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Much has already been said about the twin antitrust suits filed by Epic Games against Apple and Google. For those who are not familiar with the cases, the game developer – most famous for its hit title Fortnite and the “Unreal Engine” that underpins much of the game (and movie) industry – is complaining that Apple and Google are thwarting competition from rival app stores and in-app payment processors. 

Supporters have been quick to see in these suits a long-overdue challenge against the 30% commissions that Apple and Google charge. Some have even portrayed Epic as a modern-day Robin Hood, leading the fight against Big Tech to the benefit of small app developers and consumers alike. Epic itself has been keen to stoke this image, comparing its litigation to a fight for basic freedoms in the face of Big Brother:

However, upon closer inspection, cracks rapidly appear in this rosy picture. What is left is a company partaking in blatant rent-seeking that threatens to harm the sprawling ecosystems that have emerged around both Apple and Google’s app stores.

Two issues are particularly salient. First, Epic is trying to protect its own interests at the expense of the broader industry. If successful, its suit would merely lead to alternative revenue schemes that – although more beneficial to itself – would leave smaller developers to shoulder higher fees. Second, the fees that Epic portrays as extortionate were in fact key to the emergence of mobile gaming.

Epic’s utopia is not an equilibrium

Central to Epic’s claims is the idea that both Apple and Google: (i) thwart competition from rival app stores, and implement a series of measures that prevent developers from reaching gamers through alternative means (such as pre-installing apps, or sideloading them in the case of Apple’s platforms); and (ii) tie their proprietary payment processing services to their app stores. According to Epic, this ultimately enables both Apple and Google to extract “extortionate” commissions (30%) from app developers.

But Epic’s whole case is based on the unrealistic assumption that both Apple and Google will sit idly by while rival play stores and payment systems take a free-ride on the vast investments they have ploughed into their respective smartphone platforms. In other words, removing Apple and Google’s ability to charge commissions on in-app purchases does not prevent them from monetizing their platforms elsewhere.

Indeed, economic and strategic management theory tells us that so long as Apple and Google single-handedly control one of the necessary points of access to their respective ecosystems, they should be able to extract a sizable share of the revenue generated on their platforms. One can only speculate, but it is easy to imagine Apple and Google charging rival app stores for access to their respective platforms, or charging developers for access to critical APIs.

Epic itself seems to concede this point. In a recent Verge article, it argued that Apple was threatening to cut off its access to iOS and Mac developer tools, which Apple currently offers at little to no cost:

Apple will terminate Epic’s inclusion in the Apple Developer Program, a membership that’s necessary to distribute apps on iOS devices or use Apple developer tools, if the company does not “cure your breaches” to the agreement within two weeks, according to a letter from Apple that was shared by Epic. Epic won’t be able to notarize Mac apps either, a process that could make installing Epic’s software more difficult or block it altogether. Apple requires that all apps are notarized before they can be run on newer versions of macOS, even if they’re distributed outside the App Store.

There is little to prevent Apple from more heavily monetizing these tools – should Epic’s antitrust case successfully prevent it from charging commissions via its app store.

All of this raises the question: why is Epic bringing a suit that, if successful, would merely result in the emergence of alternative fee schedules (as opposed to a significant reduction of the overall fees paid by developers).

One potential answer is that the current system is highly favorable to small apps that earn little to no revenue from purchases and who benefit most from the trust created by Apple and Google’s curation of their stores. It is, however, much less favorable to developers like Epic who no longer require any curation to garner the necessary trust from consumers and who earn a large share of their revenue from in-app purchases.

In more technical terms, the fact that all in-game payments are made through Apple and Google’s payment processing enables both platforms to more easily price-discriminate. Unlike fixed fees (but just like royalties), percentage commissions are necessarily state-contingent (i.e. the same commission will lead to vastly different revenue depending on an underlying app’s success). The most successful apps thus contribute far more to a platform’s fixed costs. For instance, it is estimated that mobile games account for 72% of all app store spend. Likewise, more than 80% of the apps on Apple’s store pay no commission at all.

This likely expands app store output by getting lower value developers on board. In that sense, it is akin to Ramsey pricing (where a firm/utility expands social welfare by allocating a higher share of fixed costs to the most inelastic consumers). Unfortunately, this would be much harder to accomplish if high value developers could easily bypass Apple or Google’s payment systems.

The bottom line is that Epic appears to be fighting to change Apple and Google’s app store business models in order to obtain fee schedules that are better aligned with its own interests. This is all the more important for Epic Games, given that mobile gaming is becoming increasingly popular relative to other gaming mediums (also here).

The emergence of new gaming platforms

Up to this point, I have mostly presented a zero-sum view of Epic’s lawsuit – i.e. developers and platforms are fighting over the distribution app store profits (though some smaller developers may lose out). But this ignores what is likely the chief virtue of Apple and Google’s “closed” distribution model. Namely, that it has greatly expanded the market for mobile gaming (and other mobile software), and will likely continue to do so in the future.

Much has already been said about the significant security and trust benefits that Apple and Google’s curation of their app stores (including their control of in-app payments) provide to users. Benedict Evans and Ben Thompson have both written excellent pieces on this very topic. 

