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Europe charges Apple with antitrust breach, citing Spotify App Store complaint

The European Commission has issued a formal ‘statement of objections’ against Apple, saying today that its preliminary view is Apple’s app store rules distort competition in the market for music streaming services by raising the costs of competing music streaming app developers.

Apple has a period of 12 weeks to respond to the preliminary charges.

The Commission begun investigating competition concerns related to iOS App Store (and also Apple Pay) last summer. But today’s charges relate only to music streaming apps, and the App Store’s role as a gatekeeper for such apps to access iOS users. This is also a market where Apple competes, with its eponymous offering (Apple Music).

“The Commission takes issue with the mandatory use of Apple’s own in-app purchase mechanism imposed on music streaming app developers to distribute their apps via Apple’s App Store,” it wrote. “The Commission is also concerned that Apple applies certain restrictions on app developers preventing them from informing iPhone and iPad users of alternative, cheaper purchasing possibilities.”

The statement of objections focuses on two rules that Apple imposes in its agreements with music streaming app developers: Namely what the Commission said is a “mandatory” requirement to use Apple’s proprietary in-app purchase system (IAP) to distribute paid digital content (with the Commission stating that Apple charges a 30% commission fee on all such subscriptions bought via IAP); and ‘anti-steering provisions‘ which limit the ability of developers to inform users of alternative purchasing options.

“The Commission’s investigation showed that most streaming providers passed this fee [Apple’s 30% cut] on to end users by raising prices,” it went on, adding: “While Apple allows users to use music subscriptions purchased elsewhere, its rules prevent developers from informing users about such purchasing possibilities, which are usually cheaper. The Commission is concerned that users of Apple devices pay significantly higher prices for their music subscription services or they are prevented from buying certain subscriptions directly in their apps.”

Commenting in a statement, EVP and competition chief Margrethe Vestager, added:?“App stores play a central role in today’s digital economy. We can now do our shopping, access news, music or movies via apps instead of visiting websites. Our preliminary finding is that Apple is a gatekeeper to users of iPhones and iPads via the App Store. With Apple Music, Apple also competes with music streaming providers. By setting strict rules on the App store that disadvantage competing music streaming services, Apple deprives users of cheaper music streaming choices and distorts competition. This is done by charging high commission fees on each transaction in the App store for rivals and by forbidding them from informing their customers of alternative subscription options.”

Apple sent us this statement in response to the Commission’s statement of objections:

“Spotify has become the largest music subscription service in the world, and we’re proud for the role we played in that. Spotify does not pay Apple any?commission on over 99% of their subscribers, and only pays a 15% commission on those remaining subscribers that they acquired through the App?Store. At the core of this case is Spotify’s demand they should be able to advertise alternative deals on their iOS app, a practice that no store in the?world allows. Once again, they want all the benefits of the App Store but don’t think they should have to pay anything for that. The Commission’s?argument on Spotify’s behalf is the opposite of fair competition.”

Spotify’s founder, Daniel Ek, has also responded to the news of the Commission’s charges against Apple with a jubilant tweet — writing: “Today is a big day. Fairness is the key to competition… we are one step closer to creating a level playing field, which is so important for the entire ecosystem of European developers.”

 

The music streaming company also sent us this statement, attributed to its head of global affairs and chief legal officer, Horacio Gutierrez — in which he suggests the antitrust charges will have “far-reaching implications”:

“Ensuring the iOS platform operates fairly is an urgent task with far-reaching implications. The European Commission’s Statement of Objections is a critical step toward holding Apple accountable for its anticompetitive behavior, ensuring meaningful choice for all consumers and a level playing field for app developers.”

“This is not a Spotify case”

During a press conference following the announcement of the Commission’s charges, Vestager went into a little more detail on the case — saying the Commission believes the impact of Apple’s distortion of the music streaming market has led to raising subscription prices for consumers to €12.99, rather than the €9.99 Apple charges for its own service.

Apple of course is not subject to the 30% fee it levies on third party music streaming services which opt to sell subscriptions via its store. (Spotify stopped doing so in 2018 in order to avoid the IAP fee.)

During a Q&A with journalists Vestager was pressed on the fact that Spotify is itself as thriving music streaming business — and Apple also points out that Spotify describes itself as the “largest global music subscription service” and has a market capitalization of $50BN+, so is hardly a minnow of a digital business — but she argued it’s “really difficult to say what would have been the market development without these conditions imposed by Apple in its App Store”.

