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How Regulation Fractured Apple’s App Store

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Since launching the App Store in 2008, Apple has managed it the same way in 175 countries, right down to the 30% commission charged on each app sold.

The company calls this result an economic miracle. The store generated more than $1 trillion in sales, helped create more than seven million jobs, and generated billions of dollars in annual profits for Apple.

But as the App Store approaches its 16th anniversary, a patchwork of local rules is upending Apple’s authority over it.

On Thursday, European Union regulators will begin enforcing the Digital Markets Acta 2022 law that requires Apple to open the bloc’s iPhones to competing app marketplaces and alternative payment systems for in-app sales.

The changes follow similar demands in South Korea and the United States, where Apple was forced to allow alternative payment processors. Similar concessions are being discussed in Britain, Japan And Australia.

The rules divide what was once a single store into a jumble of digital stores across national borders. The once uniform experience of buying software on an iPhone now differs depending on where people live.

“The App Store is completely divided,” said Eric Seufert, who invests in app makers and runs Mobile Dev Memo, a blog about the app economy. “The approach to compliance is pretty similar: ‘Let’s cut costs a little.’ But it’s painful.

Apple has worked hard to adapt to the changing regulatory landscape. An Apple spokesperson said the company spent months talking with the European Commission about the Digital Markets Act and held meetings with developers to develop plans to change the App Store while minimizing the risks of malware, fraud and scams on iPhones.

Apple says its control over the App Store is essential to the security and quality of the apps it distributes. The company didn’t go so far as to drop the 30 percent commission. But over time, it made some concessions to developers and regulators by reducing commissions paid by small app creators and allowing developers to link to their websites to charge users directly for subscriptions.

These changes are expected to weigh on Apple’s sales and reduce its profits. Last year, the App Store generated an estimated $24.12 billion in revenue, according to Bernstein Research.

When the App Store first appeared, Apple co-founder Steve Jobs said the fees were “a good deal” because they allowed every developer – big or small – to deliver software to every iPhone. But for years, the fees charged by Apple have been a point of frustration for developers. Over time, regulators began to listen to these complaints.

In 2019, Spotify filed a complaint against Apple in Europe, accusing it of anti-competitive practices because it prevented streaming music services from advertising where and how users could subscribe to their app. A year later, Epic Games, the creator of Fortnite, filed a complaint in a US federal court, accusing Apple of violating antitrust laws by forcing developers to use its payment system.

The complaints have prompted developers around the world to start pushing for changes to the app economy. In 2021, South Korean lawmakers were among the first to respond by passing legislation requiring app store operators to allow alternative payment systems. Apple relaxed its requirement for developers to use its in-app payment service, but said developers who used alternative services would owe Apple a small fee. 26 percent commission on sale.

The developers argued that the new commission rate is the same as the 30 percent rate after adding credit card processing fees. Their criticism resonated with South Korean regulators, who said Apple’s plan defeated the purpose of the law. The country’s telecommunications regulator said could fine Apple $15.4 million for “unfair practices”.

Apple said it disagreed with the South Korean regulators’ conclusion and believed its changes complied with the law.

The company has taken a similar approach in the United States. During the lawsuit against Epic Games, Tim Cook, Apple’s chief executive, said that being forced to offer alternative payment systems “would be a disaster.”

“We would have to find another system to charge developers,” he said, adding that Apple would still charge a commission.

The federal judge in the case ruled in 2021 which Apple needed to allow alternative payments in the United States. Apple complied much as in South Korea, except it said developers who used alternatives had to a commission of 27 percent.

“Obviously, it’s smoke and mirrors,” said Colin Kass, an antitrust lawyer with Proskauer Rose who has no connection to the case. “Does this satisfy the court? Maybe.”

Apple said the judge upheld its right to charge a commission and that its solution addressed the judge’s request to allow out-of-app purchases. Epic said it plans to file a motion challenging the 27% fee and asking the court to intervene.

In 2022, the European Union passed the Digital Markets Act to introduce, among other changes, competition in the App Store on iPhone. Apple had two years to comply.

The company’s engineers have spent thousands of hours creating more than 600 new software tools for developers. In January, the company presented these tools and presented three options for app creators in the European Union, where around 450 million people live.

Under Apple’s plan, developers could stick with the status quo of the App Store system and pay up to 30% commission on sales. They could reduce their commission to 17 percent while adding a new tax of 50 euro cents for each download above one million per year. Or, they could avoid Apple’s commission by selling through a competing app store while still paying download fees.

Apple said the plan complied with the law and meant that 99% of developers in the European Union would reduce or maintain the fees they owe.

But app makers said the plan violated the letter and spirit of the law. Under the new rules, a tech giant like Apple is supposed to allow app creators to sell subscriptions and services outside of their apps “for free,” said Damien Geradin, a European antitrust lawyer who advises developers of applications. He said Apple’s 50-cent fee and 17 percent commission violated that part of the law.

European regulators won’t rule on Apple’s proposal until after its effective date on Thursday. If they open a formal investigation, it could result in a lengthy legal battle that could force Apple to change or risk fines of up to 10% of its nearly $400 billion in global annual revenue. dollars last year.

Mr. Geradin said Apple was unlikely to succeed but in the meantime it could continue to earn commissions.

“It’s part of their tactic,” he said.

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