The E.U. Antitrust Charges Against Apple Could Rewrite the App Store Model
The European Union antitrust regulator handed Spotify a major victory in its tussle against Apple, announcing that the company has been found to be in breach of competition law with regards to Apple Music, alleging the company distorted competition in the music streaming market by abusing its dominant position as a "gatekeeper" for distributing music streaming apps through its App Store. The charges relate to a two-year-old antitrust dispute initiated by rival music streaming service Spotify.
"Our preliminary finding is that Apple is a gatekeeper to users of iPhones and iPads via the App Store. With Apple Music, Apple also competes with music streaming providers," said Margrethe Vestager, executive vice-president overseeing competition policy for the European Commission, in a statement of objections issued on Friday. "By setting strict rules on the App store that disadvantage competing music streaming services, Apple deprives users of cheaper music streaming choices and distorts competition. This is done by charging high commission fees on each transaction in the App store for rivals and by forbidding them from informing their customers of alternative subscription options."
In 2019, Apple found itself entangled in regulatory hot waters after Spotify filed a complaint with the European Commission, alleging that Apple enforces App Store rules that "purposely limit choice and stifle innovation at the expense of the user experience," accusing the company of "acting as both a player and referee to deliberately disadvantage other app developers." The Commission, the E.U.s executive arm, commenced an investigation into the App Store (along with Apple Pay) in June 2020.
In siding with the Swedish music streaming service, the findings mark the first time the European Union has levelled formal anti-competitive charges against Apple. The charges also come a week before Apple's face off with Epic Games in a U.S. antitrust trial following a lawsuit by the Fortnite creator alleging that Apple has abused its dominance in the market for mobile apps.
Central to this entire case is the mandatory use of Apple's own in-app purchase mechanism imposed on third-party (music streaming) app developers to distribute their apps via the App Store, a practice that's now come to be called the "Apple Tax" under which the iPhone maker levies a 30% commission — 15% from the second year for subscription services and for "small" developers making less than US$ 1 million a year through the marketplace, with the higher cut kicking in once that threshold has been breached — on all transactions, leading Spotify to pass this fee on to end users by raising the subscription prices in iOS from US$ 9.99 to US$ 12.99 per month for every sign-up made through the app on the platform.
In contrast, Apple, which debuted its own Apple Music streaming service in 2015, doesn't require Apple device owners to pay the extra fee for their subscriptions.
Apple's App Store guidelines explicitly state that "Apps and their metadata may not include buttons, external links, or other calls to action that direct customers to purchasing mechanisms other than in-app purchase." While the company has argued that its App Store does not constitute a monopoly and that these restrictions, including having a single well-vetted app portal, are necessary to offer a "safe, convenient experience," the truth is that Apple is a monopoly, albeit of a different kind, when it comes to market for iOS apps.
What's more, Apple's complex set of rules have allowed it to make exceptions to suit its own needs, permitting apps in the "reader" category like Amazon and Netflix to sell subscriptions and content to customers outside of the app without having to offer a corresponding in-app purchase.
"There are strong dependencies between Apple and the IT-Giants," the developers of iA Writer said last September. "Amazon gets a special deal, Netflix, Spotify, and similar 'Reader' apps have found a backdoor to pay less. Google pays the Apple tax via Safari Settings. Uber and Airbnb get away without paying anything."
"Apple needs Instagram, Amazon, Uber, and Google Maps," they added. "A more convincing reason why the top apps do not pay taxes is that Apple needs them as much as they need Apple. The iPhone without Instagram is like Instagram without iPhone. In spite of Apple's Championship for privacy and Facebook's championship for destroying privacy, the relationship between Instagram and Apple is a perfect symbiosis. An iPhone without YouTube? Possible, but for some exactly not as much fun. An iPhone without Facebook and Messenger? The iPhone would be a better place without them, just as the world would be a better place without Facebook, but, right now, Apple still needs Facebook just as Facebook needs Apple."
It's these "anti-steering provisions" that's proven so contentious that several companies have pitched in support of Spotify's claim over the past few months, counting Epic Games, Match Group, Telegram, Rakuten Kobo, Basecamp, and ProtonMail, among others, with some of them forming a "Coalition for App Fairness" to create a level playing field and "advocate for freedom of choice and fair competition across the app ecosystem."
