Europe Charges Apple with Antitrust Breach Over Spotify Complaint
European Commission Challenges Apple's App Store Practices
The European Commission has formally lodged a ‘statement of objections’ with Apple. This action stems from the Commission’s belief that Apple’s regulations concerning its app store create an uneven playing field in the music streaming market.
Response Timeline and Investigation Scope
Apple now has a 12-week period to address the preliminary accusations presented. The Commission initiated an investigation into competition concerns related to the iOS App Store, alongside Apple Pay, last summer. However, the current charges are specifically focused on music streaming applications and the App Store’s function as a gateway to iOS users.
Apple's Dual Role and Competitive Landscape
It’s important to note that Apple itself is a competitor in this market, offering its own music streaming service, Apple Music. The core of the Commission’s concern revolves around Apple’s position as both a platform provider and a direct competitor.
Concerns Regarding In-App Purchases
The Commission objects to the compulsory use of Apple’s in-app purchase (IAP) system by music streaming app developers. This requirement dictates how these developers distribute their apps through the App Store. Furthermore, the Commission is worried about restrictions placed on developers that prevent them from informing users about potentially cheaper alternative purchasing methods.
Specific Rules Under Scrutiny
The statement of objections centers on two specific rules within Apple’s developer agreements. These include the “mandatory” use of Apple’s proprietary in-app purchase system for distributing paid digital content, which incurs a 30% commission fee for Apple on all subscriptions purchased through IAP. Additionally, ‘anti-steering provisions’ are being challenged, as they limit developers’ ability to communicate alternative purchasing options to users.
Impact on Consumer Pricing
The Commission’s investigation revealed that the majority of streaming providers pass Apple’s 30% commission onto consumers through increased prices. While Apple permits the use of subscriptions acquired elsewhere, its policies hinder developers from informing users about these typically more affordable options. The Commission fears that Apple device users are consequently paying higher prices for music streaming services or are unable to access certain subscriptions directly within apps.
Vestager's Statement on App Store Dominance
Margrethe Vestager, EVP and competition chief, stated: “App stores are integral to the modern digital economy. We now rely on apps for shopping, news, music, and movies, rather than traditional websites. Our initial assessment indicates that Apple functions as a gatekeeper for iPhone and iPad users through the App Store.
With Apple Music, Apple also directly competes with other music streaming providers. By imposing stringent rules on the App Store that disadvantage competing services, Apple potentially limits user choice and distorts competition. This is achieved through substantial commission fees and restrictions on informing customers about alternative subscription possibilities.”
Apple's Response
Apple provided the following statement in response to the Commission’s statement of objections.
Industry Reaction: Spotify's Perspective
Daniel Ek, founder of Spotify, expressed his enthusiasm regarding the Commission’s charges against Apple via a celebratory tweet. He stated that fairness is crucial for competition and that this development brings the industry closer to a level playing field for European developers.
Spotify's Statement on Antitrust Implications
Spotify also released a statement, attributed to Horacio Gutierrez, its head of global affairs and chief legal officer. Gutierrez suggested that the antitrust charges could have “far-reaching implications”.
Understanding the European Commission's Concerns Regarding Apple's App Store
Following the announcement of formal charges, Margrethe Vestager, representing the European Commission, elaborated on the specifics of the case. The Commission believes Apple’s actions within the music streaming market have contributed to increased subscription costs for consumers, reaching €12.99 instead of the €9.99 charged for Apple’s own music service.
The 30% Fee and its Implications
Apple does not apply the standard 30% fee to its own music streaming service, a point of contention in the case. Spotify, for example, discontinued selling subscriptions through the App Store in 2018 to avoid incurring this In-App Purchase (IAP) fee.
Despite Spotify’s success as a leading global music subscription service with a substantial market capitalization of over $50 billion, Vestager emphasized the difficulty in predicting market development without Apple’s imposed conditions.
Impact on Competition
The Commission’s investigation extends beyond Spotify, considering the potential impact on other competitors like Deezer and SoundCloud. The concern centers on whether these rivals could have achieved greater market share under different App Store conditions.
Vestager clarified that the issue isn’t solely the 30% fee itself, but rather the combination of conditions Apple imposes while simultaneously operating a competing service exempt from those same conditions.
Unequal Application of Fees
It was highlighted that Apple’s fee isn’t universally applied across all apps. Specifically, it applies to all music streaming applications with the exception of Apple Music, potentially creating a 30% price disparity.
Restrictions on Communication with Subscribers
Apple’s anti-steering provisions are also under scrutiny. These provisions limit music streaming apps’ ability to directly communicate with subscribers who initially signed up through the App Store, hindering their ability to compete effectively.
Rival services are often unable to directly access customer information, preventing them from proactively addressing subscription cancellations or offering incentives to retain users. For instance, they cannot email a user who ends their subscription to inquire about the reason or offer assistance.
Margin Squeeze and Customer Attraction
While Apple allows access to subscription content purchased outside the App Store, the combination of this rule with the aforementioned restrictions creates challenges for competitors. Reduced margins and limited customer engagement can make them less appealing to potential subscribers.
Ongoing Investigation and Potential Remedies
The Commission’s case is still ongoing, with Apple having 12 weeks to respond to the statement of objections. Vestager summarized the preliminary view, stating concerns that Apple’s rules negatively affect rivals by increasing costs, reducing profit margins, and diminishing their visibility on the Apple platform.
