One of the most intriguing provisions of the Digital Markets Act (“DMA”) is Article 6(12), which provides that the designated gatekeeper shall apply “fair, reasonable, and non-discriminatory general conditions of access for business users to its software application stores, online search engines and online social networking services …” Thus, Article 6(12) only applies to three of the core platform services (“CPS”) listed in the DMA.
The fair, reasonable and non-discriminatory requirement (“FRAND”) requirement has a rich history, particularly in the field of intellectual property where holders of standard-essential patents (“SEPs”) are usually bound to license at FRAND terms. While the FRAND requirement makes sense as it is impossible to determine in advance the exact terms and conditions on which an SEP license should be signed, what FRAND means in practice has led to a fair amount of litigation with courts, in particular in the US and in the UK, using a variety of tools to determine what FRAND terms should look like.
In the case of the DMA, the FRAND requirement laid out at Article 6(12) is clarified in Recital 62, which inter alia provides that: “Pricing or other general access conditions should be considered unfair if they lead to an imbalance of rights and obligations imposed on business users or confer an advantage on the gatekeeper which is disproportionate to the service provided by the gatekeeper to business users or lead to a disadvantage for business users in providing the same or similar services as the gatekeeper.” Thus, the FRAND requirement does not only apply to pricing (e.g., commissions or fees), but also to other general conditions, which are considered unfair in three sets of circumstances, namely if they lead to
- imbalance of rights and obligations imposed on business users; or
- confer an advantage on the gatekeeper which is disproportionate to the service provided by the gatekeeper to business users; or
- lead to a disadvantage for business users in providing the same or similar services as the gatekeeper.
One area where business users have voiced their unhappiness with the pricing and other terms imposed by gatekeepers for access to their CPS is app stores. As has been recognized by competition authorities, mobile ecosystems are dominated by two parallel monopolists, i.e., Apple and Google. Apple has granted itself a monopoly of app distribution in that it does not allow other app stores than the Apple App Store and the direct downloading of apps from the web (so-called sideloading) is prohibited. Google allows third-party app stores and direct downloading of apps from the web, but it has adopted various tactics to undermine third-party app stores (whose market shares are very small) and made direct downloading difficult.
In short, both Apple and Google have a monopoly over app distribution, respectively on iOS and Android devices. In practice, this has allowed Apple and Google to impose terms and conditions that would not be sustainable in competitive markets, which several provisions of the DMA now seek to ban, such as Article 5(4) (prohibiting anti-steering provisions), Article 5(7) (prohibiting tying of app distribution with in-app payment systems), Article 6(4) (ending the prohibition of third-party app stores and sideloading), etc. These provisions should stimulate fair competition in mobile ecosystems.
One of the most vexing issues for app developers is the 30% commission (limited to 15% in some cases) Apple and Google charge to app developers whose apps sell digital goods and services. This includes news apps, gaming apps, streaming apps, and a range of others. What constitutes “digital goods and services” is left at the sole discretion of these two gatekeepers. As I have shown elsewhere, the distinction is often applied in an arbitrary manner with, for instance, Tinder having to pay the commission, while Uber does not pay any commission, while the two apps provides quasi-identical matchmaking services. This arbitrary distinction also means that in the case of Apple, 16% of the apps (those selling digital content) will have to pay a hefty commission, whereas all other apps will pay nothing, although they use the same app store services. While Apple and Google often refer to app developers criticizing their commissions as “rent seekers”, the use of this term is paradoxical when we know that Apple and Google respectively make around $85 billion and $42 billion from these commissions (without taking into considering additional revenues, such as search ads and developer fees).
