Yahoo Finance Inside the War on Apple and Google App Stores
Match Group, the online dating company that recently spun off from Barry Diller’s IAC, generated $2.4 billion in revenue last year.
Its biggest single expense? The 30% app store “tax” charged by Apple for purchases in Match’s apps, which include Tinder, Hinge and OkCupid — fees the company claims are on an annual run rate of $500 million. Starting in September, Google also will force Match to pay the same commission rate on apps distributed via the Google Play store.
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The two tech giants have a stranglehold on the app economy, according to Jared Sine, Match Group’s chief business affairs and legal officer. And their grip has become as damaging to the American economy as those of the oil barons, railroad tycoons and Ma Bell of years past, he testified at a Senate Judiciary Committee hearing in April.
“Apple and Google,” Sine asserted, “are using their monopoly power to dictate how apps operate, how much they will be forced to pay and, in many cases, if they will even survive.”
After years of simmering spats, the industry’s big two app stores are now the targets of attacks on multiple fronts. Getting Apple and Google to change the way they operate their digital storefronts — which together raked in a whopping $111 billion in fees last year, per research firm Sensor Tower — is among the most urgent issues in regulatory and legal circles amid a broad and growing backlash against Big Tech.
Epic Games, maker of the blockbuster battle game “Fortnite,” last year sued both Apple and Google, alleging they operate illegal monopolies that force app makers to use the companies’ in-app payment systems and extract exorbitant fees. A judge’s ruling in the Epic Games v. Apple trial is expected this fall.
For Epic CEO Tim Sweeney, it’s an existential fight that will determine access to the next generation of mobile computing. Epic has not asked for any monetary damages in the Apple or Google lawsuits — underscoring its long-game strategy — and mainly seeks for its apps to be able to use alternate payment mechanisms. The company, valued at nearly $29 billion after a new round of investments this year from Sony and others, is taking an economic hit in the crusade: “Fortnite” is still banned from the Apple App Store and Google Play, after Epic defied their in-app payment rules.
“The long-term evolution of ‘Fortnite’ will be opening up ‘Fortnite’ as a platform for creators to distribute their work to users, and creators will make the majority of profits,” Sweeney testified in the trial in May. “With Apple taking 30% off of the top, it makes it very hard for Epic and creators to exist in this future world.”
Tech billionaire Elon Musk has also chimed in on the fracas, saying in a July 30 tweet, “Apple app store fees are a de facto global tax on the internet. Epic is right.”
Meanwhile, Google is facing a new legal challenge from 36 U.S. state attorneys general, who are similarly charging that the internet giant’s app store abuses its powerful position in the Android market, and specifically that it, like Apple, unfairly takes a 30% cut. “Google has served as the gatekeeper of the internet for many years, but more recently, it has also become the gatekeeper of our digital devices — resulting in all of us paying more for the software we use every day,” New York Attorney General Letitia James said in announcing the legal action in July.
The Federal Trade Commission may soon initiate a rule-making process to institute new restrictions on app stores, D.C. insiders say. And there’s a bill pending in the Senate Judiciary Committee that would prohibit the Apple App Store and Google Play from engaging in discriminatory behavior, according to a Beltway source.
The European Commission is proceeding with an antitrust probe into Apple, including its App Store practices, prompted in part by a complaint from Spotify, which has long argued that the tech giant bestows advantages to Apple Music over its own streaming app. EU regulations on app stores are expected in 2022. Change is not likely to happen quickly. “Washington and Brussels move at a glacial pace,” says Paul Gallant, a tech policy analyst at Wall Street firm Cowen and Co.
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While a ruling in Epic Games v. Apple could lean in favor of one party, the case is expected to be appealed either way. Government action will be required to change the status quo, says Meghan DiMuzio, exec director of the Coalition for App Fairness. Formed last September, the lobbying group has 60-plus members, including Spotify, Epic Games, Match Group, Deezer, News Media Europe, Tile and Basecamp.
Why not organize a boycott of the app stores? That’s not an economically feasible weapon for most developers, she says: “It would be like trying to boycott Standard Oil.”
