Some arguments are stronger than others for Apple’s €0.50 per-install-per-year fee being illegal under the DMA

The Core Technology Fee is seemingly just a €0.50 question, but it is actually a “to be or not to be” question for alternative app stores, thus more of a multi-billion-euro than €0.50 issue. It will be a big topic on Monday. But unless other critics of Apple’s policies pursue a different strategy than the CAF,

• an interpretation of the DMA will be prioritized that hinges on whether “interoperability” is defined broadly or narrowly,
• a valid argument from a competition economics point of view will be made, but only as the number two priority, and
• the most fundamental legal and economic question (that should actually be put front and center) won’t be raised.

The above strategy appears clearly suboptimal to games fray, but there still is time until Monday to get it right.

The EU’s interoperability definition is unfortunately narrow, also in the DMA

After talking about Apple’s remaining anti-steering rules, the CAF document takes aim at the CTF for the first time (of two) in the two-page document:

“Forcing developers to pay a fee when Apple isn’t providing anything besides iOS access is illegal and will discourage developers from distributing their app anywhere outside the Apple App Store.” (emphases added)

Apple will dispute that all its provides to developers is iOS access: it will stress that there is intellectual property involved, even though Apple has never been too specific about it. To make the point that the fee is “illegal,” the document quotes the second sentence of Art. 6(7) DMA:

“[T]he gatekeeper shall allow business users and alternative providers of services provided together with, or in support of, core platform services, free of charge, effective interoperability with, and access for the purposes of interoperability to, the same operating system, hardware or software features, regardless of whether those features are part of the operating system, as are available to, or used by, that gatekeeper when providing such services.” (emphases added)

Regrettably, that paragraph must be read in light of how the DMA itself (consistent with plenty of other EU laws, regulations and documents) defines interoperability in its Article 2 (Definitions):

(29) ‘interoperability’ means the ability to exchange information and mutually use the information which has been exchanged through interfaces or other solutions, so that all elements of hardware or software work with other hardware and software and with users in all the ways in which they are intended to function;

The EU typically has a data-centric understanding of “interoperability”: it’s about information. If you can save a document on one system and someone on another system can open it, that’s interoperability. In some other contexts, the EU has extended this definition in the sense of bringing in the human component: people and organizations should be enabled to work together, which means they must be able to exchange information (messages, files etc.). But that is a different direction than the one that is needed to tackle Apple’s fee with respect to apps being installed from the web or distributed through alternative app stores.

The CAF’s understanding of interoperability here is presumably based on the fact that application programming interfaces exchange information between an app and, in this case, iOS, for the purpose of making the app run on the operating system. The DMA’s interoperability definition generally refers to “interfaces,” which doesn’t exclude APIs, the CAF would argue.

Apple will predictably make two counterarguments:

• Art. 6(7) DMA doesn’t explicitly say Apple must make it possible to run an app on iOS free of charge but merely refers to “interoperability with, and access for the purposes of interoperability to, [iOS].” Apple would then define interoperability narrowly as just doing what it takes to exchange data. An analogy would be that if you get access to a train it’s not the same as a ticket to go anywhere on that train. Access to the train might just mean that you can board it, maybe just for such a limited purpose as providing a baggage service (bringing the bag to the passenger’s seat, only to exit the train before it departs).
• Apple will probably also argue that even if parts of the intellectual property rights the Core Technology Fee relates to were deemed to just serve an interoperability purpose, there are others (such as the tools that developers use when making their apps and cetain libraries) that are not merely interfaces.

The DMA itself says nothing useful about intellectual property rights. The term “intellectual property” does not appear even once. Nor does the word “patent(s).” “Copyright” appears only once: Recital 70 says the gatekeeper should not “unlawfully claim[] a copyright on application programming interfaces,” which is a totally useless “obey the law” wording: it just says that the gatekeeper should not make a claim that is not supported by copyright law. It doesn’t decide this question under copyright law. It says sensu contrario: “You can claim an API copyright, but only if you lawfully own one.”

There is no EU-level case law yet on application programming interface copyrights. The closest decision is SAS, where it was about the keywords of a programming language but the issue was that without being able to process those keywords, another app couldn’t open certain data files. Think of the analogy of an Excel spreadsheet where you would only get the numbers but not a single formula: that would be an interoperability issue even if narrowly defined. The Advocate General’s opinion in SAS talked about interoperability, but the 13 judges of a Grand Chamber of the European Court of Justice who decided the case based their decision (which is the one that matters) only on whether the material in question was expressive and interoperability is only mentioned in the form of a quote from a statute, but nothing more than that.

It’s understandable that the open app store movement would like to prevail on the basis of free-of-charge interoperability. In that case, Apple would have to do on iOS what Apple itself does on the Mac, what Microsoft does on Windows, what every Linux distributor does (as it’s open source anyway), and what Google does on Android: developers could provide their apps to end users without a per-install per-year charge.

But one has to be realistic that the DMA does not say gatekeepers must let apps run on their operating systems free of charge. It has a purpose-specific statute, the purpose is interoperability, and there is no support in EU law, as of today, for the position that interoperability goes beyond exchanging data (such as transmitting messages and sharing files).

