Context: Apple’s response to the EU’s Digital Markets Act (DMA) is a set of rules that prohibits “sideloading” of apps (only app store fronts can be installed from the web), makes alternative payment systems unprofitable and alternative app stores no serious competitive threat (previous games fray article).
What’s new: After further analysis of Apple’s EU app rules, games fray is now able to explain how Apple seeks to defend itself against potential enforcement action by the European Commission (EC) and/or private parties. Apple is pursuing a FRAND-centric strategy, which means that the courts of law would have to hold a set of financial terms in violation of Apple’s obligation under the DMA to provide fair, reasonable and non-discriminatory (FRAND) access to the platform. Only if Apple lost on that one, plus on some non-numerical questions, would there be effective competition in the EU.
Direct impact: Apple is taking advantage of various loopholes and shortcomings of the EU DMA’s statutory language and overall structure to prevent the emergency of effective competition. Realistically (and sadly), Apple’s App Store monopoly rents in the EU are safe for years to come. The enforcement efforts here would take so long that even a legislative initiative to amend the DMA could yield results sooner, though the fact that the EU is already at the end of a legislative term makes any headway in 2024 extremely unlikely.
Wider ramifications:
- Apple itself normally advocates that FRAND rates must be low. It is currently lobbying the EU institutions in connection with a proposed regulation on standard-essential patents (SEPs) to that effect. If Apple, which fielded a FRAND defense in various SEP disputes over the last 14+ years, suddenly had to explain why a FRAND rate should be very high, that would stand in contradiction (despite various differences between SEPs and app stores) to its traditional stance.
- Lawmakers in such jurisdictions as Japan, where an initiative concerning digital platforms is in the works, will take note of the situation in the EU and may realize that only hard and fast rules, coupled with strong enforcement, will bring about change.
This is now a bird’s-eye view:
First, there are various “structural” questions such as what technical steps users must take to enable alternative app stores or make them their default, or whether “sideloading” of apps must be allowed in the way it is normally understood (installing apps directly from the web) versus the theoretical (even if not commercially viable) availability of rival app stores being sufficient as an alternative to going through Apple’s App Store (the topic of the previous article). The extent to which Apple can subject apps to its review even if they’re not offered on its store, or whether Apple can reject certain app store providers, are other questions that fall in that category. By “structural” this article means non-numerical questions, i.e., it’s not about how many cents Apple gets per download or what percentage of in-app purchasing revenues.
The full extent of issues of that kind may not even be clear yet. At least it can’t be inferred from the published rules alone. Some of it will have to be seen in practice, particularly what happens when Apple reviews apps.
Those who want to open up iOS app distribution won’t have to overcome all of those issues, but if Apple can defend just one or two really “nasty” items, that alone could be enough to thwart competition.
At this stage, games fray believes that Apple will be able to defend at least some and, in the worst case for competition, even all of those structural elements. Even if Apple lost on just one or two of those items, it is hard to see how the consequences would be severe. Theoretically, there can be hefty fines, but each of those structural questions is seemingly small, which would dissuade courts from upholding hefty fines.
Second, Apple’s risk in the context of structural (i.e., non-numerical) rules is that a court of law would focus on the aggregate effect of a set of Apple app rules as opposed to the legality of every single one of them. For instance, Apple’s privacy and security justifications (which the DMA allows within reason) are more likely to serve their purpose on an item-by-item basis than if the decision is based on whether Apple should have contented itself with a reasonable degree of security when looking at the overall picture. For example, a decision could be based on the fact that if an alternative app store is operated by a company such as Microsoft, it’s debatable whether Apple should still subject to a variety of other rules those app makers who want to sell apps through Microsoft’s store. Whether a court would be likely to look at the forest rather than the trees is hard to predict. But it would up the ante for Apple.