The way Apple and Google have collected their 30% commission is by mandating app developers selling digital content to use their in-app payment solution, IAP in the case of Apple and GPB in the case of Google. With that system, Apple and Google would collect payments made by users and deduct their commission, then transferring the balance to app developers. Mandating the use of IAP or GPB will no longer be possible with Article 5(7), but the app developers’ experience in the Netherlands and Korea suggests that Apple and Google will still seek to collect a 26/27% commission (i.e., the full commission minus the cost of payment processing). This is where Article 6(12) and Recital 62 come in. There is indeed no question that the commissions charged by Apple and Google are:
- Unfair and unreasonable in that they are “disproportionate to the service provided by the gatekeeper to business users”. Clearly, running an app store does not cost $85 billion to Apple. As noted by the Competition and Markets Authority (“CMA”) in its mobile ecosystems report, the gross profit margin of the App Store was in the range of 75-100% for 2020. The same applies to a lesser extent to Google. The lack of proportionality is compounded by two additional reasons. First, the commissions fail to take into consideration the massive value that app developers bring to the iOS and Android ecosystems. But for the availability of popular apps, such as Tinder, Netflix, Spotify and the like, iOS and Android devices would not sell. Second, the lack of proportionality becomes even more manifest when we know that Apple and Google are now making billions in search ads that app developers often need to buy for users to discover their apps. If anything, these commissions reflect monopoly power.
- Discriminatory in that apps selling digital content which pay the 30% commission and app that selling physical goods and services which do not pay any commission use the same app store services, except for payment processing which Apple and Google consider worth a fee of 3 to 4%. Recital 62 provides a helpful benchmark: “prices charged or conditions imposed by the provider of the software application store for different related or similar services or to different types of end users.” The 26/27% price difference between apps selling digital content and those selling physical goods and services is impossible to justify, and therefore is in direct breach with the FRAND requirement encapsulated in Article 6(12).
One legitimate question is what the European Commission should do to ensure that the App Store and the Play Store commissions are in line with FRAND. First, it is not for the Commission to decide what the FRAND rate should be. It is indeed for Apple and Google to produce a compliance plan explaining how they intend to comply with Article 6(12). The ball is in their court. Second, a good starting point would be for these gatekeepers to end their discriminatory policies vis-à-vis apps selling digital content. To the extent all apps distributed through the App Store and the Play Store use the same app store services, the pricing structure should be similar for all. Indeed, there is no reason why a small news or game app should pay a hefty commission, while many large and profitable apps do not pay any commission.
One solution would be to bring the commission to zero. This could be justified for several reasons. First, as noted above, both Apple and Google derive huge benefits from the apps that are available on their ecosystem. iOS and Android devices are only commercially viable because they offer millions of apps that smartphone and tablet users enjoy. Second, the App Store and the Play Store would still be very profitable with a zero rate. In the first place, both gatekeepers charge developer fees ($99 for Apple and $25 for Google) and they have millions of developers. These fees represent an important source of revenue. Moreover, Apple and Google derive large amounts of revenue from search apps. For instance, Apple’s search ads revenues are expected to grow to $6 billion in 2025. That is many multiples of the cost of running the App Store.
Now, if the Commission considered that a zero-commission rate would not sufficiently reward Apple and Google (even considering their additional sources of revenue), the best approach would be to increase the developer fee in a way that reflects the consumption of app store services. For instance, it would make no sense for the Facebook, Google Search or Twitter apps – who get downloaded hundreds of millions of times every year to pay the same fee as small apps who get a few hundred downloads every year.
To be FRAND, fees should be consumption-based with some exceptions when necessary (e.g., for apps run by non-profits). Spreading the fees over a much larger base (than the 16% of apps that are currently charged a commission by Apple) would not only address the ND part of FRAND, but also its FR part as by spreading the app store “tax” on a much larger app user base, the rates charged could be materially lower than they currently are.
Thus, while Apple and Google are likely to make things difficult, compliance with Article 6(12) is quite straightforward. There is a strong argument to be made that these gatekeepers are sufficiently remunerated for their app stores even with a zero rate, but if this argument was not accepted, then the pricing structure should be modified so that all apps using app store services should contribute through increased developer fees, ideally modulated based on consumption patterns. That could be done on the basis of well accepted metrics, such as the number of monthly active users (“MAUs”) or downloads.
Other considerations
While the focus of this blog post has been on the compliance with FRAND of commissions charged by Apple and Google for app distribution, the FRAND principle also applies to online search engines and online social networking services. Although these services are typically offered for free, that does not mean that the conditions of access to these services are necessarily FRAND, especially in circumstances where they may derive greater benefits from their business users (e.g., access to content and data) than what they offer to these users.
