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CoRe 1|2021 Blog Highlight 79 Blog Highlight This section of journal presents a post from the official CoRe Blog which has received significant at- tention from the online readers in the past quarter. The CoRe Blog is your source of weekly news, analyses and a case law reference digest on EU competition law and its interplay with regulatory law but also an interactive discussion platform for the expert community. Visit the blog at https://www.lexxion.eu/core-blog/ or submit your own blog post by contacting the editors at core- blog@lexxion.eu. Epic v Apple: Antitrust’s Latest Big Tech Battle Royale Friso Bostoen* Mid-August 2020, a series of events unfolded in a Google’s Play Store and having users ‘sideload’ it in- short period of time. They may prove a watershed stead (ie download it directly from the web), thus by- moment for the role of antitrust in regulating digital passing the 30% fee. However, the Dutch Competi- markets. tion Authority, which examined this experiment in It started when players of Epic Games’ popular a report on app stores, came to sobering conclusions: Fortnite game on their iPhone were suddenly faced Fortnite downloads dropped an estimated 41%, with with a choice screen when buying in-app currency Epic seemingly losing users to competing game (V-Bucks). The screen asked users how they wanted PUBG.3 to pay for 1.000 V-Bucks, through Apple’s App Store Within Apple’s iOS, however, sideloading is made (for $9.99) or through Epic direct payment (for technically impossible. The consequences of being $7.99).1 Epic thus introduced its alternative payment removed the App Store are thus even more severe: system next to Apple’s. That alternative was cheap- the app becomes completely unreachable for new er: while Apple charges a 30% fee on in-app purchas- players and cannot be updated by older players. It is es, Epic charged only 10%, passing on 20% of cost no surprise, then, that Epic had a carefully crafted re- savings to players. sponse ready: it immediately filed a complaint with Apple then quickly removed Fortnite from its App the US District Court for the Northern District of Cal- Store for bypassing the 30% fee—a violation of its ifornia.4 Epic also uploaded a video titled ‘Nineteen Developer Guidelines.2 This was not the first time Eighty-Fortnite’—a parody of Apple’s iconic ‘1984’ Fortnite was yanked from an app store. Epic itself commercial (which was directed at the monopolist had already experimented with pulling its app from of its time, IBM).5 * Friso Bostoen, PhD researcher at Consumer, Competition Market, 2 App Store Review Guidelines, Section ‘3.1.1 In-App Purchase’ (‘If KU Leuven (University of Leuven); Fellow of the Research Founda- you want to unlock features or functionality within your app, (by tion - Flanders. In accordance with the ASCOLA Transparency and way of example: subscriptions, in-game currencies, game levels, Disclosure Declaration, the author has nothing to disclose. For access to premium content, or unlocking a full version), you must correspondence: . use in-app purchase. Apps may not use their own mechanisms to This article is an adapted version of Friso Bostoen, ‘Epic v Apple unlock content or functionality’). (1): introducing antitrust’s latest Big Tech battle royale’ (CoRe Blog, 4 September 2020) accessed 22 January 2021, with part of a follow-up blog ACM/18/032693, 2019) 48–49. post added as well: Friso Bostoen, ‘Epic v Apple (3): two perspec- tives on app stores’ 30% commission fee’ (CoRe Blog, 3 November 2020) 4 US District Court for the Northern District of California, Epic accessed 22 January 2021. This article and those blog posts draw Games, Inc. v Apple Inc. (Complaint for Injunctive Relief), 13 on earlier work, in particular Friso Bostoen and Daniel Mândrescu, August 2020, available via accessed 22 January 2021. study of app stores’ (2020) 16 European Competition Journal 431. 5 Compare the original accessed 22 January 2021 with the parody Fortnite’ accessed 22 January 2021. 22 January 2021.
