Depending how you look at it, Apple is gaining a fresh opportunity to explain why the charges it levies at the App Store are fair, or regulators are getting the chance to decide what the future shape of online business will be by defining what constitutes an acceptable profit margin in digital sales.
In either case, these decisions set precedents which can, presumably, be applied against other forms of business and retail. After all, if regulators define acceptable profit margins for one line of business, then they must adopt a consistent approach that can be applied across all industries. Right now, Apple seems to believe that for most transactions, the fair figure is zero or 15%, with those with the broadest shoulders paying more to support others.
Two sides to every story
What’s happening is that the UK’s Competition Appeal Tribunal has decided to permit a Collective Proceedings Order (CPO, basically equivalent to a class action) to go to trial.
The action was brought in May 2021 by Dr. Rachael Kent, a lecturer in Digital Economy and Society Education at King's College, London. It argues that Apple is engaged in unfair business practices by forcing developers to use its own payment systems and taking up to 30% commission. If the case succeeds, approximately 19.6 million UK customers who have purchased apps from the App Store will get a share of up to £1.5 billion compensation. More information concerning the background to this case is available at the UK Apple App Store Claim site.
At its simplest, the allegations are that the company breached the law by excluding competition and charging an unlawful level of commission on digital purchases in the App Store. These allegations boil down to a combination of three charges:
- Unfair pricing (the 30% commission)
- Unfair tying (by requiring app purchases use Apple’s own payment systems)
- Exclusive dealing (by only supporting App Store purchases on its platforms)
Apple had attempted to get part of the claim that alleged unfair pricing withdrawn but was prepared to challenge allegations of exclusive dealing and tying in the court.
Apple faces growing global scrutiny
Apple’s App Store fees continue to face challenges worldwide. These include:
- A UK Competition and Markets Authority (“CMA”) investigation into Apple’s conduct in relation to the distribution of iOS apps
- A CMA study into mobile ecosystems in the UK
- The European Commission's investigation into alleged anti-competitive behavior on the part of the App Store
- The Dutch Authority for Consumers & Markets decision around dating apps and payments
- South Korean legislation that requires app stores to support alternative payment systems
- Investigations by the Japan Fair Trade Commission and the Competition Commission of India into various restrictions imposed by Apple on developers in relation to tools for app development and payment for apps
- Numerous actions in the US, China, and the Netherlands
Perhaps the history also matters
What’s strange about many of these challenges is that Apple is not unique in levying its up to 30% charge. Most every platform operator charges something similar, with some demanding more.
Historically, Apple’s App Store upended then-existing models of software distribution. Developers had been coughing up much higher percentages for distribution through retail stores and had also had to take the risk of manufacturing CDs and boxes as well as distribution costs.
Apple’s store offered developers a much better deal and reflected existing digital service fees. Developers gained access to international markets, tools, and Apple platforms. Developers who didn’t charge paid no commission at all. More recently, those earning under $1,000,000 per year pay 15%.
Apple, meanwhile, invests in platform development, software development, fraud protection, payment systems, server, and other marketing/infrastructure costs to support its stall. That Apple’s 30% commission represents its profit margin is a myth — the company’s margins are certainly slimmer.
What does winning look like?
To win, accusers must prove Apple’s commission is excessive and its business practices unfair.
That’s going to involve the usual roll call of Apple developer critics providing statements to the courts and will doubtless see conversations concerning Apple’s costs against revenues and the extent to which App Store profits have grown.
For most humans, many of these arguments will be as interesting as a discussion of the geology of Rockall or the chance to buy NFTs in the (yawn) 'metaverse,' but for the tech industry what’s really under scrutiny is cold, hard cash.
After all, for the courts to reach a decision as to what is a fair price for Apple to charge, they will also need to define what constitutes a fair price in more general terms. You can’t set such rules arbitrarily, which means any global entity offering online stores for digital services could perhaps be impacted by the decision.
And, of course, with every business today also being an online business, the repercussions could impact every enterprise. Think about it: In the context of an inflationary economy and growing wealth inequality, a decision that effectively defines a fair profit margin in one industry becomes a precedent for similar discussions in every industry.
It also seems likely that if such a decision is reached, other global digital software stores will be sucked into the discussion and should perhaps anticipate similar actions against them.
Do consumers win? Possibly a little, but given that running online services does have actual cost and that the decision will not be between 30% and free, but more likely between 30% and another figure probably higher than 10%, consumer benefit will be limited at best.
The court battle will take place at an unspecified date, presumably in 2023.
What the protagonists say
In a statement, Dr. Kent said: “A claim of this magnitude is always going to be heavily defended. The anti-competitive practices that we are alleging against Apple go to the heart of Apple’s business strategy, and with its almost unlimited resources, it will always make this a challenging fight.”
While Apple has not made a fresh comment at this time, the company last year said: “The commissions charged by the App Store are very much in the mainstream of those charged by all other digital marketplaces. In fact, 84 percent of apps on the App Store are free and developers pay Apple nothing. And for the vast majority of developers who do pay Apple a commission because they are selling a digital good or service, they are eligible for a commission rate of 15 per cent.”
Apple introduced reduced commissions for most developers in late 2020. Developers earning under a million dollars each year pay 15% commission, while those offering apps for free pay nothing at all. Despite these and other changes, the level of challenge and scrutiny Apple is facing continues to intensify, and it's hard to predict what the overall impact of these decisions on Apple's business will be.
Please follow me on Twitter, or join me in the AppleHolic’s bar & grill and Apple Discussions groups on MeWe.