In a nutshell, the closed model allows previously unknown developers to rapidly expand because (i) users do not have to fear their apps contain some form of malware, and (ii) they greatly reduce payments frictions, most notably security related ones. But while these are indeed tremendous benefits, another important upside seems to have gone relatively unnoticed. 

The “closed” business model also gives Apple and Google (as well as other platforms) significant incentives to develop new distribution mediums (smart TVs spring to mind) and improve existing ones. In turn, this greatly expands the audience that software developers can reach. In short, developers get a smaller share of a much larger pie.

The economics of two-sided markets are enlightening in this respect. Apple and Google’s stores are what Armstrong and Wright (here and here) refer to as “competitive bottlenecks”. That is, they compete aggressively (amongst themselves, and with other gaming platforms) to attract exclusive users. They can then charge developers a premium to access those users (note, however, that in the case at hand the incidence of those platform fees is unclear).

This gives platforms significant incentives to continuously attract and retain new users. For instance, if Steve Jobs is to be believed, giving consumers better access to media such as eBooks, video and games was one of the driving forces behind the launch of the iPad

This model of innovation would be seriously undermined if developers and consumers could easily bypass platforms (as Epic games is seeking to do).

In response, some commentators have countered that platforms may use their strong market positions to squeeze developers, thereby undermining software investments. But such a course of action may ultimately be self-defeating. For instance, writing about retail platforms imitating third-party sellers, Anfrei Hagiu, Tat-How Teh and Julian Wright have argued that:

[T]he platform has an incentive to commit itself not to imitate highly innovative third-party products in order to preserve their incentives to innovate.

Seen in this light, Apple and Google’s 30% commissions can be seen as a soft commitment not to expropriate developers, thus leaving them with a sizable share of the revenue generated on each platform. This may explain why the 30% commission has become a standard in the games industry (and beyond). 

Furthermore, from an evolutionary perspective, it is hard to argue that the 30% commission is somehow extortionate. If game developers were systematically expropriated, then the gaming industry – in particular its mobile segment – would not have grown so drastically over the past years:

All of this this likely explains why a recent survey found that 81% of app developers believed regulatory intervention would be misguided:

81% of developers and publishers believe that the relationship between them and platforms is best handled within the industry, rather than through government intervention. Competition and choice mean that developers will use platforms that they work with best.

The upshot is that the “closed” model employed by Apple and Google has served the gaming industry well. There is little compelling reason to overhaul that model today.

Final thoughts

When all is said and done, there is no escaping the fact that Epic games is currently playing a high-stakes rent-seeking game. As Apple noted in its opposition to Epic’s motion for a temporary restraining order:

Epic did not, and has not, contested that it is in breach of the App Store Guidelines and the License Agreement. Epic’s plan was to violate the agreements intentionally in order to manufacture an emergency. The moment Fortnite was removed from the App Store, Epic launched an extensive PR smear campaign against Apple and a litigation plan was orchestrated to the minute; within hours, Epic had filed a 56-page complaint, and within a few days, filed nearly 200 pages with this Court in a pre-packaged “emergency” motion. And just yesterday, it even sought to leverage its request to this Court for a sales promotion, announcing a “#FreeFortniteCup” to take place on August 23, inviting players for one last “Battle Royale” across “all platforms” this Sunday, with prizes targeting Apple.

Epic is ultimately seeking to introduce its own app store on both Apple and Google’s platforms, or at least bypass their payment processing services (as Spotify is seeking to do in the EU).

Unfortunately, as this post has argued, condoning this type of free-riding could prove highly detrimental to the entire mobile software industry. Smaller companies would almost inevitably be left to foot a larger share of the bill, existing platforms would become less secure, and the development of new ones could be hindered. At the end of the day, 30% might actually be a small price to pay.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Kristian Stout, (Associate Director, International Center for Law & Economics]

The public policy community’s infatuation with digital privacy has grown by leaps and bounds since the enactment of GDPR and the CCPA, but COVID-19 may leave the most enduring mark on the actual direction that privacy policy takes. As the pandemic and associated lockdowns first began, there were interesting discussions cropping up about the inevitable conflict between strong privacy fundamentalism and the pragmatic steps necessary to adequately trace the spread of infection. 

Axiomatic of this controversy is the Apple/Google contact tracing system, software developed for smartphones to assist with the identification of individuals and populations that have likely been in contact with the virus. The debate sparked by the Apple/Google proposal highlights what we miss when we treat “privacy” (however defined) as an end in itself, an end that must necessarily  trump other concerns. 

The Apple/Google contact tracing efforts

Apple/Google are doing yeoman’s work attempting to produce a useful contact tracing API given the headwinds of privacy advocacy they face. Apple’s webpage describing its new contact tracing system is a testament to the extent to which strong privacy protections are central to its efforts. Indeed, those privacy protections are in the very name of the service: “Privacy-Preserving Contact Tracing” program. But, vitally, the utility of the Apple/Google API is ultimately a function of its efficacy as a tracing tool, not in how well it protects privacy.