80 Blog Highlight CoRe 1|2021 These are only the first shots in a larger battle that rency or Spotify subscriptions, but not from Uber will rage on for some time. Given that app stores are rides or Airbnb stays. the quintessential online platform, rulings in this 2. So-called ‘reader’ apps (including newspaper, book, area will have outsized influence in shaping antitrust audio, music and video apps) may allow users to law in the digital era. This article introduces the access content they previously purchased/sub- source of the dispute (the Apple ‘tax’), examines its scribed to elsewhere. That is why you can subscribe broader context (the gaming industry), describes the to Netflix or Spotify through your web browser first battle in this larger war, and assesses its impor- and then log in to your app. However, app devel- tance for EU competition law. opers are not allowed to inform their users of such alternative options (the ‘anti-circumvention rule’). 3. The commission fee on subscriptions that exceed I. The Apple ‘Tax’ one year has been lowered to 15%. After the launch of the iPhone in 2007, Apple opened Apple’s policy became the standard for the industry up its ecosystem to third-party developers in 2008 as other app stores followed its example.9 with the launch of the App Store. The announcement The list of developers dissatisfied with Apple’s lev- stressed that ‘applications must be approved by Ap- el of commission fees, coupled with a prohibition to ple and will be available exclusively through the App use other payment mechanisms, is long.10 A growing Store.’6 On pricing, it noted: ‘Developers set the price number of apps—including Netflix, Amazon’s Kin- for their applications—including free—and retain 70 dle, and Google’s YouTube TV—have simply disabled percent of all sales revenues.’7 In other words, Apple IAP, making it impossible for consumers to pur- www.lexxion.eu charges a 30% commission fee (or ‘tax’, according to chase/subscribe within the app.11 A new e-mail app, critics). HEY, tried to disable IAP as well but was kicked out Powered by TCPDF (www.tcpdf.org) Over time, the policy was modified slightly. Today, of the App Store for doing so because it did not qual- Apple’s in-app purchase system (IAP) applies not on- ify as reader app.12 And Facebook alleges it is prohib- ly to app purchases, but also to in-app purchases and ited from even informing users about App Store fees.13 subscriptions. There are, however, some excep- Until recently, Apple could say that its IAP policy tions:8 was applied equally to all developers. During an in- 1. Only purchases of/subscriptions to digital content vestigation of the US House Antitrust Subcommit- must use IAP; it is not mandatory for in-app pur- tee, however, it became clear that some developers chases of physical goods and services. This means did get an exemption: Apple lowered the commis- Apple gets a cut from purchases of Fortnite cur- sion fee for Amazon’s Prime Video from 30 to 15%.14 6 ‘Apple Announces iPhone 2.0 Software Beta’ (Apple Newsroom, 6 Dante D’Orazio, ‘Amazon skirts Apple restrictions with updated March 2008) accessed 22 January 2021; Chris Welch, ‘YouTube TV will cancel subscriptions of customers 7 ibid. using Apple’s in-app payments in March’ (The Verge, 13 February 8 App Store Review Guidelines, Section ‘3.1 Payments’. 2020) ac- cessed 22 January 2021. 9 See eg Google Developer Program Policy, Section ‘Monetization 12 A work-around solution was finally found, see Nilay Patel, ‘Apple and Ads’. approves Hey email app, but the fight’s not over’ (The Verge, 22 10 For two examples, see Natasha Lomas, ‘Telegram hits out at June 2020) Apple’s App Store “tax” in latest EU antitrust complaint’ accessed 22 January 2021. (TechCrunch, 30 July 2020) accessed 22 January 2021 and Ina Fried, ‘Tinder’s 2020) accessed 22 January 2021. 14 Kim Lyons, ‘Documents show Apple gave Amazon special treat- 11 Brian Fung, ‘The app-store war between Netflix and Apple is ment to get Prime Video into App Store’ (The Verge, 30 July 2020) heating up’ (The Washington Post, 4 January 2019) accessed 22 January 2021; cessed 22 January 2021.
CoRe 1|2021 Blog Highlight 81 Major newspapers are asking what it would take for Growth has only accelerated during the pandemic. them to get a similar deal.15 As The New York Times put it: ‘People aren’t reading So, complaints have been coming in for or watching movies. They’re gaming.’17 years—what makes Epic different? It may just be the The gaming industry can be divided into three seg- straw that breaks the camel’s back. However, Epic is ments: console (eg Microsoft’s Xbox, Sony’s PlaySta- also in a unique position as complainant. To under- tion, Nintendo Switch), personal computer (PC), and stand why, we need take a closer look at the gaming mobile.18 Within each segment, a distinction can be industry. made between developing/publishing the game (con- tent) and offering a platform to distribute it (distrib- ution). The largest game companies by revenue are II. The Gaming Industry—and Epic’s generally those that have a hand in both content and Plans for It distribution (eg Sony, the second largest game com- pany).19 However, the third largest