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Apple often portrays the App Store as the democratisation of software. Since 2008, developers everywhere have been able to use Apple’s code to create new smartphone applications, and users can find and try them there, knowing that the company has vetted the offerings.
Now both the App Store and its rival Google Play are under attack as cut-throat monopolies that disadvantage competition and extract unfair commissions. Last week, South Korea enacted the world’s first law allowing mobile phone users to bypass the tech groups and pay app developers directly. In a recent settlement with the Japan Fair Trade Commission, Apple was forced to create a payment bypass for certain subscription apps. The EU and India are also probing app sales and Australia may wade in.
Meanwhile, a US judge is considering Fortnite-maker Epic Games’ claims that Apple’s 30 per cent commission on app sales and in-app purchases is an illegal monopoly. Epic’s lawsuit against Google is pending, and US senators are waiting with draft legislation that allows both developers and customers to bypass official app stores.
Complaints about Big Tech are nothing new, so why has this issue caught fire? Part of it is simplicity. Rather than novel legal issues, the app sale fight is about money. Powerful, well-funded opponents are helping make the case for change. Epic chief executive Tim Sweeney crusaded against the App Store for years before filing suit, and Brussels’ interest was sparked by a 2019 complaint from streaming group Spotify.
There is ample evidence of the financial benefits of charging commissions. In 2019, Google’s parent, Alphabet, drew an estimated 20 per cent of operating profits from Play, even though it was just 10 per cent of revenue. Apple bundles the App Store into “services”, a category that accounts for one-fifth of revenue, one-third of gross profit margin, and almost all margin growth, says Joseph Evans of Enders Analysis.
Regulators, lawmakers and judges are also on familiar ground as they consider whether Apple and Google unfairly use app store control to box out competitors and extract rents from developers. The allegation of bundling — using dominance in one kind of software to gain advantage in another — was at the heart of the 1990s case seeking to break up Microsoft. Though the company ultimately worked out a deal, the pressure is often credited with creating space for Google and Apple to thrive.
High-end department stores provide a parallel. Luxury brands such as Chanel or Hermès often enter concession deals with them. While terms vary, the brand supplies the product while the store provides the real estate and sales staff, and usually takes a 25 to 40 per cent cut.
With that in mind, the 30 per cent app commissions look hard to justify. Apple and Google supply the underlying code, the sales platform and curation that encourages users to download apps. But their costs are far lower than a store’s because the sales process is automated and they sell phones rather than renting or buying real estate.
Claims that Google and Apple need app store control to protect users also seem self-serving. Epic trial documents showed that Apple reviewers spent an average of 13 minutes on each app. No wonder scams have repeatedly snuck through. Curation is another revenue opportunity: Apple sells the top position after a search. Ask for the Ringo parking app, and you get Uber. Put in Lyft and you see Bolt.
That may explain why Google and Apple are not above beating strategic retreats. Both companies have already cut commissions to 15 per cent for smaller developers. Apple avoided a fight with Amazon by exempting the Prime app from paying commission on video sales. In the past two weeks it has loosened global payment rules for some small developers as well as Netflix, Spotify and other “reader” apps that let subscribers access content on multiple platforms. Notably, these concessions exclude Epic and other big game developers who account for most app revenue. Spotify called them insufficient.
Google insists that app payments allow it to keep the Android operating system free, while Apple contends that letting users “sideload” apps purchased externally would lead to anarchy. Big Tech may have conceded a few battles but it remains dug in for a long war.