Apple/Google — despite the complaints of some states — are rolling out their Covid-19-tracking services with notable limitations. Most prominently, the APIs will not allow collection of location data, and will only function when users explicitly opt-in. This last point is important because there is evidence that opt-in requirements, by their nature, tend to reduce the flow of information in a system, and when we are considering tracing solutions to an ongoing pandemic surely less information is not optimal. Further, all of the data collected through the API will be anonymized, preventing even healthcare authorities from identifying particular infected individuals.

These restrictions prevent the tool from being as effective as it could be, but it’s not clear how Apple/Google could do any better given the political climate. For years, the Big Tech firms have been villainized by privacy advocates that accuse them of spying on kids and cavalierly disregarding consumer privacy as they treat individuals’ data as just another business input. The problem with this approach is that, in the midst of a generational crisis, our best tools are being excluded from the fight. Which begs the question: perhaps we have privacy all wrong? 

Privacy is one value among many

The U.S. constitutional order explicitly protects our privacy as against state intrusion in order to guarantee, among other things, fair process and equal access to justice. But this strong presumption against state intrusion—far from establishing a fundamental or absolute right to privacy—only accounts for part of the privacy story. 

The Constitution’s limit is a recognition of the fact that we humans are highly social creatures and that privacy is one value among many. Properly conceived, privacy protections are themselves valuable only insofar as they protect other things we value. Jane Bambauer explored some of this in an earlier post where she characterized privacy as, at best, an “instrumental right” — that is a tool used to promote other desirable social goals such as “fairness, safety, and autonomy.”

Following from Jane’s insight, privacy — as an instrumental good — is something that can have both positive and negative externalities, and needs to be enlarged or attenuated as its ability to serve instrumental ends changes in different contexts. 

According to Jane:

There is a moral imperative to ignore even express lack of consent when withholding important information that puts others in danger. Just as many states affirmatively require doctors, therapists, teachers, and other fiduciaries to report certain risks even at the expense of their client’s and ward’s privacy …  this same logic applies at scale to the collection and analysis of data during a pandemic.

Indeed, dealing with externalities is one of the most common and powerful justifications for regulation, and an extreme form of “privacy libertarianism” —in the context of a pandemic — is likely to be, on net, harmful to society.

Which brings us back to efforts of Apple/Google. Even if those firms wanted to risk the ire of  privacy absolutists, it’s not clear that they could do so without incurring tremendous regulatory risk, uncertainty and a popular backlash. As statutory matters, the CCPA and the GDPR chill experimentation in the face of potentially crippling fines. While the FTC Act’s Section 5 prohibition on “unfair or deceptive” practices is open to interpretation in manners which could result in existentially damaging outcomes. Further, some polling suggests that the public appetite for contact tracing is not particularly high – though, as is often the case, such pro-privacy poll outcomes rarely give appropriate shrift to the tradeoff required.

As a general matter, it’s important to think about the value of individual privacy, and how best to optimally protect it. But privacy does not stand above all other values in all contexts. It is entirely reasonable to conclude that, in a time of emergency, if private firms can devise more effective solutions for mitigating the crisis, they should have more latitude to experiment. Knee-jerk preferences for an amorphous “right of privacy” should not be used to block those experiments.

Much as with the Cosmic Turtle, its tradeoffs all the way down. Most of the U.S. is in lockdown, and while we vigorously protect our privacy, we risk frustrating the creation of tools that could put a light at the end of the tunnel. We are, in effect, trading liberty and economic self-determination for privacy.

Once the worst of the Covid-19 crisis has passed — hastened possibly by the use of contact tracing programs — we can debate the proper use of private data in exigent circumstances. For the immediate future, we should instead be encouraging firms like Apple/Google to experiment with better ways to control the pandemic. 

A spate of recent newspaper investigations and commentary have focused on Apple allegedly discriminating against rivals in the App Store. The underlying assumption is that Apple, as a vertically integrated entity that operates both a platform for third-party apps and also makes it own apps, is acting nefariously whenever it “discriminates” against rival apps through prioritization, enters into popular app markets, or charges a “tax” or “surcharge” on rival apps. 

For most people, the word discrimination has a pejorative connotation of animus based upon prejudice: racism, sexism, homophobia. One of the definitions you will find in the dictionary reflects this. But another definition is a lot less charged: the act of making or perceiving a difference. (This is what people mean when they say that a person has a discriminating palate, or a discriminating taste in music, for example.)

In economics, discrimination can be a positive attribute. For instance, effective price discrimination can result in wealthier consumers paying a higher price than less well off consumers for the same product or service, and it can ensure that products and services are in fact available for less-wealthy consumers in the first place. That would seem to be a socially desirable outcome (although under some circumstances, perfect price discrimination can be socially undesirable). 

Antitrust law rightly condemns conduct only when it harms competition and not simply when it harms a competitor. This is because it is competition that enhances consumer welfare, not the presence or absence of a competitor — or, indeed, the profitability of competitors. The difficult task for antitrust enforcers is to determine when a vertically integrated firm with “market power” in an upstream market is able to effectively discriminate against rivals in a downstream market in a way that harms consumers

Even assuming the claims of critics are true, alleged discrimination by Apple against competitor apps in the App Store may harm those competitors, but it doesn’t necessarily harm either competition or consumer welfare.