A key argument is that iOS users are unlikely to switch platforms, reinforcing Apple’s “gatekeeper” role and control over access to music streaming apps.
Data Access and Competitive Disadvantage
Vestager explained that Apple gains valuable insights from in-app payment systems, data that music streaming providers do not have access to. This disparity hinders competitors’ ability to understand customer behavior and improve their services.
Apple's Monopoly Within its Ecosystem
The Commission’s assessment defines Apple as holding a monopoly within the Apple App Store ecosystem. Once a user is invested in the Apple ecosystem, there is no alternative avenue for accessing apps.
Potential Penalties and Future Actions
If the charges are formalized, Apple could face a financial penalty of up to 10% of its annual global turnover. The Commission would also mandate Apple to cease any anti-competitive practices.
Vestager clarified that any remedies wouldn’t dismantle the Apple App Store business model, noting the existing annual fee for app listing covers administrative costs.
Broader Investigations into Apple's Practices
The EU regulator is pursuing additional cases against Apple, including investigations into ebooks and a broader complaint concerning the App Store’s overall operation. This case is separate from the ongoing investigation into Apple Pay.
Vestager confirmed that further investigations related to the App Store are anticipated, but declined to provide a timeline for their progression.
Examining Scrutiny of Digital Gatekeepers
Numerous formal complaints regarding Apple’s business practices have been submitted to the European Union’s competition authorities in recent years. These originate from companies like Spotify, a music streaming service, Epic Games, a video game developer, and Telegram, a messaging application, among others who have publicly voiced their concerns.
The core of the dispute centers on the commission—reaching up to 30%—that Apple levies on sales completed through applications belonging to third-party developers. This is frequently criticized as an ‘Apple tax’. Furthermore, concerns exist regarding Apple’s restrictions preventing developers from informing users about alternative methods to bypass in-app payment systems, such as subscribing through a developer’s website.
Another key complaint is Apple’s prohibition of third-party app stores on its iOS operating system.
Apple maintains that its App Store does not represent a monopolistic entity. The global market share of iOS mobile devices is just over 10%, contrasting with Google’s Android OS, which dominates the majority of the mobile hardware market.
However, the determination of monopoly status is contingent upon how regulators define the relevant market. When considering the market specifically for iOS applications, Apple faces no direct competition.
Apple also emphasizes that the majority of third-party applications do not pay any commission, as they do not utilize in-app purchasing. The company argues that restrictions on native apps are essential for safeguarding iOS users from security and privacy risks.
Last year, the European Commission clarified that its investigation into the App Store focused on Apple’s mandatory requirement for developers to employ its proprietary in-app purchase system. It also examined restrictions on developers’ ability to inform users about cheaper purchasing options available outside of apps.
The Commission also initiated an investigation into Apple Pay, scrutinizing the terms and conditions governing its integration into other apps and websites on iOS devices. This included examining limitations on access to the NFC functionality for contactless payments in stores.
The EU’s antitrust regulator also indicated it was investigating allegations of “refusals of access” concerning Apple Pay.
In March of this year, the United Kingdom joined the investigation into the Apple App Store, launching a formal inquiry to determine if Apple holds a dominant position and imposes unfair conditions on developers utilizing its app store.
In the United States, legislators have increased their focus on app stores, generally, and competition within digital markets. Both Apple and Google have been summoned for questioning regarding the operation of their mobile app marketplaces in recent years.
Last month, representatives from both tech companies were questioned about whether their app stores share data with their product development teams. Lawmakers specifically investigated complaints against Apple, alleging that the company frequently replicates features from other apps, effectively ‘sherlocking’ their businesses.
In July 2020, the House Antitrust Subcommittee heard testimony from Apple CEO Tim Cook. A subsequent report on competition in digital markets accused Apple of leveraging its control over iOS and the App Store to “establish and enforce barriers to competition, discriminate against rivals, and favor its own products”.
The report further stated, “Apple also exploits its power by misusing competitively sensitive information and charging app developers excessive prices within the App Store.” It continued, “Apple’s dominance is sustained by network effects, high barriers to entry, and substantial switching costs in the mobile operating system market.”
The report’s criticism wasn’t limited to Apple, also targeting Alphabet (Google’s parent company), Amazon, and Facebook for abusing their market power. Shortly thereafter, the Justice Department filed a lawsuit against Google.
Consequently, in the U.S., preparations are underway for further legal actions against major technology companies. The specific federal charges Apple might face, however, remain uncertain.
Several state-level initiatives are also emerging to regulate big tech and address antitrust concerns. This includes a proposal in Arizona to reduce the commission Apple and Google collect from app store profits.
A bill introduced by Senator Josh Hawley aims to prevent large tech companies from making acquisitions, proposing a complete ban on mergers and acquisitions.
Although the Hawley bill’s passage appears unlikely, numerous antitrust reform bills are expected to be introduced as U.S. lawmakers from both parties seek ways to foster greater competition within the technology sector.
In Europe, legislators are already developing draft laws with similar objectives.
The EU Commission has proposed a new regulatory framework to prevent big tech companies from abusing their market power. The Digital Markets Act will impose specific conditions on large intermediating platforms considered ‘gatekeepers’ to market access.
The United Kingdom, now outside the EU, is also drafting new legislation to address the market power of tech giants. The government intends to establish a ‘pro-competition’ regime applicable to platforms with ‘strategic market status’, but plans to tailor specific measures to each platform rather than implementing a uniform set of requirements.
