The Apple App Store and Market Power
Under US antitrust law, some practices are obviously bad and are considered “per se” unlawful (such as price-fixing and bid-rigging) while others are debatable and require a “rule of reason” examination to determine whether the action was permissible or harmful. Actions that fall in this “rule of reason” camp include mergers or dealings with competitors.
For the last half a decade or so, the consumer welfare standard has been one of the key guideposts used in antitrust in these rules of reason practices. Under the consumer welfare standard, an action is illegal only in that a firm uses its market power such that it leads to higher prices for consumers or lower quality products.
While there has been a lot of discussion about whether focusing on prices born by consumers is the right standard in today’s age amidst network effects, it is interesting that under this standard, one of the big tech companies’ actions, in particular, stand out: Apple.
Tim Cook has been quick to point out Apple does not have a monopoly position in the smartphone market, where they only have a 27% market share.
“Apple does not have a dominant market share in any market where we do business. The smartphone market is fiercely competitive, and companies like Samsung, LG, Huawei, and Google have built very successful smartphone businesses offering different approaches.”
But its not the smartphone market that’s the cause for concern, its the App Store.
Tim Cook describes the motivation for and origins of the app store as such:
“We created the App Store in 2008 as a feature of the iPhone. Launching with a little more than 500 apps, it was our ambitious attempt to drastically expand the features and customizability of every user’s device. We wanted to create a safe and trusted place for users to discover apps — and a means of providing a secure and supportive way for developers to develop, test and distribute apps to iPhone users globally.”
Today the App Store has over 1.7M apps and is essentially a bundle of services. For consumers, it most importantly provides curation, safety, and convenience. Consumers know that apps have been in some level vetted by Apple and are unlikely to brick your phone or steal your data. They also can easily browse through installed and available apps and cancel subscriptions from one place.
For developers, the app store provides for distribution and a way to reach these billions of devices. In addition, through in-app purchases, it allows developers to monetize their applications and accept payments.
The App Store provides a valuable service and one which I believe Apple should have full ability to charge for. I also believe they should be able to charge whatever they want to charge and if they believe their work justifies 30% or 15% for subscriptions then so be it.
After all, if its too expensive to justify the cost, developers, and consumers will end up using an alternative, right?
Except that they can’t use an alternative today.
Developers have no choice but to use the App Store and Apple’s in-app payments system. Today, there are over one billion iOS devices, and companies cannot really afford to not reach these devices. And the only way to reach these billion devices is to be on the App Store. And the only way for an app to accept in-app purchases from these devices is through Apple, which requires giving up that 30% cut even though alternative payment systems might be under 5%. Note that developers are paying for more than payments, but some might believe they can generate their own demand and downloads and so all they really need is the ability to be in the store and accept payments, which they can accomplish a lot cheaper.
In the seminal tech antitrust case put forward by the DOJ, Microsoft was judged to leverage their monopoly in the OS market to gain an advantage in the browser market, in a way that stifled competition and harmed consumers. One might make a similar argument against Apple: Apple is leveraging the power they have accumulated by aggregating a billion consumers in the smartphone market to essentially ensure they then have a monopoly when it comes to reaching these consumers via apps. However, there is a critical exception: Microsoft had a monopoly in the OS market but Apple doesn’t in the Smartphone market (at least not under traditional measures of market share but perhaps if you consider profit share).
But that doesn’t mean that Apple doesn’t now have a monopoly in the app distribution market, which is what Epic Games is arguing. Yesterday, Epic tried to bypass both the Apple and Google App Stores and offer the ability for consumers to pay it directly, as in the screenshot below.
What was interesting about their approach is that it brings to light the potential consumer welfare argument against Apple. Consumers are bearing higher prices because developers and consumers have no alternative but to use Apple’s in-app purchases.
Apple and Google quickly took down Fortnite for violating their respective Store’s TOS, to which Epic responded by filing a lawsuit against Apple and Google. They pointed out that Apple does have a monopoly: in the iOS in-app distribution market and the payment processing market.
“Apple’s removal of Fortnite is yet another example of Apple flexing its enormous power in order to impose unreasonable restraints and unlawfully maintain its 100 percent monopoly over the iOS in-app payment processing market,” said an Epic Games representative.
So where do we go from here?
Epic isn’t the first major developer to have a go at Apple, with Spotify suing Apple last year for the same reason. So could this pressure cause Apple to reduce their cut? I think it’s unlikely. Apple’s services revenue (which includes the App store but also Apple Music and Apple Care and digital content purchases such as music and movies) is an increasingly important part of their business and brought in $13.35B last year and is growing at close to 20% a year. It’s also an important part of their story with investors going forward, and so reducing their take rate will be tough.
But regulation could obviously be a bad outcome and so what other options does Apple have if it chooses to do something? I think the best option for Apple might be to allow for an alternative mechanism for the distribution of apps, which don’t have the same restrictions around the use of Apple’s in-app payments.
Tim Cook in his statement talked about how the App Store was better than the options prevailing at the time: brick and mortar stores and physical CDs which had limited reach and were expensive. Except, he left one option out - the open distribution model on the web. There is an app store on the Mac, but that’s not the only place one can download software for the Mac. Consumers have the option of downloading apps directly from developers’ websites or in alternative stores as well. Perhaps iOS needs the same thing, even if it might run a bit counter to Apple’s general design philosophy of a tightly controlled system.
I haven’t mentioned Google much, and that’s because I feel like Epic’s argument against Google is less strong even though Google’s Play Store does charge similar rates to Apple’s. And the reason is that Google does provide this alternative approach: developers aren’t required to use its Store and consumers can sideload apps onto their phones (although the experience is a bit clunky) and there are even alternative stores aside from the Google Play Store. Google also does allow developers to use their own payment systems in some cases even when using the Google Play Store.
I think Apple should be able to charge 30% if they believe that’s the value they provide, as long as developers and consumers can vote with their feet and get apps a different way, which today they can’t.
In closing, here is Epic Games’ commercial aimed at Apple, which was inspired by Apple’s commercial in 1984 aimed at IBM. As the adage goes, you either die a hero or live long enough to see yourself become the villain.
Thanks for reading! Worth reiterating given the topic: I am not a lawyer and these thoughts and opinions are strictly my own.