The European Commission has taken cognizance of Apple’s App Store practices, after a complaint by Spotify, which is violative of the European Commission’s Competition Rules.

The Commission centered on the 2 rules that Apple imposes on developers –

  • Compulsory usage of Apple’s in-app system (IAP) for purchases.
  • Developers must refrain from informing users of other purchasing options.

These rules affect competition in the market for music streaming by increasing costs that are borne by consumers. The EU is investigating separate cases on E-Books and the App Store in general, including the gaming market. Apple now faces a fine of up to 10 percent of its annual revenue if found guilty of breaking EU rules and in fact, could be forced to change its business model.

Apple’s defense for the 30% tax (opposed by companies like Netflix, Spotify, or Epic Games) is that it’s necessary for maintaining the store[1].

EU against Apple CEO

Analysis

Apple’s market form

Apple exerts a monopoly (a market situation wherein “there is a single seller selling a product which has no close substitutes.”) when it comes to the distribution of music-streaming apps through its App Store. This is essentially a market form wherein “it doesn’t meet the rigorous standards of a perfectly competitive market (which is a theoretical concept)”

The App Store acts as the single seller in the iOS (Apple) ecosystem and the sole place where developers can upload their applications and consumers can download them from. Though, users cannot download applications from the external browser. The App Store has no close substitutes or even substitutes, at the same time. It is the only provider of applications in the ecosystem and no other app store exists (unlike Android). Additionally, there even exist restrictions on the applications that can be uploaded. Applications have to abide by Apple’s guidelines to have a presence in their store.

This also grants them arbitrary power, for instance, Apple delisting applications without justification and later incorporated the rival’s features in its ecosystem as their own[2]. Apple practices price discrimination (a “practice of charging different prices from different buyers at the same time, for the same product.”) wherein developers with a revenue of less than $1M pay a commission of 15%, else a flat 30% commission is levied. At the same time, the Apple App Store is a price maker as well, being the single seller in the ecosystem, dictates the prices. Developers and consumers must abide by its prices, else Apple can take away its services.

Pricing Strategies

Pricing rates are different across the globe, the cheapest being in India (Place Price Discrimination). Differential Rates are offered for students, individuals, and families (Personal Price Discrimination) [3]. Differential Rates (from the perspective of developers) are offered wherein developers with profits <$1M have to pay a 15% commission instead. (Personal Price Discrimination).

Price Discrimination is practiced in this market also by the firms. Services like Apple Music, Amazon Music, Netflix use a Pay-to-use pricing model which allows users to access their platform only after paying a subscription fee. On the other hand, Spotify uses a Freemium pricing model (wherein users can try out ‘basic’ features of service temporarily/permanently for free & pay for a ‘premium’ version which has additional features) with ad-free music and other features in its premium version.

Freemium Model
Freemium Model

Apple’s stance and Counter-Arguments

The unjustified pricing against developers by charging a flat 30% commission on sales made through their platform, tilts the scales in favor of Apple Music being cheaper for the end consumer, which acts like an anticompetitive agreement between each other (These are agreements entered into by competitors so as to prevent, restrict and distort competition in the market). This is affecting the consumer surplus (when a consumer is paying for a product that is less than what they are willing to pay) for the other streaming services. After much outcry, nevertheless, they have halved their commission to 15% for small-time developers[4].

Apple has even been called out for its practices when Fortnite’s Epic Games established their own payment system that bypassed Apple’s 30% cut, which led to Fortnite being pulled down from the store[5]. Apple is trying to further monopolize itself in the market by using unfair practices which is a form of antitrust violation (Violations of laws designed to protect trade and commerce from abusive practices such as price-fixing, monopolization, etc), the other being cartelization. It is unlawful for a company to monopolize trade, meaning a firm with market power cannot act to maintain or acquire a dominant position by excluding competitors or preventing new entry.

Apple argues that its App Store is a mall and the developers (stores) must pay a fee as rent[6]. This argument is redundant since they must realize that they are the only mall (only app store) in the ecosystem and thus cannot unabashedly exploit the developers and its users.

By resorting to these tricks, Apple is trying to achieve economies of scale by increasing their user base which further brings down input costs of maintenance of their Store.