game company is The gaming industry is big—perhaps surprisingly Apple, which is almost solely thanks to the 30% com- so. Since 2016, it has been larger than the music in- mission charged by the App Store for game distrib- dustry and box office combined. Take, for example, ution. these numbers from 2018/2019: What about the largest game company? It is the This year, the global games market is estimated to Chinese tech conglomerate Tencent, which operates generate US$152.1 billion from 2.5 billion gamers the PC gaming platform WeGame, serves as gateway around the world. By comparison, the global box to the Chinese market for non-Chinese develop- office industry was worth US$41.7 billion while ers/publishers, and owns or has a stake in a variety global music revenues reached US$19.1 billion in of game developers/publishers (eg Riot Games, Su- 2018.16 percell, Activision and Ubisoft). In 2012, Tencent al- so took a 40% stake in Epic. If there is one lesson to be drawn from the above, 15 Nick Statt, ‘Major news publishers ask Apple what can get them it is that the saying ‘content is king’ is no longer an App Store deal like Amazon’s’ (The Verge, 20 August 2020) true—rather, distribution is king.20 Epic has realised accessed 22 January 2021. this. It disrupted PC game distribution by launching 16 Samuel Stewart, ‘Video game industry silently taking over entertain- its own platform (the Epic Store) with a 12% com- ment world’ (ejinsight, 22 October 2019) accessed 22 January 2021. 30% fee charged by the incumbent Valve (Steam).21 17 Ruchir Sharma, ‘People aren’t reading or watching movies. They’re gaming.’ (The New York Times, 15 August 2020) accessed 22 January 2021. Apple’s guidelines prohibit ‘creating an interface for 18 In terms of revenue, console constitutes 28% of the market, displaying third-party apps … similar to the App mobile 48%, and PC 23%, see Tom Wijman, ‘The world’s 2.7 Store’ and iOS makes it technically impossible.22 Epic billion gamers will spend $159.3 billion on games in 2020; the market will surpass $200 billion by 2023’ (newzoo, 8 May 2020) does support a variety of other games available on accessed 22 Jan- uary 2021. facilitates the creation of 3D graphics. 19 See ‘Top 25 public companies by game revenues’ (newzoo) Epic’s plans do not stop at mobile distribution. The accessed 22 January 2021. 20 The saying ‘content is king’ originates from a 1996 essay by Bill shared, virtual space that’s persistently online and Gates of that title, available via accessed 22 January 2021. with its own economy, jobs, shopping and media to 21 For an updated list with articles on the competition between the consume.23 (Science fiction fans will recognize the Epic Store and Steam, see accessed 22 January 2021. Ernest Cline’s Ready Player One.) With Fortnite, Epic 22 App Store Review Guidelines, Section ‘3.2.2 Unacceptable’. is closer than anyone to such a metaverse: it is al- 23 Gene Park, ‘Silicon Valley is racing to build the next version of the Internet. Fortnite might get there first.’ (The Washington Post, ready hosting live events including concerts and 17 April 2020) accessed 22 Janu- movies, while the game proceeds in ‘seasons’. It faces ary 2021. competition from Roblox, among others.
82 Blog Highlight CoRe 1|2021 While the metaverse is still some time away, a with Apple and those agreements have not been more immediate innovation is cloud gaming: a type breached.’29 Moreover, Apple’s conduct is not only of online gaming that runs games on remote servers detrimental to the Unreal Engine, but also affects and streams them directly to a user’s device (one ben- many other developers who have built their games efit being that your device must not be state-of-the- using the engine. According to the judge, ‘Epic Games art in order to play advanced games). But Microsoft’s and Apple are at liberty to litigate against each oth- xCloud—a ‘Netflix for games’ as subscribers have ac- er, but their dispute should not create havoc to by- cess to 100+ games—is not allowed on the App Store: standers.’30 Apple decrees that every game must be submitted in- dividually, which of course beats the purpose of xCloud.24 It is no real surprise then that Microsoft IV. What’s Next? Two Perspectives on submitted a declaration in support of Epic.25 the 30% Commission Fee As the district judge noted, a number of ‘serious ques- III. After the First Shots, the First Battle tions’ remain to be answered. The relevance of those questions for the EU cannot be overstated. The Eu- Days after Epic submitted its complaint to the US Dis- ropean Commission (EC) is investigating both the trict Court, it filed a motion for a temporary restrain- App Store and Apple Pay.31 Those investigations are ing order.26 Apple had not only removed Fortnite from driven in part by Spotify, which was quick to support the App Store but also revoked all developer tools, Epic’s complaint against Apple.32 The Dutch Compe- which makes updates to other programs—including tition Authority is also investigating whether Apple the Unreal Engine—impossible. is abusing the position it has attained with its App When it came to the Fortnite removal, the judge Store.33 And the president