How app stores operate in the future affects millions of developers globally and, by extension, how consumers pay for and access their products.
But some of the entertainment biz’s biggest app makers have stayed silent on the issue. Disney, Netflix, NBCUniversal, ViacomCBS and WarnerMedia each declined to comment for this story. (Netflix, for one, does not allow customers to subscribe through its apps, specifically to avoid the 30% fees; Spotify and others have taken the same tack.)
Why isn’t Hollywood more vocal on app stores? Industry execs suggest they simply don’t want to attract unwanted attention by joining the fight. There’s also the possibility that entertainment companies have cut special distribution pacts with Apple and Google.
For example, there’s evidence Amazon brokered special treatment from Apple. A House antitrust subcommittee investigation into Big Tech’s business practices last year revealed a 2016 exchange between Amazon founder Jeff Bezos and Apple senior VP Eddy Cue about a deal to get Prime Video’s app on Apple TV. According to the emails, Cue agreed that Apple would take only 15% of app revenue — half the standard 30% commission — with the understanding that the ecommerce kingpin would, in return, start selling Apple products. That contradicts Apple’s repeated claim that it deals with all app developers on the same terms. (Earlier that year, in June 2016, Apple announced that it was reducing fees for in-app subscriptions to 15% — but only after 12 months at the 30% rate. Google later followed suit.)
If history is any indication, neither Apple nor Google will willingly make significant concessions on their app store businesses. And of course, the tech powerhouses argue their detractors have it all wrong.
Apple and Google say the fees they collect ensure they can continue to keep their app stores safe, secure and scalable, as well as fund development of an array of tools for app creators. As for the 30% cut? Both point to their counterparts — and other app stores — as charging the same commission. Apple and Google both deny that they have a monopoly in the app market.
Apple CEO Tim Cook, testifying in the Epic case, said that without the ability to collect fees for in-app purchases, “we would have to come up with another system to invoice developers, which I think would be a mess.” By allowing alternate payment options outside the App Store, “we would in essence give up our total return on our IP,” Cook argues.
But incredibly, Apple witnesses including ex-marketing boss Phil Schiller said under oath that they didn’t know how much money the App Store generates. (Epic claims the App Store’s profit margin is around 80%.) “It doesn’t come up,” Schiller said under cross-examination. “That’s not how I look at the business.”
To tech industry allies, the uproar over app stores is not driven by consumers — but rather companies like Epic, Spotify and Facebook that want to pay less in distribution fees.
“Policy makers are more likely to act when there’s clear evidence of the consumer getting screwed. They’re much less likely to act in a dispute between two successful companies,” says Adam Kovacevich, a former Google lobbying exec who is CEO of the Chamber of Progress. The left-leaning tech trade group’s backers include Google and Amazon.
Under existing antitrust law, judges have been reluctant to find that a single-company market is a monopoly. It’s like complaining that Yelp has a monopoly market on Yelp reviews, Kovacevich says. But the switching costs between iOS and Android ecosystems are so high for consumers that “this is a case where it seems to make sense,” says Stanford Law School Prof. Mark Lemley, an expert in technology law. “You’d have to throw out your investment in one phone.”
Google argues that its framework is different than Apple’s stovepipe model. Google senior director of policy Wilson L. White, calling the state AGs’ antitrust suit “meritless,” said in a response that Google Play is “a system that provides more openness and choice than others.” Android is free and open to anyone, he wrote in a July 7 blog post: “If you don’t find the app you’re looking for in Google Play, you can choose to download the app from a rival app store or directly from a developer’s website.”
By allowing for “sideloading” of Android apps — meaning they don’t go through Google Play at all — the company is not playing a gatekeeper role, it says. White noted that the Android “Fortnite” app remains available through other avenues, despite being removed from Google Play.
But that ignores that Google Play is the primary way consumers discover and download Android apps. Just offering a sideloading option doesn’t address other issues, like Google’s alleged self-preferencing and the mandated use of its in-app payment system.