The three potential antitrust issues facing Apple can be summarized as:

There is nothing new here economically. All three issues are analogous to claims against other tech companies. But, as I detail below, the evidence to establish any of these claims at best represents harm to competitors, and fails to establish any harm to the competitive process or to consumer welfare.

Prioritization

Antitrust enforcers have rejected similar prioritization claims against Google. For instance, rivals like Microsoft and Yelp have funded attacks against Google, arguing the search engine is harming competition by prioritizing its own services in its product search results over competitors. As ICLE and affiliated scholars have pointed out, though, there is nothing inherently harmful to consumers about such prioritization. There are also numerous benefits in platforms directly answering queries, even if it ends up directing users to platform-owned products or services.

As Geoffrey Manne has observed:

there is good reason to believe that Google’s decision to favor its own content over that of other sites is procompetitive. Beyond determining and ensuring relevance, Google surely has the prerogative to vigorously compete and to decide how to design its products to keep up with a changing market. In this case, that means designing, developing, and offering its own content to partially displace the original “ten blue links” design of its search results page and offer its own answers to users’ queries in its stead. 

Here, the antitrust case against Apple for prioritization is similarly flawed. For example, as noted in a recent article in the WSJ, users often use the App Store search in order to find apps they already have installed:

“Apple customers have a very strong connection to our products and many of them use search as a way to find and open their apps,” Apple said in a statement. “This customer usage is the reason Apple has strong rankings in search, and it’s the same reason Uber, Microsoft and so many others often have high rankings as well.” 

If a substantial portion of searches within the App Store are for apps already on the iPhone, then showing the Apple app near the top of the search results could easily be consumer welfare-enhancing. 

Apple is also theoretically leaving money on the table by prioritizing its (already pre-loaded) apps over third party apps. If its algorithm promotes its own apps over those that may earn it a 30% fee — additional revenue — the prioritization couldn’t plausibly be characterized as a “benefit” to Apple. Apple is ultimately in the business of selling hardware. Losing customers of the iPhone or iPad by prioritizing apps consumers want less would not be a winning business strategy.

Further, it stands to reason that those who use an iPhone may have a preference for Apple apps. Such consumers would be naturally better served by seeing Apple’s apps prioritized over third-party developer apps. And if consumers do not prefer Apple’s apps, rival apps are merely seconds of scrolling away.

Moreover, all of the above assumes that Apple is engaging in sufficiently pervasive discrimination through prioritzation to have a major impact on the app ecosystem. But substantial evidence exists that the universe of searches for which Apple’s algorithm prioritizes Apple apps is small. For instance, most searches are for branded apps already known by the searcher:

Keywords: how many are brands?

  • Top 500: 58.4%
  • Top 400: 60.75%
  • Top 300: 68.33%
  • Top 200: 80.5%
  • Top 100: 86%
  • Top 50: 90%
  • Top 25: 92%
  • Top 10: 100%

This is corroborated by data from the NYT’s own study, which suggests Apple prioritized its own apps first in only roughly 1% of the overall keywords queried: 

Whatever the precise extent of increase in prioritization, it seems like any claims of harm are undermined by the reality that almost 99% of App Store results don’t list Apple apps first. 

The fact is, very few keyword searches are even allegedly affected by prioritization. And the algorithm is often adjusting to searches for apps already pre-loaded on the device. Under these circumstances, it is very difficult to conclude consumers are being harmed by prioritization in search results of the App Store.

Entry

The issue of Apple building apps to compete with popular apps in its marketplace is similar to complaints about Amazon creating its own brands to compete with what is sold by third parties on its platform. For instance, as reported multiple times in the Washington Post:

Clue, a popular app that women use to track their periods, recently rocketed to the top of the App Store charts. But the app’s future is now in jeopardy as Apple incorporates period and fertility tracking features into its own free Health app, which comes preinstalled on every device. Clue makes money by selling subscriptions and services in its free app. 

However, there is nothing inherently anticompetitive about retailers selling their own brands. If anything, entry into the market is normally procompetitive. As Randy Picker recently noted with respect to similar claims against Amazon: 

The heart of this dynamic isn’t new. Sears started its catalogue business in 1888 and then started using the Craftsman and Kenmore brands as in-house brands in 1927. Sears was acquiring inventory from third parties and obviously knew exactly which ones were selling well and presumably made decisions about which markets to enter and which to stay out of based on that information. Walmart, the nation’s largest retailer, has a number of well-known private brands and firms negotiating with Walmart know full well that Walmart can enter their markets, subject of course to otherwise applicable restraints on entry such as intellectual property laws… I think that is possible to tease out advantages that a platform has regarding inventory experimentation. It can outsource some of those costs to third parties, though sophisticated third parties should understand where they can and cannot have a sustainable advantage given Amazon’s ability to move to build-or-bought first-party inventory. We have entire bodies of law— copyright, patent, trademark and more—that limit the ability of competitors to appropriate works, inventions and symbols. Those legal systems draw very carefully considered lines regarding permitted and forbidden uses. And antitrust law generally favors entry into markets and doesn’t look to create barriers that block firms, large or small, from entering new markets.