of Germany’s Federal Car- had little sympathy. She noted that ‘Epic Games made tel Office said that Epic’s case ‘has most certainly at- the calculated decision to breach its [developer] agree- tracted our interest … [W]e are looking at this very ments with Apple’.27 Given that ‘the current predica- closely.’34 ment appears of its own making’, Epic did note Most recently, Epic brought its case to Europe, reg- demonstrate irreparable harm.28 istering its claim with the UK’s Competition Appeal Apple’s revocation of all developer tools was con- Tribunal. A summary of its claim, published in Jan- sidered different. Epic’s access to those tools relies uary 2021, holds that Apple infringes Articles 101 and on ‘separate developer program license agreements 102 TFEU (and their UK equivalents) by:35 24 Ron Amadeo, ‘Apple won’t let Stadia or xCloud into iOS, citing 31 EC, ‘Commission opens investigations into Apple’s App Store App Store guidelines’ (Ars Technica, 7 August 2020) accessed 22 January 2021. 2020) IP/20/1075. 25 US District Court for the Northern District of California, Epic 32 Mikey Campbell, ‘Spotify supports Epic Games’ private antitrust Games, Inc. v Apple Inc. (Declaration of Kevin Gammill), 24 action against Apple’ (Apple Insider, 13 August 2020) accessed 22 January 2021. 26 US District Court for the Northern District of California, Epic Games, Inc. v Apple Inc. (Motion for Temporary Restraining 33 ACM, ‘ACM launches investigation into abuse of dominance by Order), 17 August 2020, available via accessed 22 January 2021. 27 US District Court for the Northern District of California, Epic 34 Douglas Busvine, ‘Apple-Epic row being closely watched by Games, Inc. v Apple Inc. (Order Granting in Part and Denying in German antitrust chief’ (Reuters, 2 September 2020) accessed 22 January 2021. 28 ibid 5. 35 Competition Appeal Tribunal, Case 1377/5/7/20, Epic Games, Inc. and Others v Apple Inc. and Another (Notice of Claim), 29 ibid 6. available via accessed 22 January 2021.
CoRe 1|2021 Blog Highlight 83 (a) reserving to itself the sole channel for the distri- 1. Exploitation: Is 30% Excessive? bution of apps to and/or the payment processing mechanism for purchases of in-app content for Article 102(a) TFEU prohibits ‘imposing unfair … and by consumers who use iPhones and iPads; prices or other unfair trading conditions’. Could Ap- (b) using its position of dominance to charge unfair ple’s 30% commission fees constitute such an unfair prices for the distribution of apps via the App Store price? According to the ECJ, a price is unfair—or and/or use of the Apple IAP; excessive—when ‘it has no reasonable relation to the (c) its response to the introduction by Epic of price economic value of the product supplied’.37 This for- competition for purchases of in-app content in mula has been operationalised through a two- Fortnite. pronged test: first, one has to determine whether the difference between the costs actually incurred and The claim thus focuses on alternative avenues for the price actually charged—ie the profit margin—is app distribution on iOS and the App Store’s 30% excessive; second, if the profit margin is excessive, commission fee. Focusing on the latter,36 there are it must be established whether the price is unfair in two possible perspectives, both of which seem itself or in comparison to the prices of competitors.38 present in the complaint. One the one hand, you The App Store’s profit margin is undoubtedly could focus on the (high) level of the commission high: while the number is not public, analysts put it fee—the perspective of exploitation (cf ‘charg[ing] at 90%.39 But is the 30% fee comparatively high? This unfair prices for the distribution of apps’). One the depends, of course, on the chosen point of compari- other hand, you could examine how the commission son. Play Store fees are also set at 30%, but this point fee is sustained, ie by not allowing others to pro- of comparison is unhelpful given that Google also en- vide app store payment processing—the perspec- joys market power. And even app stores without mar- tive of exclusion (cf ‘reserving to itself … the pay- ket power model their fees on the market leader Ap- ment processing mechanism’). Let us dive deeper ple.40 into those two perspectives, focusing on EU com- Perhaps PC game stores offer a more useful point petition law. of comparison. Here too the incumbent (Steam) charges a 30% fee for distribution. As noted before, however, this fee is being challenged by Epic, which set up its own store, charging only a 12% fee. (With 36 On the former, see Daniel Mândrescu, ‘Epic v Apple (2): market the first part of its claim, Epic seeks to achieve exact- power and foreclosure in the app distribution market(s)’ (CoRe Blog, 22 September 2020) accessed 22 January 2021. 