“Spotify is a big player in the music streaming market but we don’t know what would have been the conditions without this,” Vestager went on, pointing to other rivals who — the clear implication is — might have been able to cut themselves a larger chunk of Spotify’s (and Apple’s) music streaming pie, under different App Store conditions.

“There are other rivals to Apple Music — there are Deezer, there are Soundcloud. Smaller competitors and here we have real concerns about their developments,” she said, adding: “This is not a Spotify case — this is a music streaming case. It’s about what are the different service providers, what are the conditions in order to be able to present to us their offers so we might be their customers. This is what it’s about… It’s important for a market to stay innovative and competitive and that we have the chance to see the different rivals and that they are free to make their own decisions.”

Vestager suggested it’s not the level of the fee Apple charges on in-app subscriptions, per se, that the Commission is objecting to but the combination of the conditions it imposes on players in this market while also offering its own rival service which is not subject to the same conditions.

She also noted that Apple’s fee doesn’t apply universally to all apps in its store — but does apply to all music streaming apps except Apple’s own, remarking: “So you have a possible 30% price difference between the two.”

On Apple’s anti-steering provisions, she suggested the impact of it constraining music streaming apps’ ability to communicate with subscribers who have signed up through the App Store significantly restricts their ability to compete, including by being combined with Apple’s own richer view of iOS users.

“If you are a rival to Apple Music you cannot send your subscribers an email telling them to go to your website to subscribe at a price without the commission fee,” she emphasized.

“The rival music streaming services — they don’t even get to know their customers. So if I end my subscription they cannot even send me an email to say is there something we can do for you, why did you end your subscription?”

And while she noted Apple does have a rule allowing access to subscription content via an iOS app when the subscription has been purchased outside the store (aka, the ‘reader’ app rule) she suggested the combination of the two rules Apple applies to music streaming apps “makes it quite difficult for competitors because your margins are being squeezed and you may not look that attractive to potential customers”.

It’s important to note that the Commission case has not concluded — and Apple will have 12 weeks to respond to today’s statement of objections, so it remains to be seen what the final outcome will be — but Vestager summed up her preliminary view by saying: “We are concerned that Apple’s rules negatively impact its rivals by raising its costs, reducing their profit margins as well as their attractiveness on the Apple platform.”

She also argued that iOS users simply don’t switch platforms — meaning that, even if there are cheaper music streaming options available via Android devices, it does not change Apple’s “gatekeeper” role over iOS users’ ability to access music streaming apps.

“Through these rules, Apple steps in between its competitors and their customers with access to valuable data from the in-app payments system Apple gets insights that music streaming providers don’t get,” she argued, suggesting “they may no longer be in a position to understand the reasons of termination of a subscription and communicate with their customers about them”.

“One of the specificities of this case is the market definition,” she went on. “Because when it comes to the concrete devices Apple is not necessarily the dominant player in Europe — it holds a high marketshare — but once you have an iPhone for instance you can go nowhere else. And this is why I said in the after markets of providing you with the apps that you would want to have Apple holds a monopoly in the Apple App Store. You can go nowhere else to get it.”

Should the Commission end up formalizing its charges against Apple it has the power to issue a financial penalty (the fine threshold for breaches of EU competition law is 10% of the overall annual turnover of the company) — and would certainly order Apple to cease any behaviors deemed to infringe competition laws and avoid from any other practices with an equivalent effect.

Vestager wouldn’t be drawn on what remedies might look like in this case. But she pointed out that Apple charges developers a basic annual fee to list apps — to cover the costs of administering the App Store — suggesting: “So it’s not as if this will end the business model of the Apple App Store.

“Hopefully we can get to a situation where there is fair competition,” she added. “Because with the combination of the two concerns, that prices are so much higher for rivals of Apple Music and that rivals are not allowed to tell their customer that they can get their product cheaper then they are at a disadvantage.”

More Apple cases are being worked on by the EU regulator, per Vestager, who said the Commission continues to investigate ebooks — and a more general complaint against the App Store.

She also confirmed today’s case is also unrelated to the ongoing investigation into Apple Pay.

“We have more than one case concerning the Apple App Store,” she noted. “We have one specifically on ebooks, we have one specifically on the App Store as such — and the way that works — so this is not the last case we will have when it comes to the App Store as such.”

Vestager declined to give a timeline on when the other cases may progress to a next stage.

