In what directions could the EU Commission’s ‘other investigatory steps’ concerning alternative app distribution go?

The two formal Apple DMA investigations relate to secondary theaters of war:

• The question of whether Apple’s browser choice window could better present alternatives is separate from the real issues facing web apps on iOS and should normally lend itself to an easy settlement (March 26, 2024 games fray article).
• The anti-steering part (informing users of, and directing them to, other purchasing options) is where App Store cases and investigations that start with greater and broader concerns often gravitate:
  • The United States District Court for the Northern District of California decided the (more important) antitrust pat of the case against Epic, but granted an anti-anti-steering injunction that is now enforceable in the United States (all appeals exhausted).
  • The EC investigated a complaint by Spotify for several years, only to narrow the scope of the investigation to anti-steering. A decision came down recently and Spotify has been waiting three weeks for an Apple decision on a new app version.
  • And the first full-blown DMA investigation relating to the App Store is also about anti-steering. It could be that for a certain period of time the ability to promote external purchasing offers (buying digital goods on websites) will remain the only viable option to bypass Apple’s app tax. It may be increasingly embraced by users. A settlement of this DMA investigation is less likely than a ruling that will involve a fine.

The EC itself was obviously aware of the fact that it could have picked more important issues, though it may have had valid reasons to focus on technically and economically simpler ones for the first round of investigations. The press release also stated less advanced and formal inquiries, one of which relates to app distribution on iOS:

The Commission is also taking other investigatory steps to gather facts and information to clarify whether:

• [an Amazon matter]
• Apple’s new fee structure and other terms and conditions for alternative app stores and distribution of apps from the web (sideloading) may be defeating the purpose of its obligations under Article 6(4) of the DMA.

That wording (“to gather facts and information to clarify”) is rather different from the presentation of the five formal investigations (“The Commission suspects that the measures put in place by these gatekeepers fall short of effective compliance […]”). So the full-blown investigations are based on a substantially stronger assumption of non-compliance than the early-stage fact-finding missions. But the part concerning Apple is actually the most important one: alternative distribution of native iOS apps. This doesn’t mean to say other issues (web apps, distribution via Apple’s App Store, interoperability) aren’t also important, but alternative app stores of mass-market appeal would make a far greater difference. They would transform the competitive environment.

The purpose of this article is not to take a position on how meritorious a given attack vector or how likely a given outcome is. It’s all about understanding the context and the potential decision tree.

For now, no reference to interoperability

A fact-finding mission can always result in the conclusion that the scope should be modified. At closer look, the original scope is not as a broad as the issues are important.

For instance, the press release cites only Art. 6(4), which mandates the ability to distribute apps without having to go through Apple’s App Store, but not Art. 6(7), which mandates free-of-charge interoperability. Art. 6(7) is the basis of which some complainants (including, but not limited to, the Coalition for App Fairness) argue Apple is not entitled to a Core Technology Fee (CTF). The CTF amounts to €0.50 per install per year, with the first million installs being free except for the frontend apps of alternative app stores, and it is the only variable fee Apple charges in connection with alternative app stores and direct web installs (“sideloading”).

For now, the focus is not on Apple’s entire “Alternative Terms Addendum for Apps in the EU”

The CTF is also charged in connection with the distribution of apps through Apple’s own App Store unless app makers continue to operate under the old terms (which are purely percentage-based, with small developers paying 15% but most of the apps that consumers really use being taxed at a rate of 30%). There are two reasons for which app makers may opt into the new terms and, therefore, the CTF:

• A developer may just want the reduced commission rate (20% instead of 30% or 13% instead of 15% in the small business program). Depending on a given developer’s situation, that’s a good deal or a bad deal. If a developer never exceeds the first million installs, the lower rate is obviously a net saving.
• A developer may want to exercise certain freedoms under the DMA. The oversimplified version is that once you start to deviate significantly from total loyalty to the Apple App Store, you must sign the Alternative Terms Addendum for Apps in the EU.

