Context: Today is the day after the EU Commission’s decision in the Spotify case and the day before the deadline for meeting the gatekeeper obligations under the EU’s Digital Markets Act. And Epic’s contempt motion in the U.S. may also be coming shortly. The overall landscape concerning those three matters was discussed in yesterday’s games fray article.
What’s new: After looking at the chessboard(s) from the perspective of Apple’s critics, games fray complements that analysis with this look at why Apple is presumably doing what it is doing (and, especially, why it is not doing what it is not doing).
Direct impact & wider ramifications: This does not mean to rationalize Apple’s walled-garden philosophy and heavyhandedness. App Store critics of all sizes must be aware of what drives Apple’s dogged defense and makes it so resilient. Policy makers and private-sector stakeholders have too often brought butter knives to a high-stakes gunfight, or overestimated their positions and pieces on the chessboard. Complainants have also made it easy for Apple to “divide and defend” as each pursued their own objectives in ways that were not strategically complementary, but isolated and weakened each of them to the detriment of the common cause.
The first clue of where to look for explanations is provided by the following Forbes headline:
“73%: This 1 Number Shows Why Apple’s Future Is In Services Not Devices”
For its first fiscal quarter of 2024 (the first calendar quarter of 2024 obviously isn’t even over yet), Apple reported record “Services” revenue of $23.12 billion versus just $6.3 billion in cost, representing a 73% gross margin as compared to its device business (which is also by far the most profitable in the industry) with a 40% margin.
The term “Services” is a euphemism because it’s the so-called app tax more so than offerings like Apple Music. The difference between a genuine “service” and the app tax is that in the former case, customers have choice and elect to pay for something they deem valuable, while in the latter case app developers have no choice as Apple controls access to a high percentage of the world’s richest billion or two billion people.
But the App Store does a lot more for the “Services” business than just inflate its sales and its margins. It also gives Apple control over how users discover apps (especially since Apple destroyed, through its App Tracking Transparency (ATT) program, the advertising business that previously existed on iOS) and enables Apple to impose all sorts of rules, typically claiming security and/or privacy reasons, that limit the freedom of other providers. The latter is what Spotify’s CEO Daniel Ek also explained in a video yesterday, where he accepted that Apple would also compete in the music streaming business but complained about (in other words, not Mr. Ek’s) a non-level playing field where one market actor can “cheat” (in gamers’ lingo) or put a thumb on the scales. Some call it self-preferencing, a term that is sometimes more and sometimes less appropriate because even if Apple doesn’t follow a “rules for thee, not for me” approach, it can still simply define the rules in such a way that it gets to play out its strength. In that case, others could theoretically, but cannot practically, leverage the rules for their purposes.
If alternative app stores were allowed to effectively compete and also to define a lot of app rules themselves (as opposed to all apps being submitted, as Apple wants, to its notarization process, which among other things reinforces the ATT policy), and if those alternative app stores became a major competitive force, things would change. Apple might then have negative growth (ceding market share) in the app distribution context, its margins would shrink from a supra-competitive app tax to a competitive one, app discovery would diversify and Apple’s ability to tilt the playing field would be limited to its own App store.
So we already have four reasons for why Apple is doing what it’s doing:
- growth
- margins
- control over app discovery
- ability to tilt the playing field
This is not the end of this article. There are other important factors to consider. But either one of the first two reasons would be self-sufficient in its own right for Apple to just think to itself “regulators be damned” and pick a fight. Coming from the assumption that any major acquisition by Apple (say, a merger with Disney) would face stiff regulatory resistance anyway, Apple doesn’t appear to be acquisitive anymore. Even the relatively small Shazam deal faced a degree of scrutiny that a smaller acquirer wouldn’t have had to deal with. Apple has a clear priority and it’s the App Store.
Here you have the world’s richest company fighting for its biggest growth opportunity (where the third and fourth reason stated above come into play) and its highest-margin business. Like many others, games fray believes that competition is needed, but unlike some of them, games fray is not prepared to take butter knives seriously when Apple brings out the big guns.
