Archives For In-app purchases

European Commission Objection to App Store Rules Lack Empirical Support

Paula Pernas Castrillo —  27 May 2021

The European Commission recently issued a formal Statement of Objections (SO) in which it charges Apple with antitrust breach. In a nutshell, the commission argues that Apple prevents app developers—in this case, Spotify—from using alternative in-app purchase systems (IAPs) other than Apple’s own, or steering them towards other, cheaper payment methods on another site. This, the commission says, results in higher prices for consumers in the audio streaming and ebook/audiobook markets.

More broadly, the commission claims that Apple’s App Store rules may distort competition in markets where Apple competes with rival developers (such as how Apple Music competes with Spotify). This explains why the anticompetitive concerns raised by Spotify regarding the Apple App Store rules have now expanded to Apple’s e-books, audiobooks and mobile payments platforms.

However, underlying market realities cast doubt on the commission’s assessment. Indeed, competition from Google Play and other distribution mediums makes it difficult to state unequivocally that the relevant market should be limited to Apple products. Likewise, the conduct under investigation arguably solves several problems relating to platform dynamics, and consumers’ privacy and security.

Should the relevant market be narrowed to iOS?

An important first question is whether there is a distinct, antitrust-relevant market for “music streaming apps distributed through the Apple App Store,” as the EC posits.

This market definition is surprising, given that it is considerably narrower than the one suggested by even the most enforcement-minded scholars. For instance, Damien Geradin and Dimitrias Katsifis—lawyers for app developers opposed to Apple—define the market as “that of app distribution on iOS devices, a two-sided transaction market on which Apple has a de facto monopoly.” Similarly, a report by the Dutch competition authority declared that the relevant market was limited to the iOS App Store, due to the lack of interoperability with other systems.

The commission’s decisional practice has been anything but constant in this space. In the Apple/Shazam and Apple/Beats cases, it did not place competing mobile operating systems and app stores in separate relevant markets. Conversely, in the Google Android decision, the commission found that the Android OS and Apple’s iOS, including Google Play and Apple’s App Store, did not compete in the same relevant market. The Spotify SO seems to advocate for this definition, narrowing it even further to music streaming services.

However, this narrow definition raises several questions. Market definition is ultimately about identifying the competitive constraints that the firm under investigation faces. As Gregory Werden puts it: “the relevant market in an antitrust case […] identifies the competitive process alleged to be harmed.”

In that regard, there is clearly some competition between Apple’s App Store, Google Play and other app stores (whether this is sufficient to place them in the same relevant market is an empirical question).

This view is supported by the vast number of online posts comparing Android and Apple and advising consumers on their purchasing options. Moreover, the growth of high-end Android devices that compete more directly with the iPhone has reinforced competition between the two firms. Likewise, Apple has moved down the value chain; the iPhone SE, priced at $399, competes with other medium-range Android devices.

App developers have also suggested they view Apple and Android as alternatives. They take into account technical differences to decide between the two, meaning that these two platforms compete with each other for developers.

All of this suggests that the App Store may be part of a wider market for the distribution of apps and services, where Google Play and other app stores are included—though this is ultimately an empirical question (i.e., it depends on the degree of competition between both platforms)

If the market were defined this way, Apple would not even be close to holding a dominant position—a prerequisite for European competition intervention. Indeed, Apple only sold 27.43% of smartphones in March 2021. Similarly, only 30.41% of smartphones in use run iOS, as of March 2021. This is well below the lowest market share in a European abuse of dominance—39.7% in the British Airways decision.

The sense that Apple and Android compete for users and developers is reinforced by recent price movements. Apple dropped its App Store commission fees from 30% to 15% in November 2020 and Google followed suit in March 2021. This conduct is consistent with at least some degree of competition between the platforms. It is worth noting that other firms, notably Microsoft, have so far declined to follow suit (except for gaming apps).

Barring further evidence, neither Apple’s market share nor its behavior appear consistent with the commission’s narrow market definition.

Are Apple’s IAP system rules and anti-steering provisions abusive?

The commission’s case rests on the idea that Apple leverages its IAP system to raise the costs of rival app developers:

 “Apple’s rules distort competition in the market for music streaming services by raising the costs of competing music streaming app developers. This in turn leads to higher prices for consumers for their in-app music subscriptions on iOS devices. In addition, Apple becomes the intermediary for all IAP transactions and takes over the billing relationship, as well as related communications for competitors.”