Going after gatekeepers

A number of complaints against Apple’s practices have been lodged with the EU’s competition division in recent years — including by music streaming service Spotify; video games maker Epic Games; and messaging platform Telegram, to name a few of the complainants who have gone public (and been among the most vocal).

The main objection is over the (up to 30%) cut Apple takes on sales made through third parties’ apps — which critics rail against as an ‘Apple tax’ — as well as how it can mandate that developers do not inform users how to circumvent its in-app payment infrastructure, i.e. by signing up for subscriptions via their own website instead of through the App Store.

Other complaints include that Apple does not allow third party app stores on iOS.

Apple, meanwhile, has argued that its App Store does not constitute a monopoly. iOS’ global market share of mobile devices is a little over 10% vs Google’s rival Android OS — which is running on the lion’s share of the world’s mobile hardware.

But monopoly status depends on how a market is defined by regulators (and if you’re looking at the market for iOS apps then Apple has no competitors).

The iPhone maker also likes to point out that the vast majority of third party apps pay it no commission (as they don’t monetize via in-app payments). While it argues that restrictions on native apps are necessary to protect iOS users from threats to their security and privacy.

Last summer the European Commission said its App Store probe was focused on Apple’s mandatory requirement that app developers use its proprietary in-app purchase system, as well as restrictions applied on the ability of developers to inform iPhone and iPad users of alternative cheaper purchasing possibilities outside of apps.

It also said it was investigating Apple Pay: Looking at the T&Cs and other conditions Apple imposes for integrating its payment solution into others’ apps and websites on iPhones and iPads, and also on limitations it imposes on others’ access to the NFC (contactless payment) functionality on iPhones for payments in stores.

The EU’s antitrust regulator also said then that it was probing allegations of “refusals of access” to Apple Pay.

In March this year the UK joined the Apple App Store antitrust investigation fray — announcing a formal investigation into whether it has a dominant position and if it imposes unfair or anti-competitive terms on developers using its app store.

US lawmakers have, meanwhile, been dialling up attention on app stores, plural — and on competition in digital markets more generally — calling in both Apple and Google for questioning over how they operate their respective mobile app marketplaces in recent years.

Last month, for example, the two tech giants’ representatives were pressed on whether their app stores share data with their product development teams — with lawmakers digging into complaints against Apple especially that Cupertino frequently copies others’ apps, ‘sherlocking’ their businesses by releasing native copycats (as the practice has been nicknamed).

Back in July 2020 the House Antitrust Subcommittee took testimony from Apple CEO Tim Cook himself — and went on, in a hefty report on competition in digital markets, to accuse Apple of leveraging its control of iOS and the App Store to “create and enforce barriers to competition and discriminate against and exclude rivals while preferencing its own offerings”.

“Apple also uses its power to exploit app developers through misappropriation of competitively sensitive information and to charge app developers supra-competitive prices within the App Store,” the report went on. “Apple has maintained its dominance due to the presence of network effects, high barriers to entry, and high switching costs in the mobile operating system market.”

The report did not single Apple out — also blasting Google-owner Alphabet, Amazon and Facebook for abusing their market power. And the Justice Department went on to file suit against Google later the same month.

So, over in the U.S., the stage is being set for further actions against big tech. Although what, if any, federal charges Apple could face remains to be seen.

A number of state-level tech regulation efforts are also brewing around big tech and antitrust — including a push in Arizona to relieve developers?from Apple and Google’s hefty cut of app store profits.

While an antitrust bill introduced by Republican Josh Hawley earlier this month takes aim at acquisitions, proposing an outright block on big tech’s ability to carry out mergers and acquisitions.

Although that bill looks unlikely to succeed, a flurry of antitrust reform bills are set to introduced as U.S. lawmakers on both sides of the aisle grapple with how to cut big tech down to a competition-friendly size.

In Europe lawmakers are already putting down draft laws with the same overarching goal.

In the EU, the Commission recently proposed an ex ante regime to prevent big tech from abusing its market power. The Digital Markets Act is set to impose conditions on intermediating platforms who are considered ‘gatekeepers’ to others’ market access.

While over in the UK, which now sits outside the bloc, the government is also drafting new laws in response to tech giants’ market power. It has said it intends to create a ‘pro-competition’ regime that will apply to platforms with so-called? ‘strategic market status’ — but instead of a set list of requirements it wants to target specific measures per platform.

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