Governmental Intervention

The European Commission has slapped antitrust charges over Apple’s practices, in violation of the EU’s antitrust rules. However, the Anti-Steering provisions laid down by Apple coupled with its mandatory IAP system have been found to distort competition as Apple enjoys the dominant position through its App Store[7], which is essentially the dictator of the closed ecosystem that Apple is. If found guilty, Apple violates Article 102 of the Treaty on the Functioning of the European Union that prohibits the abuse of dominant power, and/or Article 101 that prohibits anticompetitive agreements[8] and pays fines up to $27B.

The United States Department of Justice is investigating Apple[9] including Google after the US Supreme Court allowed the case. At the same time, Apple has been held for exercising its ‘gatekeeper power’ that has led to the exploitation of competing services which could threaten its profits[10].

In India, Section 3 and Section 4 of the Competition Act, 2002 regulates anti-competitive agreements and abuse of dominant position respectively.

Conclusion

Apple’s tactics are stifling competition, restricting fair play, and hurting both developers and consumers in the market. The government needs to intervene to inhibit such unchecked flagrant violation of pro-competitive practices. Authorities must regulate via Price Cap & Cost-Plus techniques to ensure the fair commission is levied. Consumers should not bear the brunt of Apple’s arm-twisting maneuvers.


[1] Warren T. (2021) EU accuses Apple of App Store antitrust violations after Spotify complaint (https://www.theverge.com/2021/4/30/22407376/apple-european-union-antitrust-charges-app-store-music-competition-commission-margrethe-vestager)

[2] Room T. et al. (2020). House Investigation faults Amazon, Apple, Facebook & Google for engaging in anti-competitive monopoly tactics (https://www.washingtonpost.com/technology/2020/10/06/amazon-apple-facebook-google-congress/)

[3] Wolfe S. (2018) We compared Spotify and Apple Music subscriptions (https://www.businessinsider.in/tech/we-compared-spotify-and-apple-music-subscriptions-and-the-winner-is-clear/articleshow/64982337.cms)

[4] Sherr I. et al. (2020), Apple lowers App Store ‘tax’ to 15% for developers making under $1M a year (https://www.cnet.com/news/apple-lowers-app-store-tax-to-15-for-developers-making-under-1m-a-year/)

[5] BBC (2020), Apple removes Fortnite developer Epic from App Store (https://www.bbc.com/news/world-us-canada-53955183)

[6] Yen A. (2020). How Apple uses anti-competitive practices to extort developers and support authoritarian regimes (https://protonmail.com/blog/apple-app-store-antitrust/)

[7] European Commission (2021), Commission sends Statement of Objections to Apple on App Store rules for music streaming providers (https://ec.europa.eu/commission/presscorner/detail/en/ip_21_2061)

[8] European Commission (2020), Commission opens investigation into Apple’s App Store rules (https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1073)

[9] Feiner L. (2019). Tim Cook says Apple is not a monopoly as the government takes a harder look at big tech (https://www.cnbc.com/2019/06/04/cook-says-apple-is-not-a-monopoly-as-government-begins-antitrust-probe.html)

[10] Room T. et al. (2020). House Investigation faults Amazon, Apple, Facebook & Google for engaging in anti-competitive monopoly tactics (https://www.washingtonpost.com/technology/2020/10/06/amazon-apple-facebook-google-congress/)

[11] Mehta P. et al. (2012). Global Problems & Solutions (https://www.financialexpress.com/archive/global-problems-&-solutions/899105/0/)

[12] United States Antitrust Division (2010). Horizontal Merger Guidelines (https://www.justice.gov/atr/horizontal-merger-guidelines-08192010)

[13] Economic Times (2020). France to impose a digital tax for 2020 despite US retaliation threat (https://economictimes.indiatimes.com/news/international/world-news/france-risks-us-ire-with-vow-to-impose-digital-tax-this-year/articleshow/79410430.cms)

[14] Federal Trade Commission Press Release (2020). FTC sues Facebook for Illegal Monopolization (https://www.ftc.gov/news-events/press-releases/2020/12/ftc-sues-facebook-illegal-monopolization)