Apple in the EU’s crosshairs: What next for the App Store?

Apple in the EU’s crosshairs: What next for the App Store?

US tech giant Apple is coming under increasing pressure in Brussels after the European Commission recently charged the firm with abusing its dominant position in the music-streaming market, to the detriment of smaller developers seeking to compete on a level playing field.

While the Commission’s gripes in this particular case centre on the app market for music streaming services, the move is likely to open up a wider debate on the conditions imposed on developers for entry onto the App Store.

The EU executive’s charge sheet against Apple homes in on the obligation for music-streaming developers to use the company’s in-app purchase system (IAP) when distributing their service subscriptions. Here, the company levies a 30% commission on all subscriptions taken out via the App Store, a cost that EU antitrust regulators say is eventually passed onto the consumer.

Moreover, the Commission claims that Apple’s alleged ‘anti-steering’ practices obstruct the ability of developers to inform their customers of cheaper purchasing alternatives made away from the App Store.

Apple has now been tasked with responding to the Commission’s findings, but if found guilty of the charges, it could be hit with fines of up to 10% of its global annual turnover.

The Commission’s recent announcement is a (preliminary) win for Spotify, who first raised the complaint with Brussels two years ago. Responding to the announcement, the Swedish firm’s Head of Global Affairs and Chief Legal Officer Horacio Gutierrez called the Commission’s move a ‘crucial step’ towards ensuring a level playing field for app developers.

A statement from lobby group Coalition for App Fairness called the Commission’s announcement a positive sign in attempting to prevent “monopolistic gatekeepers from controlling consumer access, self-preferencing, and charging exorbitant fees.”

Following criticism in the past, in 2016 Apple decided to revise developer levies from 30% to 15%, for purchases from users who re-subscribed to services. In 2020 the company also introduced new rules that would allow developers turning over $1 million or less annually to be granted an advantageous commission rate of 15%.

And while this is the first charge the Commission has levelled at Apple, it is far from the only case in which the App Store has come under the antitrust spotlight, as there is growing convergence worldwide on the risks to fairness in the online economy posed by the App Store’s conditions.

Speaking to reporters on the day of the announcement (April 30) the Commission’s Executive Vice-President for Digital, Margrethe Vestager, said that it would not be “the last case when it comes to the App store.”

The App store is also being investigated by the Commission for similarly unfair terms and conditions imposed on e-book and audiobook distributors, and a broader probe into the fairness of Apple pay is also being conducted.

Elsewhere in Europe, Apple’s commission on purchases made through the App Store has also been a source of ire for publishing groups. In October last year, the French Alliance de la Presse d’Information Générale (APIG) wrote to Apple Chief Tim Cook, complaining of the ‘excessively high’ 30% commission rate on app subscriptions for news services.

Apple Vs Epic draws attention to the App Store

Stateside, the App Store is also embroiled in a legal dispute with creator of online video game Fortnite, Epic Games, after the latter brought a lawsuit against Apple for its high commission charges as well as the mandatory requirement that distributions for apps must take place on Apple’s own platform.

Epic found itself in Apple’s crosshairs after the video games firm decided to implement its own in-app payment systems into Fortnite, effectively bypassing Apple’s own mechanism, and avoiding the high commission levied on purchases made through the app store.

As a result, Epic was kicked off the App store, but appealed the decision and attempted to sue Apple as a result.

Last week as part of the ongoing trial in California, Apple found itself on the backfoot with App Store executive Matt Fischer being asked to respond to company presentations and emails that seemed to suggest the App store had outperformed all expectations, with late co-founder Steve Jobs having said that the company didn’t expect the App store to be a “big profit generator.”

Moreover, evidence presented in the case has also suggested that the company had previously considered the option of cutting app store fees as far back as 2011, with correspondences between Apple executives Phil Schiller and Eddy Cue revealing that the 70/30 split would not remain “unchanged forever.”

Epic’s appeal against Apple’s conditions is not only concentrated to the US. In February this year, the company announced that it had raised its concerns with the European Commission, and concurrent investigations are also underway in Australia and the UK.

The UK’s Competition and Markets Authority (CMA) said in March that it had launched a probe, with Andrea Coscelli, Chief Executive of the CMA saying that the accusations that Apple imposes unfair terms or restricts competition “warrant careful scrutiny” by the authorities.

Further afield, Russia’s Federal Antimonopoly Service (FAS) in April levied a €10 million fine against Apple for the alleged preferencing of its own applications over those belong to third-parties on its iOS operating system, after a decision last year on a case brought by cybersecurity firm Kaspersky, following Apple’s rejection of one of their own apps for use on the firm’s operating system.

EU regulatory space: P2B and DMA

The EU has in the past attempted to foster fairness in the operation of online app stores. Such services come under the scope of the Platform-to-Business regulation, adopted in 2019, which attempts to increase transparency in the agreements platforms have with business clients.

The most relevant development in this context is the obligation for app stores to disclose the main parameters determining the ranking of services on their platforms. Under these rules, Apple effectively has to communicate to a developer its methods for ranking apps on the App store when entering into an agreement.

Meanwhile, the Commission’s Digital Markets Act, presented in mid-December last year, introduces a series of prohibitions on practices by so-called ‘gatekeeper platforms’ that could damage fairness and contestability on online markets. Fines for violations of the prohibitions, which include certain data use activities and self-preferencing practices, have been set at a maximum of 10% of a firm’s worldwide annual turnover.

And as part of the ban on certain self-preferencing activities, the Commission is attempting to, amongst other things, clamp down on unfair ranking of third-party services in app stores, so that no longer can a gatekeeper ‘show their own services more visibly than their rivals,’ according to the EU’s Vestager.

There is a growing consensus that the Commission’s recent statement of objection against Apple’s app store practices could be dealt with more quickly as part of the DMA, when it is eventually adopted - potentially next year, according to Vestager.

Moreover, it’s important to note that the DMA also prevents gatekeepers from obliging business customers to use ‘ancillary services,’ such as the App Store’s in-app- payments system. Adopted as is, the regulation would therefore no longer force app developers to sell subscriptions through Apple’s payment mechanism, although the company would still be free to charge the commission rates that it deems fit.

Green MEP Rasmus Andresen, shadow rapporteur on Parliament’s text on the DMA in the Industry committee, said that while the antitrust case against the App Store is welcome, a much more rapid approach is required.

“We share the arguments of companies like Spotify or Epic Games,” he said in a statement, adding however that “the past has shown that we cannot exclusively rely on antitrust cases.”

“We need clear provisions in the Digital Markets Act that enable fair competition from the start and put the brakes on the dominance of the large digital corporations.”

However, there is the fear that the DMA could have unintended consequences for smaller firms. A position paper from app developer group The App Association noted that as part of a potential ‘multiplication’ of app stores in the digital economy that may result from the regulation, “developers may find themselves in a position where they pay more money to less trustworthy sources that split the consumer base.”

It remains to be seen whether or not Apple’s high commissions on developer sales for the App Store has any future. However, with more and more global competition authorities raising concerns, legal proceedings being launched, and an increased attention placed on the contestability of digital markets, the company is likely to be forced to create a fairer environment for developers looking to make a breakthrough on the App Store.

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