Is This the End of the App Store as We Know It?

Ethan Navarre
11/3/2020

Big tech companies continue to face heightened scrutiny from a variety of stakeholders.  Recent reports suggest the Department of Justice is examining the potentially monopolistic policies of Apple’s App Store.  Further, in a report released last month, House Democrats identified a myriad of potentially monopolistic practices across big technology firms including Apple’s power over software distribution on iOS devices, i.e., the iPhone and iPad’s payment processing surcharges.  Similarly, the European Commission, which handles EU antitrust issues, has opened an investigation into Apple’s App Store policies following a complaint by the music streaming application, Spotify.  Spotify alleged Apple’s payment processing restrictions stifle competition and market entry.  In United States courts, Google and Apple’s payment processing practices have become the target of relatively high-profile lawsuits by Epic Games, makers of the popular video game Fortnite.

How Might App Stores Provide Monopoly Power?

The House Democrats' report identified several notable features of Apple’s business model which House Democrats use to support an assertion that Apple enjoys monopoly power over their iOS software platform by way of the Apple App Store.  Although Apple has consistently argued it is not a monopoly because it only enjoys a 45% share of the smartphone market, the House report focuses on the more specific market: iOS applications.  Broadly, the report notes the smartphone market dominance of iOS and Google’s Android, combined with Apple’s exclusive distribution power over iOS-compatible applications, makes market entry incredibly difficult, if not impossible for new platforms.  Specifically, the report identifies a host of methods Apple employs to maintain monopoly power over iOS applications including: tweaking App Store search results to promote its own applications over similar services; using “pretextual reasons” to remove third-party applications; using App Store data to create Apple branded applications to compete with third-party applications; and requiring developers process all payments made via an iOS device through Apple’s own payment system.  The Apple payment processing system takes a 30% cut for all initial payments and a 15% cut from all subscription payments after the first year (by comparison credit card companies charge about 3% to process payments).  Similar criticisms have been made against Google’s Android Play Store which charges the same 30% fee (although Google is significantly less strict about Android exclusivity).  While each of these procedures provide a reasonable basis to argue Apple, and potentially Google, have monopolistic practices at their disposal, the App Store commission rate has been the target of the bulk of public, legal scrutiny.

App Store Payments

Apple’s App Store is estimated to have made $142 billion over the past decade. Apple retains approximately 30% of those sales as profit. However, there are signs to suggest that a smartphone developers’ authority to impose high fees on marketplace applications and subscription sales may come to a close.  Although some high-profile application creators have secured lucrative deals from Apple, others, like Netflix and Spotify, have opted out of Apple and Google’s payment services entirely and have since directed new subscribers to sign up through their individual websites (prior to Netflix’s decision in 2018, it is estimated Apple’s cut of in-app Netflix subscriptions was around $700,000 daily and totaled over $450 million).  The first major legal challenge came in May of 2019 when the music streaming service Spotify filed a complaint with the European Commission.  In a blog post announcing the complaint, Spotify CEO Daniel Ek argued Apple’s 30% fee and reactive “technical and experience-limiting restrictions” placed on application developers who avoid the fee, forced Spotify to choose between subscription rate increases and limitations on their ability to communicate with Spotify users.  While Spotify continues to work with Apple, the EU has since opened an investigation into Apple’s App Store policies to determine if Apple’s in-app purchase system and restrictions on producer-consumer purchase information violates EU antitrust law.

In the United States, Apple is facing similar issues and the App Store antitrust fight has made its way into courtrooms and agency offices.  Initially, in 2011, a group of iOS users sued Apple alleging the company had created a monopoly using the 30% commission and restrictions on alternative payment systems that increased costs to the consumer.  The lawsuit, Apple v. Pepper, eventually made its way to the Supreme Court after Apple argued that they were not a monopoly and, more importantly, could not be sued because consumers did not directly purchase applications from Apple.  Rather, Apple argued consumers were buying applications from the developers that bought Apple’s services.  To support this argument, Apple relied on the Illinois Brick doctrine which prevents indirect purchasers from suing producers on antitrust grounds.  In 2019, the Supreme Court disagreed, holding that “there is no intermediary in the distribution chain between Apple and the consumer.” The case has since been remanded to the lower courts. 

Around the same time as this Supreme Court case, the Department of Justice opened an investigation of Apple and Google’s app store policies amidst scrutiny of the companies’ app stores by elected leaders and members of the tech community.  Reportedly, the Department of Justice has spoken with companies that are frustrated with the lack of payment processing options on iOS and the Department of Justice has asked these companies if a reduction in Apple’s share would be sufficient to assuage their concerns.

App store payment issues entered pop culture when Epic Games, the Maryland-based company that develops the videogame Fortnite, offered a direct payment option on iOS and Android versions of the game, prompting Apple and Google to remove Fortnite from their stores.  Before being removed from the app stores, Epic’s direct payment system provided a 20% discount to  purchasers of V-bucks, Fortnite’s in-game currency, a savings from the Apple and Google payment processing systems.  With the removal of Fortnite, Apple and Google claimed Epic Games had violated their app store guidelines (Google’s Android users can still play Fortnite and other Epic games via Epic’s own application launcher, available for download on Epic’s website; in contrast, Apple does not allow third party application launchers, leaving iOS device owners totally unable to play any mobile versions of Epic’s games).  In response, Epic claimed Apple threatened to remove the company from its “Apple Developer Program,” which is necessary to publish any applications for iOS.  Almost immediately after Fortnite’s removal, Epic filed a lawsuit seeking injunctive relief.  In this suit, Epic alleged Apple was in violation of the Sherman Antitrust Act in both the iOS Application Distribution Market and the IOS In-Application Payment Processing Market due to its anticompetitive policies, for instance, Apple’s mandatory 30% fee.  Epic also filed a nearly identical lawsuit against Google.

It has become increasingly clear that the power companies like Apple and Google hold over their app stores may have reached its high-water mark.  Google’s allowance of third-party application launchers may provide them an advantage to Apple in fighting Epic’s lawsuit.  Yet, while the Department of Justice, courts, and Congress have yet to hold technology firms to account, public scrutiny continues to build as popular platforms make their complaints known.  In that respect, every day Apple and Google do nothing to reduce their payment processing fees is another day they may be sealing their own fate.