However, expropriating rents from these developers is not nearly as attractive as it might seem. The report of the Dutch competition notes that “attracting and maintaining third-party developers that increase the value of the ecosystem” is essential for Apple. Indeed, users join a specific platform because it provides them with a wide number of applications they can use on their devices. And the opposite applies to developers. Hence, the loss of users on either or both sides reduces the value provided by the Apple App Store. Following this logic, it would make no sense for Apple to systematically expropriate developers. This might partly explain why Apple’s fees are only 30%-15%, since in principle they could be much higher.

It is also worth noting that Apple’s curated App Store and IAP have several redeeming virtues. Apple offers “a highly curated App Store where every app is reviewed by experts and an editorial team helps users discover new apps every day.”  While this has arguably turned the App Store into a relatively closed platform, it provides users with the assurance that the apps they find there will meet a standard of security and trustworthiness.

As noted by the Dutch competition authority, “one of the reasons why the App Store is highly valued is because of the strict review process. Complaints about malware spread via an app downloaded in the App Store are rare.” Apple provides users with a special degree of privacy and security. Indeed, Apple stopped more than $1.5 billion in potentially fraudulent transactions in 2020, proving that the security protocols are not only necessary, but also effective. In this sense, the App Store Review Guidelines are considered the first line of defense against fraud and privacy breaches.

It is also worth noting that Apple only charges a nominal fee for iOS developer kits and no fees for in-app advertising. The IAP is thus essential for Apple to monetize the platform and to cover the costs associated with running the platform (note that Apple does make money on device sales, but that revenue is likely constrained by competition between itself and Android). When someone downloads Spotify from the App Store, Apple does not get paid, but Spotify does get a new client. Thus, while independent developers bear the costs of the app fees, Apple bears the costs and risks of running the platform itself.

For instance, Apple’s App Store Team is divided into smaller teams: the Editorial Design team, the Business Operations team, and the Engineering R&D team. These teams each have employees, budgets, and resources for which Apple needs to pay. If the revenues stopped, one can assume that Apple would have less incentive to sustain all these teams that preserve the App Store’s quality, security, and privacy parameters.

Indeed, the IAP system itself provides value to the Apple App Store. Instead of charging all of the apps it provides, it takes a share of the income from some of them. As a result, large developers that own in-app sales contribute to the maintenance of the platform, while smaller ones are still offered to consumers without having to contribute economically. This boosts Apple’s App Store diversity and supply of digital goods and services.

If Apple was forced to adopt another system, it could start charging higher prices for access to its interface and tools, leading to potential discrimination against the smaller developers. Or, Apple could increase the prices of handset devices, thus incurring higher costs for consumers who do not purchase digital goods. Therefore, there are no apparent alternatives to the current IAP that satisfy the App Store’s goals in the same way.

As the Apple Review Guidelines emphasize, “for everything else there is always the open Internet.” Netflix and Spotify have ditched the subscription options from their app, and they are still among the top downloaded apps in iOS. The IAP system is therefore not compulsory to be successful in Apple’s ecosystem, and developers are free to drop Apple Review Guidelines.

Conclusion

The commission’s case against Apple is based on shaky foundations. Not only is the market definition extremely narrow—ignoring competition from Android, among others—but the behavior challenged by the commission has a clear efficiency-enhancing rationale. Of course, both of these critiques ultimately boil down to empirical questions that the commission will have overcome before it reaches a final decision. In the meantime, the jury is out.

In Antitrust & Competition, Apple, European Union, Google, International, Market Definition, Monopolization, Platforms, Truth on the Market , , , , , , , , , , , , , , , , , ,
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The FTC’s in-app purchasing complaint against Amazon reflects its flawed, per se approach to unfairness

Geoffrey Manne —  10 July 2014

Today the FTC filed its complaint in federal district court in Washington against Amazon, alleging that the company’s in-app purchasing system permits children to make in-app purchases without parental “informed consent” constituting an “unfair practice” under Section 5 of the FTC Act.