Comparing companies to countries (though politicians have done so in the Big Tech context more than once) is difficult, and some historic comparisons are simply not deemed acceptable. Without equating the people at Apple to animals, we may draw an analogy to the animal realm. There are many kinds of animals that will defend their turf and their ability to reproduce tooth and nail. A sci-fi video game analogy would be the Zerg in Starcraft, an organic and animalic species with “overlords” (that term makes a lot of sense in the Apple context). The Zerg are determined to expand endlessly, and reproduce quickly. Once you attack even just at the periphery of a Zerg base in order to slow down its ever-expanding land grab, you’ll need superior weaponry to achieve your objective or you’ll be overpowered.
None of this means that Apple’s arguments are correct or that its conduct is acceptable. But it has serious implications for what legal and political strategy will work. The Zerg from Starcraft are unreceptive to diplomacy. The only language they “understand” is when you overcome their resilience, but that takes a lot.
In yesterday’s video, Spotify’s CEO was far from triumphant. He felt he had a diplomatic obligation in his own company’s interest to thank the EC for what is actually too little, too late. He certainly didn’t want it to sound like Apple had been cleared of wrongdoing. With a lot of people just focusing on the fine (not even understanding that the bulk of it was even unrelated to the issue at hand and justified by the EC as a general deterrent of bad behavior), it is some publicity that Apple doesn’t like. But for reasons including but not limited to the four stated further above, that’s a publicity price that Apple has to pay and it knows that its PR machinery can still maintain a reputation where consumers love Apple (partly for the right reasons and partly for the wrong ones) and follow it religiously. They have a captive audience. And they have a lot of power and money to influence opinion.
Even though those four reasons would be collectively more than sufficient to lead Apple to do what it’s doing, there’s more to consider in order to really understand the situation.
As games fray explained in the DMA context, Apple knows a lot more about how FRAND works in practice than the ones challenging it. No one knows more about it first-hand than Apple. Knowing that the end game is always going to be a determination of commercial terms (not a ruling that certain behavior is unacceptable), Apple’s calculus is based on a very low risk of not being able to get better terms by defending itself than by making concessions to regulators or stakeholders.
If Apple’s critics want to change that, they need more than legislation, regulatory rulings and judicial decisions that, with or without mentioning FRAND, effectively relegate the most important part (though even the problem of quantifying FRAND is far from the only one to be solved) to subsequent proceedings without putting powerful chess pieces on the board and arranging them in a way that would have Apple concerned.
In the chess analogy already used in the previous article, it’s about controlling the center of the field in time for the end game. If you’re going into the end game with Apple having a huge advantage center-field because it can point to 30% as “the most prevalent rate” (Epic’s CEO’s sworn and truthful testimony), better forget it.
So FRAND (Apple’s home game and a game at which it is most skilled is the fifth reason. The sixth and closely related one is the legal, political and psychological weight of IP: intellectual property.
Those advocating weaker IP rights in different contexts, such as the free software movement, hate the term IP because it lumps together different types of rights, but even more so because “property” implies a natural right.
It’s great for Apple’s purposes for more than one reason. It makes Apple the landlord and app makers its serfs like in a medieval system called feudalism (where the owner of the land got everything and everyone else to work for him) or 18th- and 19th-century Russia. Apple made the iPhone and iOS, and Steve Jobs once explained to someone (not necessarily in the App Store context) that Apple basically makes the rails and developers are just the trains rolling on those rails.
The other benefit Apple gets from “IP” is that lawmakers, regulators, judges and juries by and large lack the technical understanding to figure out what “IP” app makers actually need and that end users haven’t already paid for. If Apple owned the users, it would also own what the users have paid for. But that is not the case. In order to understand this, one has to distinguish between different kinds of IP and would actually find that the IP used exclusively by developers isn’t nearly as huge as the term makes it sound.
When Apple and those defending its ways make the argument that it shouldn’t have to afford developers certain freedoms on the App Store, they like to portray is as a situation in which someone shouldn’t be allowed to (in other words) hijack a store belonging to someone else. Not everyone understands the fallacy, but some do: it’s the only store on a planet with many of the one to two billion of the world’s richest people, without the possibility of opening a store across the street, except under the DMA, which fails so far to make a difference. But even many of those who understand that the only store on the planet is not a valid defense of Apple’s positions will be clueless when Apple points to its IP.