If anything, Apple is in an even better position than Amazon. Apple invests revenue in app development, not because the apps themselves generate revenue, but because it wants people to use the hardware, i.e. the iPhones, iPads, and Apple Watches. The reason Apple created an App Store in the first place is because this allows Apple to make more money from selling devices. In order to promote security on those devices, Apple institutes rules for the App Store, but it ultimately decides whether to create its own apps and provide access to other apps based upon its desire to maximize the value of the device. If Apple chooses to create free apps in order to improve iOS for users and sell more hardware, it is not a harm to competition.

Apple’s ability to enter into popular app markets should not be constrained unless it can be shown that by giving consumers another choice, consumers are harmed. As noted above, most searches in the App Store are for branded apps to begin with. If consumers already know what they want in an app, it hardly seems harmful for Apple to offer — and promote — its own, additional version as well. 

In the case of Clue, if Apple creates a free health app, it may hurt sales for Clue. But it doesn’t hurt consumers who want the functionality and would prefer to get it from Apple for free. This sort of product evolution is not harming competition, but enhancing it. And, it must be noted, Apple doesn’t exclude Clue from its devices. If, indeed, Clue offers a better product, or one that some users prefer, they remain able to find it and use it.

The so-called App Store “Tax”

The argument that Apple has an unfair competitive advantage over rival apps which have to pay commissions to Apple to be on the App Store (a “tax” or “surcharge”) has similarly produced no evidence of harm to consumers. 

Apple invested a lot into building the iPhone and the App Store. This infrastructure has created an incredibly lucrative marketplace for app developers to exploit. And, lest we forget a point fundamental to our legal system, Apple’s App Store is its property

The WSJ and NYT stories give the impression that Apple uses its commissions on third party apps to reduce competition for its own apps. However, this is inconsistent with how Apple charges its commission

For instance, Apple doesn’t charge commissions on free apps, which make up 84% of the App Store. Apple also doesn’t charge commissions for apps that are free to download but are supported by advertising — including hugely popular apps like Yelp, Buzzfeed, Instagram, Pinterest, Twitter, and Facebook. Even apps which are “readers” where users purchase or subscribe to content outside the app but use the app to access that content are not subject to commissions, like Spotify, Netflix, Amazon Kindle, and Audible. Apps for “physical goods and services” — like Amazon, Airbnb, Lyft, Target, and Uber — are also free to download and are not subject to commissions. The class of apps which are subject to a 30% commission include:

  • paid apps (like many games),
  • free apps that then have in-app purchases (other games and services like Skype and TikTok), 
  • and free apps with digital subscriptions (Pandora, Hulu, which have 30% commission first year and then 15% in subsequent years), and
  • cross-platform apps (Dropbox, Hulu, and Minecraft) which allow for digital goods and services to be purchased in-app and Apple collects commission on in-app sales, but not sales from other platforms. 

Despite protestations to the contrary, these costs are hardly unreasonable: third party apps receive the benefit not only of being in Apple’s App Store (without which they wouldn’t have any opportunity to earn revenue from sales on Apple’s platform), but also of the features and other investments Apple continues to pour into its platform — investments that make the ecosystem better for consumers and app developers alike. There is enormous value to the platform Apple has invested in, and a great deal of it is willingly shared with developers and consumers.  It does not make it anticompetitive to ask those who use the platform to pay for it. 

In fact, these benefits are probably even more important for smaller developers rather than bigger ones who can invest in the necessary back end to reach consumers without the App Store, like Netflix, Spotify, and Amazon Kindle. For apps without brand reputation (and giant marketing budgets), the ability for consumers to trust that downloading the app will not lead to the installation of malware (as often occurs when downloading from the web) is surely essential to small developers’ ability to compete. The App Store offers this.

Despite the claims made in Spotify’s complaint against Apple, Apple doesn’t have a duty to deal with app developers. Indeed, Apple could theoretically fill the App Store with only apps that it developed itself, like Apple Music. Instead, Apple has opted for a platform business model, which entails the creation of a new outlet for others’ innovation and offerings. This is pro-consumer in that it created an entire marketplace that consumers probably didn’t even know they wanted — and certainly had no means to obtain — until it existed. Spotify, which out-competed iTunes to the point that Apple had to go back to the drawing board and create Apple Music, cannot realistically complain that Apple’s entry into music streaming is harmful to competition. Rather, it is precisely what vigorous competition looks like: the creation of more product innovation, lower prices, and arguably (at least for some) higher quality.

Interestingly, Spotify is not even subject to the App Store commission. Instead, Spotify offers a work-around to iPhone users to obtain its premium version without ads on iOS. What Spotify actually desires is the ability to sell premium subscriptions to Apple device users without paying anything above the de minimis up-front cost to Apple for the creation and maintenance of the App Store. It is unclear how many potential Spotify users are affected by the inability to directly buy the ad-free version since Spotify discontinued offering it within the App Store. But, whatever the potential harm to Spotify itself, there’s little reason to think consumers or competition bear any of it. 

Conclusion

There is no evidence that Apple’s alleged “discrimination” against rival apps harms consumers. Indeed, the opposite would seem to be the case. The regulatory discrimination against successful tech platforms like Apple and the App Store is far more harmful to consumers.