The EC could have decided, or could still decide, to look at the Alternative Terms Addendum for Apps in the EU as a whole, given that once a developer opts into it, they can either not return at all (if they distribute through alternative app stores or via the web) or they can do it only once (March 6, 2024 games fray article). Without taking a position here on the merits or weight of these arguments, the points that suggest a broader focus are that

• it’s one legal document that Apple requires developers to sign as a prerequsite to the exercise of essential DMA freedoms,
• it affects an entire developer account,
• apps that are in an opted-in account can only be transferred to other opted-in accounts, and
• alternative app stores effectively have to compete with Apple’s reduced commission rate for those who opt into the CTF-based deal.

The combination of the first three bullet points in the above list could be the basis for analyzing whether Apple effectively discourages the use of any alternative distribution channel for native iOS apps, as developers would consider the totality of the economic consequences and the fact that it is a point of no (or, at best, one) return.

The obvious arguments for the presently narrower focus are that it’s easier for the EC to tackle a more granular issue and that a result can be reached more quickly.

How the scope could be narrowed

There are various ways in which the Commission could narrow the scope of this inquiry before turning it into a full-blown investigation, be it as a result of a partial settlement (Apple makes concessions that the EC considers sufficient to address one part of the issue) or as a result of a deeper understanding.

Without taking a position on whether such narrowing is desirable, the theoretical options include, but are not limited to, the following ones:

• The EC could focus exclusively on the question of whether the CTF, even regardless of its amount, is non-compliant and discriminatory in terms of self-preferencing because alternative app stores and web downloads are unable to compete with Apple’s original (and still optionally available) App Store terms for the distribution of free or low-earning apps. In that case, the EC would not have to argue over whether Apple is entitled to a CTF or (if so) whether the amount is DMA-compliant, but could identify a competition problem that exists even if one accepts, for the sake of the argument, all of Apple’s other positions on the CTF.
• The EC could focus only on alternative app stores and how Apple’s terms make it impossible for them to get mass-market traction. (Theoretically, the focus could also be on web installs, but as Apple’s original DMA-related terms showed, Apple does not dispute that it has to allow alternative app stores, yet does not necessarily accept an obligation to offer direct web installs of apps other than the frontend apps of alternative app stores.)
• The EC could focus on certain non-monetary terms, such as the notarization procedure Apple imposes even if an app is distributed outside the App Store, or the restriction that the frontend apps of alternative apps must not go beyond a mere store in terms of their functionality (to name but a couple of examples).
• There obviously could also be combinations of some of the above that would yet be a subset of how the scope is currently phrased.

Decision tree under the scope as it is currently stated

Based on the EC’s present wording, the question to analyze is a purposive theory: are Apple’s new fees and other terms and conditions, taken together, “defeating the purpose” of the permission of alternative distribution options for native iOS apps.

The way the EC puts the question, it’s not about whether one particular aspect of Apple’s conduct violates one particular statute (or a part of a statute). It’s an effects-based approach.

If that is the angle, Apple will presumably argue that

• there is evidence of alternative app stores being built (Apple mentioned two examples at last week’s workshop, and Epic Games announced its store) or, at a point in the not too distant future (and certainly way before an appeal) already being available, and
• the DMA is a regulation, so if Apple complies with each rule (which it would argue it does), there is no room for a purposive theory of infringement.

To the extent the EC’s infringement theory hinges on the CTF (which is a given unless the EC focuses entirely on non-numerical facts), Apple would likely also argue that the CTF is justified under intellectual property law. The most aggressive argument would be to identify types of IP for which Apple would argue that the DMA, even if interpreted purposively, does not limit its charges in any way, and a less aggressive version would be that Apple would say the terms are commensurate with the value provided (in other words, if they were forced to charge less, it would amount to partial expropriation). That IP-based argument is not the same as saying “we comply with the letter of the law”: it would come down to saying “our sacred IP is off-limits for your DMA theory.”

For the narrower versions of the presently-stated scope of the inquiry it’s not necessary to discuss the decision tree, as it would be much simpler and could be derived from the above (or would be corollary to a single theory, such as making it impossible to distribute free and low-earning apps through alternative channels).