Once Apple’s “IP” comes into play, it’s comparable to people arguing over something related to the EU (be it as huge and controversial as Brexit or something smaller) until you bring in someone from the Brussels Bubble getting them all confused and makig it impossible for them to argue, as the Brussels insider will talk about COREPER (where ambassador-like officials cast votes on their countries’ behalf), the complex Qualified Majority Vote system, the “acquis” (the body of EU law built over time) and capitalizing on the fact that the vast majority of people will not be able to explain the difference between the European Council (heads of EU member states), EU Council (often referred to as “Council of Ministers” of EU member states) and Council of Europe (a non-EU diplomatic organization whose members include all EU member states but also plenty of others).
Apple knows “IP” gives it a natural advantage, especially (but not only) in conjunction with FRAND, and that adds to its determination to fight.
Did the EU have any serious debate over what IP Apple really owns in the app distribution context before adopting the DMA? Apparently not because no one suggested saying anything specific about IP in the DMA. Was there much IP talk in the Epic Games v. Apple litigation? Epic’s lawyers included some who have dealt with IP-centric cases, but in this dispute they first had to make some headway (the middle game) and wouldn’t have been able to persuade the court to take a look at what Apple’s allegedly relevant patents are really about.
The seventh reason is that Apple can simply afford it. They have so much money they can afford a huge litigation budget, spend a lot on lobbying and pay for a lot of fines and it’s still worth it. But those who focus too much on a “might makes right” scenario miss the point, which is why games fray brought up the deep pockets point only toward the end of the list. If you attach too much weight to it, you will fail to understand the first six reasons and the last one:
The eighth and final reason for the purposes of this article is that even though there are strong arguments to dismiss many of Apple’s arguments as pretextual and many of its tactics as self-serving, it isn’t purely pretext that Apple seeks to defend its uniqueness and that Apple hates to make changes to its technologies that are anathema to its vision. To be perfectly clear, a lot of it is pretextual and sometimes even nonsensical; and the end doesn’t justify all the means. If a country decided that it simply had the best political system and everyone should be part of it, it couldn’t just annex other countries to give them the “benefit” of that allegedly superior system.
The purpose of this final part is not to rationalize Apple’s power and money grabs in the App Store context. But its rivals have to ask themselves: how far is Apple going to be prepared to go to defend its system, its approach, its formula, its identity, its cult-like setup? And you’re never going to fully comprehend this, even if you figured out all the aforementioned seven reasons to the maximum extent, unless you also realize that there is something more to it.
For Apple’s technologists, the effect of certain injunctions, regulatory rulings and above all the DMA (and similar laws coming elsewhere) is that they feel they’re being forced to against not only their will but, far worse, against their cult-like philosophy.
Thinks of forcing someone who adheres to religion A being forced at gunpoint to engage in blasphemy against a deity he believes in and to (pretend to) worship religion B’s deity. Think of a totalitarian political regime forcing people to contradict their own views in public, such as apologizing publicly for something they still believe was the right thing to do.
Apple built an architecture optimized for its purposes. A different architecture would not only be more open but would also be designed to deal with more openness. Take progressive web apps: if one knows how to program, one can easily see that Apple could indeed (as it doesn’t even dispute if one reads its DMA web apps Q&A carefully) sandbox web apps at the operating system rather than browser engine level. That means the iOS operating system would make web app A run separately from web app B with no risk of accessing each other’s data, just like Chrome on an iPhone can’t access the Firefox installation in any way. But Apple decided that there should be only one browser engine (WebKit, which is the Safari engine), and Apple also decided that it can’t trust other browser makers, which is ridiculous in the case of Google (Chrome) and some others but not completely wrong when every Tom, Dick and Harry is allowed to make his own browser with some open-source engine. So what Apple would have to do now is something that’s objectively better and definitely would have procompetitive effects, but it’s just not the way Apple views the world.
To be fair, the browser engine example is a relatively simple one where it’s clear that Apple would merely be forced to do something bottom-line positive that they should have done all along even for purely technical reasons, just that they don’t like it. There are other issues, however, where either of two approaches has a unique strengths-weaknesses profile and even though many of us might prefer the procompetitive one, on balance, over Apple’s, it’s not like one couldn’t reasonably have another preference.
To conclude this article, which hopefully helps a lot of people understand the nature of the challenge, with a blunt analogy:
Forget about bringing butter knives to a gunfight that is over an enormous level of power, untold amounts of money and forcing the other side to act against its convictions and quasi-religious ideology, right or wrong. You can see now what you get: resistance that is, sadly, far from futile.