It might surprise some readers to learn that we think the Court’s decision today in Apple v. Pepper reaches — superficially — the correct result. But, we hasten to add, the Court’s reasoning (and, for that matter, the dissent’s) is completely wrongheaded. It would be an understatement to say that the Court reached the right result for the wrong reason; in fact, the Court’s analysis wasn’t even in the same universe as the correct reasoning.

Below we lay out our assessment, in a post drawn from an article forthcoming in the Nebraska Law Review.

Did the Court forget that, just last year, it decided Amex, the most significant U.S. antitrust case in ages?

What is most remarkable about the decision (and the dissent) is that neither mentions Ohio v. Amex, nor even the two-sided market context in which the transactions at issue take place.

If the decision in Apple v. Pepper hewed to the precedent established by Ohio v. Amex it would start with the observation that the relevant market analysis for the provision of app services is an integrated one, in which the overall effect of Apple’s conduct on both app users and app developers must be evaluated. A crucial implication of the Amex decision is that participants on both sides of a transactional platform are part of the same relevant market, and the terms of their relationship to the platform are inextricably intertwined.

Under this conception of the market, it’s difficult to maintain that either side does not have standing to sue the platform for the terms of its overall pricing structure, whether the specific terms at issue apply directly to that side or not. Both end users and app developers are “direct” purchasers from Apple — of different products, but in a single, inextricably interrelated market. Both groups should have standing.

More controversially, the logic of Amex also dictates that both groups should be able to establish antitrust injury — harm to competition — by showing harm to either group, as long as it establishes the requisite interrelatedness of the two sides of the market.

We believe that the Court was correct to decide in Amex that effects falling on the “other” side of a tightly integrated, two-sided market from challenged conduct must be addressed by the plaintiff in making its prima facie case. But that outcome entails a market definition that places both sides of such a market in the same relevant market for antitrust analysis.

As a result, the Court’s holding in Amex should also have required a finding in Apple v. Pepper that an app user on one side of the platform who transacts with an app developer on the other side of the market, in a transaction made possible and directly intermediated by Apple’s App Store, should similarly be deemed in the same market for standing purposes.

Relative to a strict construction of the traditional baseline, the former entails imposing an additional burden on two-sided market plaintiffs, while the latter entails a lessening of that burden. Whether the net effect is more or fewer successful cases in two-sided markets is unclear, of course. But from the perspective of aligning evidentiary and substantive doctrine with economic reality such an approach would be a clear improvement.

Critics accuse the Court of making antitrust cases unwinnable against two-sided market platforms thanks to Amex’s requirement that a prima facie showing of anticompetitive effect requires assessment of the effects on both sides of a two-sided market and proof of a net anticompetitive outcome. The critics should have been chastened by a proper decision in Apple v. Pepper. As it is, the holding (although not the reasoning) still may serve to undermine their fears.

But critics should have recognized that a necessary corollary of Amex’s “expanded” market definition is that, relative to previous standing doctrine, a greater number of prospective parties should have standing to sue.

More important, the Court in Apple v. Pepper should have recognized this. Although nominally limited to the indirect purchaser doctrine, the case presented the Court with an opportunity to grapple with this logical implication of its Amex decision. It failed to do so.

On the merits, it looks like Apple should win. But, for much the same reason, the Respondents in Apple v. Pepper should have standing

This does not, of course, mean that either party should win on the merits. Indeed, on the merits of the case, the Petitioner in Apple v. Pepper appears to have the stronger argument, particularly in light of Amex which (assuming the App Store is construed as some species of a two-sided “transaction” market) directs that Respondent has the burden of considering harms and efficiencies across both sides of the market.

At least on the basis of the limited facts as presented in the case thus far, Respondents have not remotely met their burden of proving anticompetitive effects in the relevant market.

The actual question presented in Apple v. Pepper concerns standing, not whether the plaintiffs have made out a viable case on the merits. Thus it may seem premature to consider aspects of the latter in addressing the former. But the structure of the market considered by the court should be consistent throughout its analysis.

Adjustments to standing in the context of two-sided markets must be made in concert with the nature of the substantive rule of reason analysis that will be performed in a case. The two doctrines are connected not only by the just demands for consistency, but by the error-cost framework of the overall analysis, which runs throughout the stages of an antitrust case.

Here, the two-sided markets approach in Amex properly understands that conduct by a platform has relevant effects on both sides of its interrelated two-sided market. But that stems from the actual economics of the platform; it is not merely a function of a judicial construct. It thus holds true at all stages of the analysis.

The implication for standing is that users on both sides of a two-sided platform may suffer similarly direct (or indirect) injury as a result of the platform’s conduct, regardless of the side to which that conduct is nominally addressed.

The consequence, then, of Amex’s understanding of the market is that more potential plaintiffs — specifically, plaintiffs on both sides of a two-sided market — may claim to suffer antitrust injury.

Why the myopic focus of the holding (and dissent) on Illinois Brick is improper: It’s about the market definition, stupid!

Moreover, because of the Amex understanding, the problem of analyzing the pass-through of damages at issue in Illinois Brick (with which the Court entirely occupies itself in Apple v. Pepper) is either mitigated or inevitable.