As I noted in my previous post on the case, in bringing this case the Commission is doubling down on the rule it introduced in Apple that effectively converts the balancing of harms and benefits required under Section 5 of the FTC Act to a per se rule that deems certain practices to be unfair regardless of countervailing benefits. Similarly, it is attempting to extend the informed consent standard it created in Apple that essentially maintains that only specific, identified practices (essentially, distinct notification at the time of purchase or opening of purchase window, requiring entry of a password to proceed) are permissible under the Act.

Such a standard is inconsistent with the statute, however. The FTC’s approach forecloses the ability of companies like Amazon to engage in meaningful design decisions and disregards their judgment about which user interface designs will, on balance, benefit consumers. The FTC Act does not empower the Commission to disregard the consumer benefits of practices that simply fail to mimic the FTC’s preconceived design preferences. While that sort of approach might be defensible in the face of manifestly harmful practices like cramming, it is wholly inappropriate in the context of app stores like Amazon’s that spend considerable resources to design every aspect of their interaction with consumers—and that seek to attract, not to defraud, consumers.

Today’s complaint occasions a few more observations:

  1. Amazon has a very strong case. Under Section 5 of the FTC Act, the Commission will have to prevail on all three elements required to prove unfairness under Section 5: that there is substantial injury, that consumers can’t reasonably avoid the injury and that any countervailing benefits don’t outweigh the injury. But, consistent with its complaint and consent order in Apple, the Amazon complaint focuses almost entirely on only the first of these. While that may have been enough to induce Apple to settle out of court, the FTC will actually have to make out a case on reasonable avoidance and countervailing benefits at trial. It’s not at all clear that the agency will be able to do so on the facts alleged here.
  2. On reasonable avoidance, over and above Amazon’s general procedures that limit unwanted in-app purchases, the FTC will have a tough time showing that Amazon’s Kindle Free Time doesn’t provide parents with more than enough ability to avoid injury. In fact, the complaint doesn’t mention Free Time at all.
  3. Among other things, the complaint asserts that Amazon knew about issues with in-app purchasing by December of 2011 and claims that “[n]ot until June 2014 did Amazon change its in-app charge framework to obtain account holders’ informed consent for in-app charges on its newer mobile devices.” But Kindle Free Time was introduced in September of 2012. While four FTC Commissioners may believe that Free Time isn’t a sufficient response to the alleged problem, it is clearly a readily available, free and effective (read: reasonable) mechanism for parents to avoid the alleged harms. It may not be what the design mavens at the FTC would have chosen to do, but it seems certain that avoiding unauthorized in-app purchases by children was part of what motivated Amazon’s decision to create and offer Free Time.
  4. On countervailing benefits, as Commissioner Wright discussed in detail in his dissent from the Apple consent order, the Commission seems to think that it can simply assert that there are no countervailing benefits to Amazon’s design choices around in-app purchases. Here the complaint doesn’t mention 1-Click at all, which is core to Amazon’s user interface design and essential to evaluating the balance of harms and benefits required by the statute.
  5. Even if it can show that Amazon’s in-app purchase practices caused harm, the Commission will still have to demonstrate that Amazon’s conscious efforts to minimize the steps required to make purchases doesn’t benefit consumers on balance. In Apple, the FTC majority essentially (and improperly) valued these sorts of user-interface benefits at zero. It implicitly does so again here, but a court will require more than such an assertion.
  6. Given these lapses, there is even a chance that the complaint will be thrown out on a motion to dismiss. It’s a high bar, but if the court agrees that there are insufficient facts in the complaint to make out a plausible case on all three elements, Amazon could well prevail on a motion to dismiss. The FTC’s approach in the Apple consent order effectively maintains that the agency can disregard reasonable avoidance and countervailing benefits in contravention of the statute. By following the same approach here in actual litigation, the FTC may well meet resistance from the courts, which have not yet so cavalierly dispensed with the statute’s requirements.
In Amazon, Apple, Federal Trade Commission, Platforms, Section 5 , , , , , , , , , , , , ,
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The FTC doubles down on its egregious product design enforcement with a threatened suit against Amazon.com

Geoffrey Manne —  2 July 2014

The Wall Street Journal reports this morning that Amazon is getting — and fighting — the “Apple treatment” from the FTC for its design of its in-app purchases:

Amazon.com Inc. is bucking a request from the Federal Trade Commission that it tighten its policies for purchases made by children while using mobile applications.