Third, even if Apple was forced to enable the “sideloading” of all apps, it would probably still take measures to discourage end users from actually using that option: so many warnings and interim steps (such as changing settings) that it wouldn’t play a major commercial role. That’s the Google playbook (on Android it’s exactly like that: “sideloading” is available, but commercially irrelevant). It would still be desirable to force Apple to allow it, but one way or the other, effective competition will require rival app stores that compete effectively. And that inevitably leads to the question of the rate at which Apple can tax apps that are distributed through rival app stores. Apple has an obligation now to provide access on FRAND terms.
FRAND determinations by courts are a complicated and resource-intensive effort. Economic experts wil then explain why a rate is too high or not.
Just pointing to other digital stores (Android, consoles etc.) that charge 30% won’t help Apple too much as those stores sell directly to users, and here the question is going to be how much Apple can charge a rival app store. But it’s going to be a huge debate and the outcome would be uncertain.
Apple’s own lowball FRAND positions in the SEP context could be mentioned, but SEPs are not apps and courts wouldn’t rely on that analogy.
Here the FRAND part is particularly tricky because Apple offers various alternative terms. The key one for rival app stores to attack is only the 50-cent fee per install per year. There would be pretty good arguments because, for instance, many apps are used by 98% of users for free and only about 2% will actually pay. If you need 50 times more installs than you have paying users, it means that you spend 25 euros per paying user. It’s not inconceivable that a court could deem that figure unreasonable. But Apple will pay economists such as Charles River Associates to explain that 50 cents per install per year is actually way below what Apple could charge.
One attack vector against the 50 cents would be the ND part of FRAND: it can be argued to be discriminatory that Apple is “charg[ing] the gamers to subsidize [banking apps]” as the Epic Games v. Apple judge in California put it. It’s not just banks but also online retailers like Amazon that do a lot of business on iOS but pay nothing. And even in the future they won’t pay the 50-cent fee per install per year because they can just opt to maintain the old rates (30% of digital revenues, but that doesn’t matter to certain types of apps). In the end, the 50-cent fee only impacts those who want to go through a rival app store and then make money through in-app purchasing.
With a per-install fee, Apple has the problem that the question of why they don’t charge Amazon (and banks, Uber etc.) the same becomes much more interesting than before. Apple could try to convince a court that this is not an issue as long as just one of the three different options it offers is FRAND:
- the old terms, which remain available as an option
- the new terms for distribution via the App Store (10% for little guys, 20% for all others; the optional reduction by 3% is irrelevant because in those scenarios the 3% would basically just be charged by a payment service provider)
- the new terms for distribution via alternative app stores (50 cents per install per year)
It’s far from inconceivable that Apple could lose the FRAND part, but in order for effective competition to happen, there would have to be a reduction (which could either be a mere adjustment of numbers or a holding that a certain fee structure, such as an install fee, is not FRAND) that would make a real difference. If the install fee went down from 50 to, say, 40 cents, it wouldn’t be enough to enable rival app stores to succeed.
Another problem (of many) is that Apple would argue that the install fees are FRAND compensation for the combination of three things:
- access to Apple’s customers
- use of Apple’s intellectual property (IP)
- Apple’s efforts to review/notarize apps even if distributed via rival stores
The IP part would involve hundreds of patents that Apple claims are related to the App Store (that’s known from the Epic case in the U.S.) and copyrights. Whether those patents would actually be deemed valid and infringed (and even if so, whether they could easily be worked around) is another question, but a court deciding an app store DMA case is not going to look at 200 or more patents. Copyright royalties would raise questions about the interoperability privilege in EU law, but again, that complicates a case that is not going to be an IP litigation but a DMA enforcement matter.
EU lawmakers can’t act at the moment, as the elections are close. They will have a lot of other priorities after the elections. Those asking for an amendment to the DMA would likely hear that they should first try to resolve it through litigation and come back to lawmakers if litigation doesn’t solve the problem.
The purpose of this article was to explain how Apple could potentially get away with its rules, or with a sufficient part of them to thwart the DMA, and that they would at least achieve a long delay. That’s regrettable, but realistically that’s the way it is.