In other words, either the users on the different sides of a two-sided market suffer direct injury without pass-through under a proper definition of the relevant market, or else their interrelatedness is so strong that, complicated as it may be, the needs of substantive accuracy trump the administrative costs in sorting out the incidence of the costs, and courts cannot avoid them.

Illinois Brick’s indirect purchaser doctrine was designed for an environment in which the relationship between producers and consumers is mediated by a distributor in a direct, linear supply chain; it was not designed for platforms. Although the question presented in Apple v. Pepper is explicitly about whether the Illinois Brick “indirect purchaser” doctrine applies to the Apple App Store, that determination is contingent on the underlying product market definition (whether the product market is in fact well-specified by the parties and the court or not).

Particularly where intermediaries exist precisely to address transaction costs between “producers” and “consumers,” the platform services they provide may be central to the underlying claim in a way that the traditional direct/indirect filters — and their implied relevant markets — miss.

Further, the Illinois Brick doctrine was itself based not on the substantive necessity of cutting off liability evaluations at a particular level of distribution, but on administrability concerns. In particular, the Court was concerned with preventing duplicative recovery when there were many potential groups of plaintiffs, as well as preventing injustices that would occur if unknown groups of plaintiffs inadvertently failed to have their rights adequately adjudicated in absentia. It was also concerned with avoiding needlessly complicated damages calculations.

But, almost by definition, the tightly coupled nature of the two sides of a two-sided platform should mitigate the concerns about duplicative recovery and unknown parties. Moreover, much of the presumed complexity in damages calculations in a platform setting arise from the nature of the platform itself. Assessing and apportioning damages may be complicated, but such is the nature of complex commercial relationships — the same would be true, for example, of damages calculations between vertically integrated companies that transact simultaneously at multiple levels, or between cross-licensing patent holders/implementers. In fact, if anything, the judicial efficiency concerns in Illinois Brick point toward the increased importance of properly assessing the nature of the product or service of the platform in order to ensure that it accurately encompasses the entire relevant transaction.

Put differently, under a proper, more-accurate market definition, the “direct” and “indirect” labels don’t necessarily reflect either business or antitrust realities.

Where the Court in Apple v. Pepper really misses the boat is in its overly formalistic claim that the business model (and thus the product) underlying the complained-of conduct doesn’t matter:

[W]e fail to see why the form of the upstream arrangement between the manufacturer or supplier and the retailer should determine whether a monopolistic retailer can be sued by a downstream consumer who has purchased a good or service directly from the retailer and has paid a higher-than-competitive price because of the retailer’s unlawful monopolistic conduct.

But Amex held virtually the opposite:

Because “[l]egal presumptions that rest on formalistic distinctions rather than actual market realities are generally disfavored in antitrust law,” courts usually cannot properly apply the rule of reason without an accurate definition of the relevant market.

* * *

Price increases on one side of the platform likewise do not suggest anticompetitive effects without some evidence that they have increased the overall cost of the platform’s services. Thus, courts must include both sides of the platform—merchants and cardholders—when defining the credit-card market.

In the face of novel business conduct, novel business models, and novel economic circumstances, the degree of substantive certainty may be eroded, as may the reasonableness of the expectation that typical evidentiary burdens accurately reflect competitive harm. Modern technology — and particularly the platform business model endemic to many modern technology firms — presents a need for courts to adjust their doctrines in the face of such novel issues, even if doing so adds additional complexity to the analysis.

The unlearned market-definition lesson of the Eighth Circuit’s Campos v. Ticketmaster dissent

The Eight Circuit’s Campos v. Ticketmaster case demonstrates the way market definition shapes the application of the indirect purchaser doctrine. Indeed, the dissent in that case looms large in the Ninth Circuit’s decision in Apple v. Pepper. [Full disclosure: One of us (Geoff) worked on the dissent in Campos v. Ticketmaster as a clerk to Eighth Circuit judge Morris S. Arnold]

In Ticketmaster, the plaintiffs alleged that Ticketmaster abused its monopoly in ticket distribution services to force supracompetitve charges on concert venues — a practice that led to anticompetitive prices for concert tickets. Although not prosecuted as a two-sided market, the business model is strikingly similar to the App Store model, with Ticketmaster charging fees to venues and then facilitating ticket purchases between venues and concert goers.

As the dissent noted, however:

The monopoly product at issue in this case is ticket distribution services, not tickets.

Ticketmaster supplies the product directly to concert-goers; it does not supply it first to venue operators who in turn supply it to concert-goers. It is immaterial that Ticketmaster would not be supplying the service but for its antecedent agreement with the venues.

But it is quite relevant that the antecedent agreement was not one in which the venues bought some product from Ticketmaster in order to resell it to concert-goers.

More important, and more telling, is the fact that the entirety of the monopoly overcharge, if any, is borne by concert-goers.

In contrast to the situations described in Illinois Brick and the literature that the court cites, the venues do not pay the alleged monopoly overcharge — in fact, they receive a portion of that overcharge from Ticketmaster. (Emphasis added).