The outcome would make sense. The derivation might work in court, but even if one wants to be reasonably CAF-friendly, one must at least concede that it’s not a slam dunk. It would take years of litigation to clarify that question at the highest level, with a high risk of Apple persuading the EU’s top court of a narrower interoperability definition. The judges who would decide such a case would press Apple’s adversaries on the question of why the DMA’s interoperability definition should be considered broader than that used by the EU in other contexts, and why the DMA doesn’t just say you must be able to run apps on operating systems free of charge if that was what lawmakers wanted.

Given that this question is not as simple as the CAF says, it’s also hard to imagine that the EC could impose a fine in the tens of billions of dollars, and that such a fine, if it was imposed, would be upheld by the Court of Justice of the European Union. Therefore, Apple can just litigate this “interoperability” argument if necessary: even the realistic worst-case scenario would just mean that they pay a fine they can easily afford and gained a lot of time.

Free-of-charge apps won’t be on alternative app stores

In the second section from the bottom of its pamphlet (not meant pejoratively, just because it’s short and combative), the CAF actually makes a much stronger argument (which games fray already raised before, see the part under the heading Alternative app stores are hit really hard in a January 28, 2024 games fray article):

“App developers that currently distribute their apps through the App Store without paying any commission (i.e., 88% of apps) would have to sign up to the new terms and pay the CTF to use alternative marketplaces. This is a significant incentive not to do so, and will deprive alternative marketplace from highly popular apps, such as Facebook, WhatsApp, Uber or Amazon.”

The “88% of apps” that the CAF means are then free apps (neither download fee nor in-app purchasing) as opposed to freemium apps (free to download, but in-app purchases are offered).

One can criticize the 88% figure because the bulk of those apps never reach the threshold above which Apple charges the Core Technology Fee (1 million downloads in the European Economic Area). But the theoretical risk exists that an app could suddenly get a huge number of downloads, and the partial solution that Apple offered (after games fray was the only media outlet to raise the issue at all) only benefits those going through Apple’s own App Store, not those going through alternative app stores. So even if you publish an app that you don’t believe will get that many downloads, with Apple’s own App Store you don’t have that risk, but if you went through an alternative app store, you might unexpectedly owe Apple €0.50 per install per year (even if your app may not generate revenues to justify it).

But the percentage isn’t all that important anyway. The stronger point is that there are highly popular apps such as Facebook, WhatsApp, Uber and Amazon (the CAF mentions those four examples) that are free and that definitely generate a level of downloads where the first million installs (which are free) don’t even matter because the total volume dwarfs that threshold.

There’s a circumvention argument here: Apple effectively precludes alternative app stores from competing with the App Store with respect to such apps.

One of the advantages of this argument over “free-of-charge interoperability” is that it’s economic, not technical. One does not have to understand the slightest thing about software development to understand that in one case very popular apps will pay a lot of money to Apple without generating in-app purchasing revenue (and even less popular ones will at least be subjected to the hypothetical risk of paying if downloads skyrocket), while in the other (where they stay on Apple’s App Store) they get a freebie. There would also be appeals over that one, but it’s the kind of question that can be resolved more quickly, and if the EC, the EU General Court and ultimately the European Court of Justice all agreed that this state of affairs runs counter to the DMA, the fine would likely be higher than over the “arcane” interoperability issue where Apple will only lose if the term is given a meaning far beyond the one it has had in the EU so far.

Whether Apple is acting in good faith is viewed differently by some. Apple is certainly not acting on the basis of a belief that the DMA should succeed. Apple is not going beyond the call of duty. Its objective is minimalistic compliance. To the extent Apple makes concessions (which it may continue to do), those don’t result in more competition on the bottom line (March 12, 2024 games fray article). But to establish a clear contempt of the law is no small task.

Apple would counter that the DMA doesn’t restrict its ability to charge for IP that goes beyond an interoperability purpose. That is, in fact, the bridge between the previous section of this article and the one that follows.

The big elephant in the room: intellectual property

The CAF’s two-page document doesn’t raise an issue that games fray considers exceedingly important: Apple wants to be paid for intellectual property rights without specifying them.

The compliance workshop on Monday will be an opportunity to raise that issue. So far, everyone lets Apple get away with it. Maybe some Apple lawyers are thinking to themselves that if their adversaries never get to that point, it will take an eternity before Apple will realistically come under serious pressure.

Apple introduced the Core Technology Fee in response to the DMA. One can argue that it’s “illegal” because of “interoperability” (which, as explained in the first section, won’t be resolved quickly and is a battle that Apple is not unlikely to win). One can also argue that alternative app stores can’t compete on free apps as they can’t offer free or purely percentage-based distribution. But it’s time to call into question what IP Apple actually wants to get paid for. Unless and until Apple comes clean on that, it isn’t even possible to have a meaningful discussion of what part(s) of that IP the free-of-charge interoperability rule covers and what end users already licensed when they bought their iPhones. The result of that discussion could be that a legislative amendment is needed to resolve the issue once and for all instead of many years of litigation with an outcome that would probably still be enough for Apple to prevent effective competition from emerging.

Apple’s adversaries must understand that if they don’t tackle the IP issue because they’re afraid to tackle an abstract term and venture into a highly specialized field, they just allow Apple to make an argument that is awe-inspiring but, so far, largely unsubstantiated. It’s high time the debate moved in that direction.

For more detail on the IP valuation part, see games fray‘s March 8, 2024 article.