 million). And Apple also generates significant ad revenue – estimated at $ 2 billion for 2020 with a sharp increase expected in the years to come. Moreover, even in the absence of any fee at all, Apple would continue to maintain and innovate in the App Store as an iOS device without an App Store and thus a means to distribute third-party apps would be unattractive to consumers (and remember, Apple charges consumers as much as $1,000 for its iPhones). While Apple loves to emphasize the opportunities it creates for app developers, it ignores the major contribution that app developers have brought to its iOS devices, which without apps would be empty shells. The only reason why Apple is able to impose IAP on app developers selling digital goods and services and charge a hefty commission is because it holds a bottleneck, and deprives both app developers and iOS users of the benefits of competition.

I am grateful to Pablo for his stimulating post and look forward to continuing the conversation. Stay tuned!

Disclosure: I am the outside antitrust counsel of the Coalition for App Fairness (“CAF”) and various app developers. The above post represents my views only, and not those of the CAF or its members.

Photo by Medhat Dawoud on Unsplash

2 thoughts on “Further thoughts on the Commission’s Statement of Objections to Apple on App Store rules for music streaming providers

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