Thus, if there was a monopoly overcharge it was really borne entirely by concert-goers. As a result, apportionment — the complexity of which gives rise to the standard in Illinois Brick — was not a significant issue. And the antecedent transaction that allegedly put concertgoers in an indirect relationship with Ticketmaster is one in which Ticketmaster and concert venues divvied up the alleged monopoly spoils, not one in which the venues absorb their share of the monopoly overcharge.

The analogy to Apple v. Pepper is nearly perfect. Apple sits between developers on one side and consumers on the other, charges a fee to developers for app distribution services, and facilitates app sales between developers and users. It is possible to try to twist the market definition exercise to construe the separate contracts between developers and Apple on one hand, and the developers and consumers on the other, as some sort of complicated version of the classical manufacturing and distribution chains. But, more likely, it is advisable to actually inquire into the relevant factual differences that underpin Apple’s business model and adapt how courts consider market definition for two-sided platforms.

Indeed, Hanover Shoe and Illinois Brick were born out of a particular business reality in which businesses structured themselves in what are now classical production and distribution chains. The Supreme Court adopted the indirect purchaser rule as a prudential limitation on antitrust law in order to optimize the judicial oversight of such cases. It seems strangely nostalgic to reflexively try to fit new business methods into old legal analyses, when prudence and reality dictate otherwise.

The dissent in Ticketmaster was ahead of its time insofar as it recognized that the majority’s formal description of the ticket market was an artifact of viewing what was actually something much more like a ticket-services platform operated by Ticketmaster through the poor lens of the categories established decades earlier.

The Ticketmaster dissent’s observations demonstrate that market definition and antitrust standing are interrelated. It makes no sense to adhere to a restrictive reading of the latter if it connotes an economically improper understanding of the former. Ticketmaster provided an intermediary service — perhaps not quite a two-sided market, but something close — that stands outside a traditional manufacturing supply chain. Had it been offered by the venues themselves and bundled into the price of concert tickets there would be no question of injury and of standing (nor would market definition matter much, as both tickets and distribution services would be offered as a joint product by the same parties, in fixed proportions).

What antitrust standing doctrine should look like after Amex

There are some clear implications for antitrust doctrine that (should) follow from the preceding discussion.

A plaintiff has a choice to allege that a defendant operates either as a two-sided market or in a more traditional, linear chain during the pleading stage. If the plaintiff alleges a two-sided market, then, to demonstrate standing, it need only be shown that injury occurred to some subset of platform users with which the plaintiff is inextricably interrelated. The plaintiff would not need to demonstrate injury to him or herself, nor allege net harm, nor show directness.

In response, a defendant can contest standing by challenging the interrelatedness of the plaintiff and the group of platform users with whom the plaintiff claims interrelatedness. If the defendant does not challenge the allegation that it operates a two-sided market, it could not challenge standing by showing indirectness, that plaintiff had not alleged personal injury, or that plaintiff hasn’t alleged a net harm.

Once past a determination of standing, however, a plaintiff who pleads a two-sided market would not be able to later withdraw this allegation in order to lessen the attendant legal burdens.

If the court accepts that the defendant is operating a two-sided market, both parties would be required to frame their allegations and defenses in accordance with the nature of the two-sided market and thus the holding in Amex. This is critical because, whereas alleging a two-sided market may make it easier for plaintiffs to demonstrate standing, Amex’s requirement that net harm be demonstrated across interrelated sets of users makes it more difficult for plaintiffs to present a viable prima facie case. Further, defendants would not be barred from presenting efficiencies defenses based on benefits that interrelated users enjoy.

Conclusion: The Court in Apple v. Pepper should have acknowledged the implications of its holding in Amex

After Amex, claims against two-sided platforms might require more evidence to establish anticompetitive harm, but that business model also means that firms should open themselves up to a larger pool of potential plaintiffs. The legal principles still apply, but the relative importance of those principles to judicial outcomes shifts (or should shift) in line with the unique economic position of potential plaintiffs and defendants in a platform environment.

Whether a priori the net result is more or fewer cases and more or fewer victories for plaintiffs is not the issue; what matters is matching the legal and economic theory to the relevant facts in play. Moreover, decrying Amex as the end of antitrust was premature: the actual affect on injured parties can’t be known until other changes (like standing for a greater number of plaintiffs) are factored into the analysis. The Court’s holding in Apple v. Pepper sidesteps this issue entirely, and thus fails to properly move antitrust doctrine forward in line with its holding in Amex.

Of course, it’s entirely possible that platforms and courts might be inundated with expensive and difficult to manage lawsuits. There may be reasons of administrability for limiting standing (as Illinois Brick perhaps prematurely did for fear of the costs of courts’ managing suits). But then that should have been the focus of the Court’s decision.

Allowing standing in Apple v. Pepper permits exactly the kind of legal experimentation needed to enable the evolution of antitrust doctrine along with new business realities. But in some ways the Court reached the worst possible outcome. It announced a rule that permits more plaintiffs to establish standing, but it did not direct lower courts to assess standing within the proper analytical frame. Instead, it just expands standing in a manner unmoored from the economic — and, indeed, judicial — context. That’s not a recipe for the successful evolution of antitrust doctrine.