In a letter to the FTC Tuesday, Amazon said it was prepared to “defend our approach in court,” rather than agree to fines and additional record keeping and disclosure requirements over the next 20 years, according to documents reviewed by The Wall Street Journal.

According to the documents, Amazon is facing a potential lawsuit by the FTC, which wants the Seattle retailer to accept terms similar to those that Apple Inc. agreed to earlier this year regarding so-called in-app purchases.

From what I can tell, the Commission has voted to issue a complaint, and Amazon has informed the Commission that it will not accept its proposed settlement.

I am thrilled that Amazon seems to have decided to fight the latest effort by a majority of the FTC to bring every large tech company under 20-year consent decree. I should say: I’m disappointed in the FTC, sorry for Amazon, but thrilled for consumers and the free marketplace that Amazon is choosing to fight rather than acquiesce.

As I wrote earlier this year about the FTC’s case against Apple in testimony before the House Commerce Committee:

What’s particularly notable about the Apple case – and presumably will be in future technology enforcement actions predicated on unfairness – is the unique relevance of the attributes of the conduct at issue to its product. Unlike past, allegedly similar, cases, Apple’s conduct was not aimed at deceiving consumers, nor was it incidental to its product offering. But by challenging the practice, particularly without the balancing of harms required by Section 5, the FTC majority failed to act with restraint and substituted its own judgment, not about some manifestly despicable conduct, but about the very design of Apple’s products. This is the sort of area where regulatory humility is more — not less — important.

In failing to observe common sense limits in Apple, the FTC set a dangerous precedent that, given the agency’s enormous regulatory scope and the nature of technologically advanced products, could cause significant harm to consumers.

Here that failure is even more egregious. Amazon has built its entire business around the “1-click” concept — which consumers love — and implemented a host of notification and security processes hewing as much as possible to that design choice, but nevertheless taking account of the sorts of issues raised by in-app purchases. Moreover — and perhaps most significantly — it has implemented an innovative and comprehensive parental control regime (including the ability to turn off all in-app purchases) — Kindle Free Time — that arguably goes well beyond anything the FTC required in its Apple consent order. I use Kindle Free Time with my kids and have repeatedly claimed to anyone who will listen that it is the greatest thing since sliced bread. Other consumers must feel similarly. Finally, regardless of all of that, Amazon has nevertheless voluntarily implemented additional notification procedures intended to comply with the Apple settlement, even though it didn’t apply to Amazon.

If the FTC asserts, in the face of all of that, that it’s own vision of what “appropriate” in-app purchase protections must look like is the only one that suffices to meet the standard required by Section 5’s Unfairness language, it is either being egregiously disingenuous, horrifically vain, just plain obtuse, or some combination of the three.

As I wrote in my testimony:

The application of Section 5’s “unfair acts and practices” prong (the statute at issue in Apple) is circumscribed by Section 45(n) of the FTC Act, which, among other things, proscribes enforcement where injury is “not outweighed by countervailing benefits to consumers or to competition.”

And as Commissioner Wright noted in his dissent in the Apple case,

[T]he Commission effectively rejects an analysis of tradeoffs between the benefits of additional guidance and potential harm to some consumers or to competition from mandating guidance…. I respectfully disagree. These assumptions adopt too cramped a view of consumer benefits under the Unfairness Statement and, without more rigorous analysis to justify their application, are insufficient to establish the Commission’s burden.

We won’t know until we see the complaint whether the FTC has failed to undertake the balancing it neglected to perform in Apple and that it is required to perform under the statute. But it’s hard to believe that it could mount a case against Amazon in light of the facts if it did perform such a balancing. There’s no question that Amazon has implemented conscious and consumer-welfare-enhancing design choices here. The FTC’s effort to nevertheless mandate a different design (and put Amazon under a 20 year consent decree) based on a claim that Amazon’s choices impose greater harms than benefits on consumers seems manifestly unsupportable.

Such a claim almost certainly represents an abuse of the agency’s discretion, and I expect Amazon to trounce the FTC if this case goes to trial.

In Amazon, Apple, Federal Trade Commission, Platforms, Section 5 , , , , , , , , , , ,
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