Context: In the previous article, games fray discussed the lawsuit by the United States Department of Justice against Apple and compared it to the situation in the EU with its Digital Markets Act (DMA).
What’s new: Today the European Commission announced non-compliance investigations under the DMA “into Alphabet’s rules on steering in Google Play and self-preferencing on Google Search, Apple’s rules on steering in the App Store and the choice screen for Safari and Meta’s “pay or consent model”. Furthermore, investigations are at an earlier stage, but could soon reach the same stage as the aforementioned ones, with respect to Amazon’s suspected self-preferencing and “Apple’s new fee structure and other terms and conditions for alternative app stores and distribution of apps from the web (sideloading).” This article focuses only on mobile app store topics.
Direct impact: “The Commission intends to conclude the proceedings opened today within 12 months,” says the press release. While the launch of these investigations was quick, the target date appears conservative. Any decision will be appealable to the EU General Court and from there to the European Court of Justice. No actual change in the marketplace is in sight. Apple and Google are confident of being able to defend their terms in court. They will likely make minor concessions this year. Given the limited scope of the investigations announced today and how difficult it will be to challenge financial terms under the DMA, games fray maintains its prediction that — in the absence of an impactful amendment to the DMA — alternative app stores won’t even come near a 5% market share (in terms of the number of app installs) within five years, and will more likely even stay below 1% in 10 years’ time.
Wider ramifications: Given that investigations are not decisions, and even any decisions resulting from this are appealable, today’s announcement by the EC is primarily a political signal. However, for Apple it comes at an inopportune time as it is also under enforcement pressure in the United States District Court for the Northern District of California with respect to its response to an anti-anti-steering injunction (March 23, 2024 games fray article). Judge Yvonne Gonzalez Rogers may take note of the fact that the EU Commission suspects a violation of a different legal framework (the DMA and the injunction under California Unfair Competition Law are distinguishable) by very similar rules that Apple imposes on app makers seeking to direct users to external purchasing options. What the district court and the appeals court in the U.S. see is that not only Epic and its amici, but also one of the world’s most reputable competition regulators, believe Apple’s rules make it practically impossible to benefit from a theoretical option to steer users to external purchasing alternatives. And whatever happens in the U.S. enforcement dispute may influence the EU investigation later in the year.
To answer the question in the headline, it’s
- politically a tidal change as it shows the European Commission has quickly identified Apple’s and Google’s intent to render the DMA useless, but
- legally a tempest in a teapot because even the realistic best-case scenario for complainants would fall far short of what is needed to open up the Android and iOS mobile app distribution markets.
Let’s conduct a realistic impact assessment:
The EC announced full-blown as well as preliminary investigations today. The distinction is important because preliminary investigation don’t necessarily result in full-blown ones, and even full-blown ones are just investigations, not decisions, much less decisions affirmed by a court of law.
- The full-blown app store investigations announced today are only about Apple’s and Google’s anti-steering rules. In that area, the difference between Apple’s and Google’s rules is only gradual, while there are fundamental differences between the two in other areas (as Google’s representatives at the DMA Enforcement Workshop on Thursday stressed repeatedly, undoubtedly alluding to Apple’s terms without mentioning the iPhone maker by name).
- The preliminary investigation of Apple’s fee structure and other terms and conditions for distribution through rival app stores and over the web (pejoratively called “sideloading” by Apple and Google) relates to the strategically far more important question. While preliminary investigations don’t necessarily result in full-blown investigations, games fray believes it is very likely that there will soon be a comprehensive inquiry into Apple’s fees and other app distribution terms.
So what can realistically happen?
In the anti-steering context, Apple and Google charge so much that it’s unattractive or even counterproductive for app makers to exercise their freedoms under the DMA. For alternative payment options, the costs to app makers are roughly the same as before (on low-price transactions, even worse). For external purchasing options, Apple’s rules make it clearly unprofitable, and Google’s terms seemingly create an opportunity but the app business is too short-lived for anyone to bet on users staying loyal to an app for more than two years (March 11, 2024 games fray article).
The problem for the EC in the anti-steering context is going to be the five-letter acronym FRAND. It’s easy to see that those terms don’t create a market opportunity for new purchasing or payment options. That still doesn’t answer the question of how much Apple and Google may charge. Apple and Google will be able to point to various examples of 30% commissions, and their referral terms are effectively the same (the discount is eaten up, and on low-price transactions often exceeded, by what services like Stripe charge). If a court of law is asked to establish a FRAND violation, it typically recognizes that FRAND is a range, not a point. The challenge for the EC will be to show that the most common app store commission (here, deducted by a few percentage points that don’t actually make it a better deal for developers and, by extension, consumers) is not in that range. The DMA explicitly allows Apple and Google to charge for access to customers.
Apple and Google will, at best, make minor adjustments to the financial terms. Apple may feel forced to be more permissive about the promotional messages used by app makers when they inform customers of other purchasing options.
Anti-steering is a secondary theater of war in the mobile app distribution context. What really matters is what terms the gatekeepers impose on alternative app stores and on apps that are distributed over the web. Google does not impose fees on rival app stores or direct installs from the web, but Apple does. However, Apple calls it a Core Technology Fee “that reflects the value Apple provides developers through ongoing investments in the tools, technologies, and services that enable them to build and share innovative apps with users around the world” as Apple describes it.
The fact that others (be it Google with respect to Android, Apple itself with respect to the Mac, or Microsoft with respect to Windows) don’t impose such a fee doesn’t legally bar Apple from doing so.
The CTF does raise at least one serious issue under the DMA, however: as long as Apple offers free distribution of apps without in-app purchasing via its own App Store (because developers can still just choose the old terms, which are just a percentage, thus zero if no IAP income is generated), rival app stores have no chance of competing on the distribution of free apps (or those with a low annual income per install).
That is a Raising Rivals’ Costs and discrimination issue.
In light of that obvious problem, games fray believes Apple will also come under a lot of pressure with respect to its fee structure. If that problem was addressed, it would still not mean that alternative app stores could get mass-market traction as Apple might still engage in a margin squeeze that makes it unattractive for app makers to distribute through alternative app stores. For the foreseeable future, the potential for alternative iOS app stores in the EU will be limited to
- apps that Apple itself declines to distribute via its App Store under its criteria (examples: adult content, smoking/vaping, political extremism, piracy),
- Fortnite (which Apple was happy to carry for many years until Epic Games launched its “Project Liberty” campaign in August 2020 and intentionally breached App Store rules it deemed unlawful, but which the courts in the U.S. upheld), and
- apps that Apple is prepared to distribute, but only on prohibitive terms (non-fungible token (NFT) transactions).
For everything else, app developers will not have an incentive to create their own app stores or use third-party app stores instead of simply getting the broadest possible distribution through Apple’s App Store. The only way to create an opportunity for alternative app stores would be to bar Apple from charging them anything.
2024 will be another year without effective competition in iOS app distribution in the EU, and no true solution is in sight even beyond this year. There will be noise, but the numbers will show that nothing really changes, except for Fortnite and such segments as adult content and NFT transactions.
The EU Commission has proved its determination, but this is far from a proof of concept for the DMA. Apple wants the DMA to fail, and won’t be worried in the slightest about today’s announcement by the EC.