Specifically, the non-profit group contends the 30% Apple Tax is unfair when viewed in light of apps that directly compete with those developed by Apple, "driving up their prices and putting them at a distinct competitive disadvantage." Indeed, the Commission said that Apple's rules manipulated the music streaming services market by increasing the costs of competing music streaming apps, in turn resulting in higher prices for consumers for their in-app music subscriptions on iOS devices.
If Apple's conduct is proven, the company would be in infringement of E.U. rules that prohibit the abuse of a dominant market position, in addition to facing fines of up to 10% of its annual revenue. It's worth noting that Apple is also under scrutiny from the U.K. Competition and Markets Authority (CMA), which launched a probe into its practice in March in the wake of complaints that its terms and conditions for app developers are unfair and anti-competitive.
It's not just Europe alone. The company has also got caught in the crosshairs of U.S. antitrust investigations into online marketplaces, which found Cupertino of exerting monopoly power in the mobile app store market by controlling the iOS mobile operating system, thereby enabling it to have the ultimate authority on all software distribution to iOS devices.
"Apple has maintained its dominance due to the presence of network effects, high barriers to entry, and high switching costs in the mobile operating system market," the House Antitrust Subcommittee noted in a report titled "Investigation of Competition in Digital Markets" last year.
Likewise, the Australian Competition and Consumer Commission (ACCC) warned both Apple and Google of having "significant market power" in the distribution of mobile apps, adding "Apple and Google don't only run the app marketplaces, they also compete within them with their own apps. They have the ability and incentive to promote their own apps over others, and they control the terms that their competitors must comply with to gain access to their stores."
In a statement to Reuters, Apple said "Spotify has become the largest music subscription service in the world, and we're proud for the role we played in that. Spotify does not pay Apple any commission on over 99% of their subscribers, and only pays a 15% commission on those remaining subscribers that they acquired through the App Store. At the core of this case is Spotify's demand they should be able to advertise alternative deals on their iOS app, a practice that no store in the world allows. Once again, they want all the benefits of the App Store but don't think they should have to pay anything for that. The Commission's argument on Spotify's behalf is the opposite of fair competition."
Apple isn't the first company to be hit with antitrust charges in the latest regulatory crackdown. In November, the European Commission said it had preliminarily established that Amazon "has breached E.U. antitrust rules by distorting competition in online retail markets" and that "Amazon systematically rel[ies] on non-public business data of independent sellers who sell on its marketplace, to the benefit of Amazon's own retail business, which directly competes with those third party sellers."
"Our preliminary finding is that Apple is a gatekeeper to users of iPhones and iPads via the App Store. With Apple Music, Apple also competes with music streaming providers," said Margrethe Vestager, executive vice-president overseeing competition policy for the European Commission, in a statement of objections issued on Friday. "By setting strict rules on the App store that disadvantage competing music streaming services, Apple deprives users of cheaper music streaming choices and distorts competition. This is done by charging high commission fees on each transaction in the App store for rivals and by forbidding them from informing their customers of alternative subscription options."
In 2019, Apple found itself entangled in regulatory hot waters after Spotify filed a complaint with the European Commission, alleging that Apple enforces App Store rules that "purposely limit choice and stifle innovation at the expense of the user experience," accusing the company of "acting as both a player and referee to deliberately disadvantage other app developers." The Commission, the E.U.s executive arm, commenced an investigation into the App Store (along with Apple Pay) in June 2020.
In siding with the Swedish music streaming service, the findings mark the first time the European Union has levelled formal anti-competitive charges against Apple. The charges also come a week before Apple's face off with Epic Games in a U.S. antitrust trial following a lawsuit by the Fortnite creator alleging that Apple has abused its dominance in the market for mobile apps.
Central to this entire case is the mandatory use of Apple's own in-app purchase mechanism imposed on third-party (music streaming) app developers to distribute their apps via the App Store, a practice that's now come to be called the "Apple Tax" under which the iPhone maker levies a 30% commission — 15% from the second year for subscription services and for "small" developers making less than US$ 1 million a year through the marketplace, with the higher cut kicking in once that threshold has been breached — on all transactions, leading Spotify to pass this fee on to end users by raising the subscription prices in iOS from US$ 9.99 to US$ 12.99 per month for every sign-up made through the app on the platform.
In contrast, Apple, which debuted its own Apple Music streaming service in 2015, doesn't require Apple device owners to pay the extra fee for their subscriptions.
