Apple will allow certain app developers, including Netflix and Spotify, to direct users to their own websites to take payments, following an investigation by Japan’s Fair Trade Commission. Both Apple and Google face growing regulatory scrutiny for the commission they charge on in-app purchases of digital content and the limits they place on alternative payment mechanisms, which some developers argue constitute an abuse of market power.
Regulatory interventions – such as a bill passed in South Korea this week – could have far-reaching consequences for the tech giants’ business models, and the digital economy as a whole.
Why are in-app payments drawing regulators’ interest?
Developers’ discontent over in-app payments hit the headlines a year ago, when Fortnite creator Epic Games sued Apple, and later Google, for pulling its app from their respective app stores, following an update that bypassed their in-app payment systems. Epic Games CEO Tim Sweeney had previously said that Apple’s 30% commission on in-app payments for digital content is “disproportionate to the cost of the services these stores perform, such as payment processing, download bandwidth, and customer service”. A verdict in Epic Games v Apple is expected later this year.
Also last year, the European Commission launched an anti-competition probe into Apple’s in-app payment terms, following similar complaints from music streaming service Spotify. In April 2021, the commission shared its preliminary view that the company had abused its dominant position.
“By setting strict rules on the app store that disadvantage competing music streaming services, Apple deprives users of cheaper music streaming choices and distorts competition,” said competition commissioner Margrethe Vestager. “This is done by charging high commission fees on each transaction in the app store for rivals and by forbidding them from informing their customers of alternative subscription options.”
In the US, meanwhile, the proposed American Innovation and Choice Online Act – one of five bills to emerge from the House Subcommittee on Antitrust’s investigation of the tech industry – would ban “anti-steering”, the practice of preventing developers from directing users to their sites.
South Korea became the first jurisdiction to take action this week. The country’s parliament approved an amendment to its Telecommunications Business Act that would require Apple and Google to allow developers to include alternative in-app payment channels in their apps.
Google protested the ruling. “Just as it costs developers money to build an app, it costs us money to build and maintain an operating system and app store,” a Google spokesperson told The Verge. “We’ll reflect on how to comply with this law while maintaining a model that supports a high-quality operating system and app store, and we will share more in the coming weeks.”
In a statement prior to the ruling, Apple argued that the bill would “put users who purchase digital goods from other sources at risk of fraud, undermine their privacy protections, make it difficult to manage their purchases, and features like ‘ask to buy’ and parental controls will become less effective. We believe user trust in app store purchases will decrease as a result of this proposal – leading to fewer opportunities for the over 482,000 registered developers in Korea who have earned more than KRW8.55trn to date with Apple”.
Meanwhile, Japan’s Fair Trade Commission (JFTC) closed its investigation into Apple’s practices in the music streaming market this week after the company agreed to allow ‘reader apps’ (content and streaming) to link users through to their sites to make payments.
As a result of that concession, it found, “the concerns that [Apple] prevents developers from providing sales channel[s] using means of payment other than [in-app purchases] will be eliminated. Therefore, the JFTC recognised that the measure proposed by Apple… would eliminate the suspicion of the violation of the Antimonopoly Act in music streaming service[s].”
Apple and Google’s contentious in-app payment policies only apply to transactions for digital content, such as music or video games, not physical goods or other services. Nevertheless, those in-app payments are a substantial revenue stream for the tech giants, and regulatory measures could significantly impact their business models and those of third-party developers.
According to figures from market researchers SensorTower, consumer in-app spending grew by 30% in 2020 to reach $111bn. The majority of that spend took place over Apple’s AppStore, despite Google’s Android having a larger market share globally. Mobile data and analytics provider App Annie estimates that global app store consumer spend in the first half of this year totalled $66bn, and that the platform operators’ commission would have equalled “about $10bn to $20bn”.
Until recently, regulators have been hesitant to move against the so-called 'Apple Tax', says Rupantar Guha, associate project manager at business intelligence provider GlobalData. "This, in parts, is because regulators have struggled to grasp the complexity of digital platforms, which typically connect many sides of a market." But after some piecemeal concessions from Apple and Google to individual developers' complaints, regulators are "getting tough", he says.
Guha expects other jurisdictions to follow South Korea's lead. "The recent regulatory measures, particularly the bill passed in South Korea, will have ripple effects, bringing Apple under scrutiny in more countries in the coming months," he says.
Not everyone believes that opening up in-app payments would be beneficial for developers or consumers. "[It] could push Apple to charge developers in different ways," wrote competition law professor Randy Picker in response to the European Commission's preliminary view on Apple. "There is a variety of API-based pricing (see, for example, Amazon Web Services) and we could imagine other metrics that track app usage on an iOS device and then [Apple could] bill developers in connection with that usage."
Others see onerous in-app payment commission as the bigger risk to the tech giants' business models. Earlier this year, tech analyst Ben Thomson argued that Apple should make concessions on in-app payments and 'anti-steering', as they could be used to justify anti-competition legislation that undermines its ability to create integrated user experiences.
"Apple, by virtue of building the underlying platform, has every advantage in the world when it comes to offering additional apps and services, and the company at its best leverages that advantage to create experiences that users love," Thomson wrote. "[I]n this view, demanding 30% and total control of the users of its already-diminished competition isn’t simply anticompetitive, it is [also] risking what makes the company unique."
Sam Yang, SVP for global field operations at App Annie, says it is unclear whether regulatory interventions will affect consumer behaviour. "While businesses may be able to use alternative payment methods, we may still see consumers continue to transact most through the app stores as the most frictionless and convenient form of payment," he says.
Nevertheless, by changing the way in which platforms make money from those developers, new rules could determine what apps – and digital business models – are commercially viable. More broadly, moves such as the new bill in South Korea reveal growing confidence among governments to shape the parameters of the digital economy. It "sets a precedent for country-level regulations to address the complexities of the digital economy," says Guha.
Join Our Newsletter
Want more on technology leadership?
Sign up for Tech Monitor's weekly newsletter, Changelog, for the latest insight and analysis delivered straight to your inbox.