The Interim Report of the CMA’s Market Study on Mobile Ecosystems :  A Great Piece of Work

On 14 December 2021, the CMA published the Interim Report of its Market Study on Mobile Ecosystems. This is a massive (445 pages + annexes) piece of work, which is – as always with the CMA – extremely well done. The purpose of this Interim Report is for the CMA to share the content of its preliminary analysis with stakeholders and open a consultation process. All those interested in making observations can do so by 7 February 2021.

At a time where competition cases become increasingly narrow, one of the great aspects of the Interim Report is that it takes a holistic view of mobile ecosystems and the competition problems associated with these ecosystems, where Apple and Google are in an “effective duopoly”.  The Interim Report also comes at a time where Apple’s App Store practices are subject to antitrust investigation or litigation in several countries (including the UK (by the CMA itself), the Netherlands and the U.S.), and are the object of a range of regulatory initiatives (including the EU Digital Markets Act, the U.S. Open App Markets Act and the Korean app store bill).

That being said, the CMA has drafted its Interim Report in a fair-minded way, contrasting the arguments made by Apple and Google, on the one hand, and those made by their critiques, on the other hand, before drawing some preliminary conclusions. I am very pleased to say that the Interim Report vindicates much of the analysis Dimitrios Katsifis and I made in a series of papers (see, e.g., here), in which we identified the wide range of problematic practices associated with the Apple App Store, and rebutted the traditional defences raised by Apple and its lawyers (see here).  

Before delving into the substance of the Interim Report it is important to note that the CMA is not inclined at this stage to make a “market investigation reference” as it considers that the “DMU – through a combination of the anticipated enforceable codes of conduct and pro-competitive interventions – will in principle be best placed to tackle the competition concerns identified by this market study to date.” While that may be true, one should not forget that the DMU does not have the power to use these tools at this stage and that the legislation that should provide the DMU with this power has not even been tabled in Parliament. Considering the sorry state of UK politics, that creates a significant risk that such enforceable codes of conduct and pro-competitive interventions will only be available several years from now or, in the worst-case scenario, never. That is why the CMA may wish to revisit its orientation not to make a market investigation reference by the time they issue their Final Report (due in June 2022).

The Interim Report points out that when consumers purchase a mobile phone, they effectively enter into one of two mobile “ecosystems”: one operated by Apple and powered by the iOS operating system (“OS”) and another operated by Google and powered by Google-compatible versions of the Android OS. As suppliers of the two key mobile OSs in the UK, Apple and Google can make decisions that can have significant implications for services and products accessed online. Apple and Google also control the key gateways through which users and content providers interact, namely, app stores and browsers. According to the CMA, the control exercised by Apple and Google over OSs, app stores and browsers makes it very difficult for another ecosystem to emerge. At the same time, Apple and Google can limit competition from third parties in various ways within their respective ecosystems.

Overall, the CMA found that there is weak competition within and between Apple and Google’s mobile ecosystems, leading to consumer harm. The CMA has identified that barriers to competition may:

  • hinder innovation as (i) Apple and Google may have reduced incentives to innovate; (ii) they may hold back innovative business models; and (iii) app developers may have reduced incentives to innovate as many are concerned that Apple and Google could use their informational advantage to copy their new products and services.
  • allow Apple and Google to charge prices (including for app store commissions) that are above a competitive rate (in this respect, the CMA’s analysis of Apple and Google’s profitability is eye-opening) and which, in most cases, will ultimately be borne by consumers.
  • prevent users from making effective choices within their ecosystems (e.g., due to the pre-installation or setting as default of certain apps or the determination of the way in which ranking in the app store search results takes place). The CMA observes that “there are a number of elements of Apple’s and Google’s mobile ecosystems where it appears that user choices are limited, potentially misleading, designed and presented in an unbalanced manner, or ultimately not respected.”
  • Apple and Google, acting in a quasi-regulatory capacity with respect to users’ security, privacy and online safety, may make decisions on behalf of consumers which may not be fully taken in their interests.   

The initial findings of the CMA which are important for app developers are the following:

There is lack of competition in the distribution of mobile apps.