Apple's App Store guidelines explicitly state that "Apps and their metadata may not include buttons, external links, or other calls to action that direct customers to purchasing mechanisms other than in-app purchase." While the company has argued that its App Store does not constitute a monopoly and that these restrictions, including having a single well-vetted app portal, are necessary to offer a "safe, convenient experience," the truth is that Apple is a monopoly, albeit of a different kind, when it comes to market for iOS apps.
What's more, Apple's complex set of rules have allowed it to make exceptions to suit its own needs, permitting apps in the "reader" category like Amazon and Netflix to sell subscriptions and content to customers outside of the app without having to offer a corresponding in-app purchase.
"There are strong dependencies between Apple and the IT-Giants," the developers of iA Writer said last September. "Amazon gets a special deal, Netflix, Spotify, and similar 'Reader' apps have found a backdoor to pay less. Google pays the Apple tax via Safari Settings. Uber and Airbnb get away without paying anything."
"Apple needs Instagram, Amazon, Uber, and Google Maps," they added. "A more convincing reason why the top apps do not pay taxes is that Apple needs them as much as they need Apple. The iPhone without Instagram is like Instagram without iPhone. In spite of Apple's Championship for privacy and Facebook's championship for destroying privacy, the relationship between Instagram and Apple is a perfect symbiosis. An iPhone without YouTube? Possible, but for some exactly not as much fun. An iPhone without Facebook and Messenger? The iPhone would be a better place without them, just as the world would be a better place without Facebook, but, right now, Apple still needs Facebook just as Facebook needs Apple."
It's these "anti-steering provisions" that's proven so contentious that several companies have pitched in support of Spotify's claim over the past few months, counting Epic Games, Match Group, Telegram, Rakuten Kobo, Basecamp, and ProtonMail, among others, with some of them forming a "Coalition for App Fairness" to create a level playing field and "advocate for freedom of choice and fair competition across the app ecosystem."
Specifically, the non-profit group contends the 30% Apple Tax is unfair when viewed in light of apps that directly compete with those developed by Apple, "driving up their prices and putting them at a distinct competitive disadvantage." Indeed, the Commission said that Apple's rules manipulated the music streaming services market by increasing the costs of competing music streaming apps, in turn resulting in higher prices for consumers for their in-app music subscriptions on iOS devices.
If Apple's conduct is proven, the company would be in infringement of E.U. rules that prohibit the abuse of a dominant market position, in addition to facing fines of up to 10% of its annual revenue. It's worth noting that Apple is also under scrutiny from the U.K. Competition and Markets Authority (CMA), which launched a probe into its practice in March in the wake of complaints that its terms and conditions for app developers are unfair and anti-competitive.
It's not just Europe alone. The company has also got caught in the crosshairs of U.S. antitrust investigations into online marketplaces, which found Cupertino of exerting monopoly power in the mobile app store market by controlling the iOS mobile operating system, thereby enabling it to have the ultimate authority on all software distribution to iOS devices.
"Apple has maintained its dominance due to the presence of network effects, high barriers to entry, and high switching costs in the mobile operating system market," the House Antitrust Subcommittee noted in a report titled "Investigation of Competition in Digital Markets" last year.
Likewise, the Australian Competition and Consumer Commission (ACCC) warned both Apple and Google of having "significant market power" in the distribution of mobile apps, adding "Apple and Google don't only run the app marketplaces, they also compete within them with their own apps. They have the ability and incentive to promote their own apps over others, and they control the terms that their competitors must comply with to gain access to their stores."
In a statement to Reuters, Apple said "Spotify has become the largest music subscription service in the world, and we're proud for the role we played in that. Spotify does not pay Apple any commission on over 99% of their subscribers, and only pays a 15% commission on those remaining subscribers that they acquired through the App Store. At the core of this case is Spotify's demand they should be able to advertise alternative deals on their iOS app, a practice that no store in the world allows. Once again, they want all the benefits of the App Store but don't think they should have to pay anything for that. The Commission's argument on Spotify's behalf is the opposite of fair competition."
Apple isn't the first company to be hit with antitrust charges in the latest regulatory crackdown. In November, the European Commission said it had preliminarily established that Amazon "has breached E.U. antitrust rules by distorting competition in online retail markets" and that "Amazon systematically rel[ies] on non-public business data of independent sellers who sell on its marketplace, to the benefit of Amazon's own retail business, which directly competes with those third party sellers."
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