Decision tree for extended version that involves free-of-charge interoperability

If the EC wanted to throw Art. 6(7) on interoperability into the mix, it would likely analyze that part first, as it has the potential to be dispositive in terms of proving Apple’s terms unlawful without having to reach any other questions. Even if it didn’t resolve the question, it could narrow it: there might be a shorter list of items for which Apple can claim to be entitled to the CTF, which would then make it easier to reach a conclusion on whether it’s acceptable or a means of contravening the DMA. Alternatively, the EC could reach interoperability only at a point where Apple’s last line of defense would be “our sacred IP.”

Apple would presumably argue that Art. 6(7) does not even apply to this situation at all (or maybe to alternative app stores, but not to apps distributed through them). For example, Apple could assert that Art. 6(4) distinguishes between “using” and “interoperating” with an operating system, and running an app on an iPhone means “using” iOS beyond merely “interoperating” with it. There is also a published opinion that Apple could cite to (by an organization named CERRE), according to which Art. 6(7) is narrowed by Recital 55. Let’s now assume, for the sake of the argument, that the EC gets over that hurdle.

The starting point for the most extensive part of the analysis would then have to be an exhaustive list of hardware, software and services based on which Apple claims to be entitled to the CTF. The EC’s fact-finding inquiry is an opportunity to obtain such a list.

Apple’s public statements are deliberately open-ended and vague, including at last week’s workshop. The EC can now demand specific answers.

For each item on the list, the logical analytical sequence would then be this:

• Is there a valid property right? For example, is something protected by copyright or patents?
• If there is a valid property right, is it already exhausted or can Apple still charge for it?
• If it’s valid and not exhausted, does it fall, in its entirety, under the free-of-charge interoperability rule or is there anything left?

The result of that exercise could be that nothing on Apple’s list justifies the CTF, that everything serves to justify the CTF, or something in between. If nothing justifies the CTF, it’s clear that Apple violates and additional non-monetary elements (such as relating to notarization or scare screens) may make the situation even worse.

For the avoidance of doubt, this article is meant to be purely analytical in a non-judgmental way. The mere fact that vocal complainants such as the CAF (but also other participants in last week’s workshop) have made the interoperability argument in public is reason enough to consider it as a hypothetical possibility of resolving or streamlining the investigation.

Decision tree for analysis of entire “Alternative Terms Addendum for Apps in the EU”

If the EC takes a broader perspective and looks at whether Apple’s terms and rules, on the bottom line of everything, enable any actual competition in iOS app distribution, then it can develop an infringement argument based on the interplay of different terms, conditions and rules.

Apple would predictably argue that some do (or by now have already announced they will) run alternative app stores (such as Epic). The EC would then have to ask itself whether those apps are indicative of effective competition:

• If apps such as adult content or, for contractual and not conceptual reasons, Fortnite are not available through Apple’s own App Store, there may be a market opportunity for alternative distribution methods, but the EC would argue that the DMA was meant to create viable alternatives for apps that Apple’s App Store would also be prepared to carry.
• If apps have a business model where the 30% app tax (or even the 15% one) is completely prohibitive, such as non-fungible token (NFT) trading, the EC would also decline to recognize that the distribution strategies of such apps are an indicator of a contestable and fair market.
• Similar arguments could be expected with respect to enterprise software, where a company may find it’s better to go through a specialized app store and pay per download (to Apple and, on top, to the alternative app store).

When looking at the Alternative Terms Addendum as a whole, the EC can furthermore build an argument on the basis that maybe Apple’s terms would make alternative distribution methods viable for some apps, but not for all apps in a typical developer account. For example, a single high-volume free app could make alternative distribution ineligible despite some low-volume high-paying apps in a portfolio.

A focus on the entire Addendum would also enable the EC to argue that if a developer (for whatever reason or motivation) opts into the CTF-based fee structure, that developer will compare the commission rate of an alternative app store (for instance, Epic announced 12%) to the one charged by Apple on top of the same CTF (20% except in the small business program), and that the difference would not make an alternative app store viable as Apple offers maximum reach.

Again, none of this was meant to imply that an argument is strong or weak. It’s just about what kinds of discussions would potentially (if not predictably) arise.

This is not the time and place to talk about whether the EC should broaden or narrow the scope of that fact-finding inquiry, as the EC would presumably not do so before having made at least some progress in terms of obtaining important information. When the EC reaches that point, it will have to consider what theory is most defensible in court. That will likely be the most important aspect for the EC given what’s at stake.