Apple insists that it must retain sole power over distributing iOS apps because that’s essential to keeping customers safe. In 2020 alone, the company claims, its proactive measures to protect the App Store prevented consumers from more than $1.5 billion in potentially fraudulent transactions. Apple says last year it rejected or removed nearly 1 million “problematic” new apps or updates from the App Store over spam, fraud, privacy and other violations.
Critics dismiss Apple’s anti-sideloading rhetoric as specious, pointing out that other operating systems (including not just Android but also Apple’s macOS) allow anyone to download and install software from third-party sources. “It’s a scare tactic used by Apple to perpetuate their monopoly,” CAF’s DiMuzio says.
Why are the app store battles coming to a head now? For one thing, anti-tech public sentiment continues to swell.
During the pandemic, Google, Facebook, Apple and Amazon have grown even larger and stronger. About 56% of Americans think major technology companies should be regulated more aggressively than they are now, according to a Pew Research Center survey conducted April 12-18 — up markedly from 47% in June 2020.
Lawmakers and regulators have read the room. “Antitrust is having a moment,” says Prof. Joshua P. Davis of the University of San Francisco School of Law. “The larger political winds have shifted against Big Tech.”
Industry watchers note that Apple previously avoided intense government scrutiny. By contrast, internet companies like Facebook, Google and Twitter have been subject to bipartisan grilling over data privacy, the spread of hate speech and misinformation, and alleged censorship of conservative voices (the last being a GOP hobbyhorse).
Apple, once Silicon Valley’s widely admired magic factory built on the masterful showmanship of late co-founder Steve Jobs, is on the outs — with the App Store a glaring example of its effective monopoly dominance. “It’s a gradual evolution of how Washington views the world,” Cowen’s Gallant says. “Apple was not the leading target, but they’ve been pulled into it.”
At the Senate hearing this spring, Kyle Andeer, Apple’s chief compliance officer and VP of corporate law, portrayed his employer as a kind of patron of the arts that wants to see apps flourish. He likened the App Store to “a studio stocked with canvases, brushes and paint — the tools that artists need to create their works — and a gallery where they can display and sell their creations.”
Andeer claimed the App Store’s 30% commission “flipped the economics of software distribution in the developer’s favor,” saying at the Senate hearing that’s “a very competitive rate in very competitive markets, and it is a far cry from the rates charged for software distribution when the App Store was launched.”
The app store giants also argue that the vast majority of apps get a free ride. Only about 15% of the apps in the Apple App Store are subject to the 30% fee, the company says. Google claims less than 0.1% of developers must pay Google Play commissions. For developers who earn less than $1 million on app purchases, both companies have recently reduced their fees to 15%. But critics label that as arbitrary and a PR move. To DiMuzio, that just means more of the economic burden to support the app store shifts to big app owners.
Ultimately, those seeking to break open the app stores say the dispute isn’t over what percentage cut is reasonable. They argue that there needs to be a level playing field that gives developers and consumers choice. “We are not advocating for a specific fee, 5% or 10% or whatever,” says DiMuzio. “The point is, if Apple is the only game in town and you have to use their payment processing system, there’s no real competition.”
If governments can break the lock of the two app stores, that will lead to a new wave of innovation, says Alex Harman, competition policy advocate at Public Citizen. That could result in a completely different concept of what an app store means.
“The entire ecosystem of what’s considered startup culture in Silicon Valley will totally shift,” Harman says. “Today, you are not going to build something that can pass through without Apple or Google’s consent.”
According to Apple’s Andeer, competition in the apps market “is fierce and fair” — in other words, don’t fix what ain’t broke. In his Senate testimony, he offered this: “Apple, after all, was started by tinkerers and dreamers, and we became successful over time because we had an opportunity to compete.”
But to critics, the legendary garage-born computer company is now a bully looking to maintain its lucrative gatekeeper status.
Apple waited until tens of millions of device owners were locked into the iPhone — and then changed the App Store rules to impose burdens on app developers, including those that compete with Apple’s applications, according to Horacio Gutiérrez, Spotify’s top attorney.
Apple’s defense of its anti-competitive App Store policies is built on “cynical pretexts,” Gutiérrez said at April’s Senate hearing. “These restrictions are nothing more than an abusive power grab and a confiscation of the value created by others.”
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