  • The CMA found on the basis of an extremely detailed analysis that, contrary to what has been regularly suggested by Apple and its lawyers, “the App Store and the Play Store face a lack of competition from within and outside of their respective ecosystems as a method of delivering native apps to users.” That is an important finding to which other competition authorities investigating Apple will certainly pay attention.
  • Apple and Google are, therefore, able to dictate the terms that govern the rules of competition for apps on their devices and have discretion over the approval or rejection of apps. This has allowed Apple to block certain types of apps altogether (e.g., cloud gaming services). Furthermore, the app review process allows Apple and Google to advantage their own apps and services and leads to uncertainty and increased development costs for app developers.
  • Apple and Google can make substantial and growing profits from their app stores because of the imposition of their payment systems for certain in-app transactions for digital content consumed within the app and the related commission of close to 30% (as the 15% discounted rate has little impact on their revenues).
  • Finally, through the control of access to the App Store, Apple has introduced policies and terms, e.g., App Tracking Transparency, which may be detrimental for ad-funded apps. The CMA is concerned that “Apple may not be applying the same standards to itself as to third parties, and the design and implementation of the ATT prompt to users may be distorting consumer choices.” It is important to note that both the French and Polish competition authorities are investigating this issue.

Apple and Google can use their control over their respective mobile ecosystems to adversely impact competition between app developers.

  • There is a potential risk of self-preferencing in mobile ecosystems because Apple and Google have a “dual role”, in that “as well as operating the app stores within their respective ecosystems, they compete with app developers who use those app stores to reach consumers. This can create conflicts of interest for Apple and Google, with the possibility to use their control over their respective app stores – as well as their control over their respective operating systems and, in Apple’s case, devices – to give their own apps or services a competitive advantage over rivals.”
  • Apple and Google may distort competition between third parties in that “they may systematically advantage certain types of app, or apps that follow particular business models, creating an uneven ‘playing field’ which may result in harm to competition and consumers”. Some of their practices may more also be harmful to the ability of app developers to develop apps, compete, and innovate. Their market position may indeed allow them to “impose costs, set unfair terms and create significant disruption to the businesses of app developers”, hence deterring entry and innovation by developers, and ultimately result in higher prices, lower quality or less choice for consumers.
  • The Interim Report provides an illuminating analysis of the obligation placed on app developers that sell digital goods or services to use Apple or Google’s in app payment systems (“IAP” in the case of Apple and “GPB” in the case of Google). As the Interim Report notes, the mandatory use of IAP may have negative consequences for app developers and users as the former are disintermediated from the latter. The argument used by Apple in various competition proceedings is that the use of IAP is necessary as this is the only effective way to collect its commission. The CMA’s preliminary view is, however, that “there may be viable alternative methods for Apple and Google to collect a commission for their app stores, while also allowing developers to handle payments directly which do not give rise to the potential harms to competition” outlined elsewhere in the Report.

Based on the assessment it has carried out, the CMA believes that Apple and Google would meet the proposed conditions for designation as firms with “Strategic Market Status” for each of the main activities within their respective mobile ecosystems, i.e., the OS (and for Apple also the devices on which it is installed), the app store and the browser / browser engine.

The CMA has considered a variety of possible interventions that would address (i) the source of market power held by Apple and Google and which would include measures that may increase competition or choice in OSs and methods of app distribution, and (ii) harms to competition and consumers where market power is being exploited. The CMA will assess potential interventions in the second half of the market study. Such interventions may include, inter alia, requirements for Apple and Google to allow alternative in-app payment options, to carry out a fair and transparent app review process, to remove their anti-steering provision, to treat consistently their own apps and third-party apps for privacy purposes, to not unreasonably restrict third-party access to hardware and software features and to provide more transparency about their algorithms for ranking apps, as well as restrictions on the sharing and use of data or insights gained from the operation of the app stores or the app review process in the development of their own apps. The CMA has furthermore considered – and will further examine in the second half of the market study – the role of separation remedies, in the form of either data separation or operational separation.

In conclusion, the CMA has provisionally found that features of the mobile OS markets, the markets for app stores and app distribution, as well as the markets for browsers and browser engines could be restricting or distorting competition in the UK. In the second half of the market study, the CMA will further assess the competition concerns it has identified. It will lay out its conclusions and recommendations for interventions in the Final Report to be published by 14 June 2022.

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