APPLE AND GOOGLE APP STORES V. DEVELOPERS.

• Author: Peters, Craig

INTRODUCTION

Cell phones are becoming an extension of the human body. Users must download applications through app stores to add functionality to phones. Those applications are created by developers who also need app stores to market and sell their products. Those applications are becoming more and more necessary to function in modern society. With people doing their banking, paying their bills, making appointments, and even paying at the register through mobile phone applications, app stores are starting to look more like a public necessity than a luxury.

In an efficient market, app stores would compete for developers to use their platforms. In theory, that would lead to terms the app stores and developers are all happy with. However, due to an effective duopoly over the app store market, the app stores have immense leverage in their dealings with developers. They are not forced to meet the developers halfway in their terms of service.

This article explains issues resulting from this bargaining power gap and outlines how different parts of the world are regulating the relationship between app stores and developers. I will describe how the European Union, South Korea, the United States, India, and Japan have attempted to legislate this area. I will compare these evolving strategies and offer my take on the best way to move forward in regulating the space.

1. BACKGROUND

   Any industry which is controlled by two companies is likely to be riddled with issues related to competition, market power, and barriers to fairness. (1) The market for mobile applications and games is a prime example. (2) The Google Play Store generated $47.9 billion (3) and the Apple App Store generated $85.1 billion in app store revenue in (2021). (4) Seventy-one percent of app sales came from mobile phone games in 2020, a market Apple dominates. (5)

   Digital markets are subject to a 'winner-takes-most' principle which can reduce competition, consumer welfare, and productive efficiency. (6) Further, app stores benefit from economies of scale. (7) Apple and Google host millions of applications and millions of users. (8) Consumers know them as one stop shops for all their application needs and have no reason to change their habits. Developers justify which markets to sell their product based on the number of customers they can reach. (9) As developers are most likely to tailor their applications for these stores and consumers are looking for stores that have many developers, the market for apps is quickly consolidating. (10) Further, consumers in digital markets are influenced by a "status quo bias," pressuring them to stick with their current digital marketplaces. (11) Therefore, Google and Apple are not pressured by new stores to change policies. Susanna Kylloinen explained this issue in her article The P2B Regulation and its Effects on Competition and Consumer Choice in Digital Markets in the Perspective of Abuse of Dominance by Ranking:

   Online platforms are involved in almost all transactions that deliver services or applications over the internet to consumers. Online platforms also have a role as an intermediary to other online and offline services. Competition among sellers intensifies when more variety of goods are offered. This creates a more attractive trading platform for more potential buyers. The buyer or the seller side of a multi-sided market will be most attracted to the idea of joining the platform only if the other side of the market is deemed large enough. Therefore, attracting users only from one market side is not sufficient because of the interrelationship of the user groups on both market sides. (12) Developers are concerned that nothing is stopping the app stores from abusing their power. (13) This leaves legislation as the only conceivable way to solve this problem. The question then turns to how much society is willing to exchange in intellectual property rights and freedom to contract in return for a more efficient market. (14)

   Apple and Google have spent the past decade building a platform to connect developers to consumers safely and seamlessly. (15) In 2010 Apple started to change and reinterpret its guidelines. (16) For instance, in 2011 Apple instituted a 30 percent fee on developers, required applications use the Apple payment system, and prohibited developers from linking customers to other payment methods. (17) In 2016 Apple started prohibiting developers from advertising alternative payment methods. (18) Google follows similar policies but is often seen as less of a threat to developers, as it allows users to download apps through other methods than the Google Play Store. (19) Android devices often come with two app stores preinstalled, allowing developers to reach their users without using the Google Play Store. (20)

   While it does not break down research and development spending by product, Apple spent $18.75 billion in research and development in 2020. (21) App stores claim to charge fees in part in exchange for access to intellectual property necessary to build an app. (22) However, Apple and Google have realized an effective duopoly of control over one of the fastest growing markets in the world: the market for mobile phone applications. (23)

2. THE RELATIONSHIP BETWEEN APP STORES AND DEVELOPERS

   Google mirrors most of Apple's terms and procedures regarding relationships with developers. Along with flat fees for using the app store, (24) app stores charge developers commission fees on every sale made on the market. (25) The market rate for commissions charged to developers is 30 percent for standard purchases or the first year of subscriptions and 15 percent for subsequent years. (26)

   Apple and Google have made concessions in response to complaints about high commissions. (27) Apple recently reduced the commission on in-app sales to 15 percent for small developers. (28) Google followed, reducing commissions to 15 percent on the first $1 million developers earn. (29) Google also offers a "Media Experience Program," decreasing service fees on certain transactions involving video, audio, and books to as low as 10 percent starting in 2022. (30) According to Apple, "headline" rates are frequently negotiated down. (31) Apple justifies their fee based on cost of upkeep and argues that the cut is much lower than what one may pay a retail store. Also, most applications do not generate revenue, so they are free riders on the platform. (32) Still, many agree that app stores deserve high profits, because they are costly to create, and profits were only speculative when they entered the business. (33)

   There are also complaints related to the contracts app stores require developers to sign. (34) These contracts have complex terms that are difficult for developers without a legal background to understand. (35) Further, platforms give themselves the ability to change the terms and conditions without notice. (36) Apple also imposes strict parameters on sale of applications such as requiring prices end in .99. (37)

   Lately developers have expressed increasing concerns with the excessive nature of this fee structure. To avoid the fees, apps such as Spotify and Netflix direct users to buy subscriptions on their websites. (38) Developers have also made attempts at selling in-app purchases using payment systems such as PayPal, but Apple has since prohibited this. (39) Developers in the past were not allowed to advertise substitute payment methods on their applications. (40) Spotify has complained that Apple prohibited them from emailing customers information about deals and promotions, as this would be "circumventing" their rules. (41) Google allows developers to communicate to customers about alternative payment methods such as external websites and pricing thereof, (42) but only outside their apps. (43) Google will not allow developers to use other payment systems on apps which are distributed on the Google Play Store and offer in-app purchases. (44) Google is temporarily relaxing this rule for businesses who moved their physical businesses online. (45) Apple claims allowing outside downloads or sales brings security concerns but never stated a reason for the "anti-steering" provisions which disallowed advertising other payment methods. (46) Google also stressed the importance of the security of its payment systems and risks involved with outside systems. (47)

   While third party app stores could force Apple and Google to compete, users have proven wary about trying new app stores. (48) The network effects on app stores are endless. (49) This creates a "winnertake-all" environment, that allows only a few large platforms to survive. (50) On the other hand, the mobile game market is ever changing and barriers to entry may be decreasing. (51) As app stores make most of their sales in mobile gaming, this may impact the entire business environment. (52)

   Apple refuses to allow users to download applications from other methods than the App Store due to claimed concerns about potential viruses in apps that had not been vetted. (53) Google on the other hand, allows other app stores to run on Android phones. (54) Apple has made it clear that it will not allow developers to offer their own application stores on Apple products. (53) Curiously, Apple does allow apps such as Netflix, Hulu, and Amazon to make sales outside of the Apple App Store and payment system. (56) In September 2020, Apple modified their Guidelines to allow for the inclusion of game streaming apps, but only if each streamed app is made available as a separate app on the App Store. (57)

   Another concern is that Apple could treat applications from developers which it owns or has business relationships with more favorably. (58) Developers complain that app store rankings are not transparent and search results are manipulated. Both stores offer app store advertisements, where developers can pay to be placed highly in search results. This allows apps to jump over...