37 Case 27/76 United Brands Company v Commission EU:C:1978:22 ecosystem.) [1978] ECR 207, para 250 and Case C-177/16 Autortiesibu un Finally, Damien Geradin and Dimitrios Katsifis ar- komunicešanas konsultaciju agentura v Latvijas Autoru apvieniba v Konkurences padome EU:C:2017:689, para 35. gue that Apple does not offer distribution services, 38 Case 27/76 United Brands Company v Commission [1978] ECR but just payment processing and related services.41 207, para 252. One would then have to compare Apple’s 30% fee 39 Adam Levy, ‘Apple’s App Store revenue growth is accelerating’ with those of PayPal, Stripe and the like, which hov- (The Motley Fool, 9 September 2019) accessed 22 January 2021. fee).42 While Apple’s price does look excessive from 40 See eg Samsung, Galaxy Store Seller Portal, Section 6. ‘Revenue Share and Tax’, available via accessed 22 January 2021. knowledged that the App Store offers more than sim- 41 Damien Geradin and Dimitrios Katsifis, ‘The antitrust case against ple payment processing. the Apple App Store’ (2020) 18–26 and 34–38 accessed 22 January 2021 However, this quantitative method may not be the 42 See eg accessed 22 January 2021 and accessed 22 January 2021. (these include ‘free’ apps that are monetised through 43 House Committee on the Judiciary, ‘Apple responses to Steube questions for the record’ (Online Platforms and Market Power, advertising).43 This means that a small minority of Part 2: Innovation and Entrepreneurship, 16 July 2019), available via accessed 22 January 2021. opers: they overpay while others benefit freely from
84 Blog Highlight CoRe 1|2021 the App Store. Perhaps the unfairness of the fees is droid OS, which does allow for competing app stores rather found in this imbalance, even though such an (such as Amazon’s), although they have to be side- analysis does not fit naturally with the established loaded.47 excessive pricing test. Importantly, however, one has to consider whether this potential abuse can be justified. Apple prides it- self on the user-friendliness and security of its ecosys- 2. Exclusion: Is App Distribution Tied to tem, which is attained—at least in part—by exclud- Payment Processing? ing other app stores from iOS. We must thus ask whether this restriction is proportionate to the ben- Instead of focusing on the level of fees, one could ex- efits achieved by it. Is Android, which is policed less amine how they are sustained, namely through a restrictively (eg through flagging, hiding and sus- form of tying (prohibited by Article 102(d) TFEU). pending of app stores considered unsafe), significant- There is no way to distribute apps within iOS other ly less secure?48 than through the App Store, which may be viewed Processing (in-)app purchases exclusively through as a tie between the operating system (tying product) IAP can also reasonably be explained by a concern and the app store (tied product). And there is no oth- for free-riding: if every app developer could use al- er way to pay for certain apps in the App Store than ternative payment processors, Apple would be un- through IAP, which may be considered a tie between able to fund its continuous investment in the App the app store (tying product) and payment process- Store. At the very least, it would have to start actual- ing (tied product). ly competing with those other payment processors, In order for tying to be abusive, the products in which would certainly lead to a lower fee. Again, the question must be separate products, customers must question is whether this restriction is proportionate be unable to get the tying product with the tied prod- to its goal. uct, there must be foreclosure in either the tying or the tied market, and the tie must not be justified.44 To test whether separate products are being tied V. Conclusion together, the EC generally examines whether there is distinct demand for the tied product. When it A consensus is building that the fees charged by app comes to app stores, this does seem to be the case: stores are too high. While app developers have long app developers have been complaining about the lack complained, they are now joined by prominent tech of alternatives to the App Store for years (and Epic commentators (eg Ben Thompson49 and Ben seems ready to supply one), while consumers go as far as jailbreaking their iPhone to access other app 44 See Case T-30/89 Hilti v Commission EU:T:1991:70 [1991] ECR stores. IAP also seems to be a distinct product: Ap- II-1439 and Case T-201/04 Microsoft v Commission ple only introduced this feature after the App Store,45 EU:T:2007:289 [2007] ECR II-3601, paras 814–1229. See also Guidance on the Commission’s enforcement priorities in applying and payment providers already take care of billing Article 82 of the EC Treaty to abusive exclusionary conduct by of App Store transactions that are not obliged to use dominant undertakings [2009] OJ C45/7, paras 47–62. IAP.46 45 See ‘Apple launches subscriptions on the App Store’ (Apple Newsroom, 15 February 2011) accessed 22 January 2021 46 See The App Solution, ‘How to integrate payment system into other app store than the App Store (of course, it is the existing app’ accessed 22 Janu- ary 2021. iOS in the first place). And when selling digital prod- 47 Amazon Appstore can be sideloaded via accessed 22 January 2021. less they qualify as reader apps). 48 On the use of this mechanism, see eg Natasha Lomas, ‘Aptoide, a Insofar as there is foreclosure in this case, it is sit- Play Store rival, cries antitrust foul over Google hiding its app’ (TechCrunch, 4 June 2019) accessed 22 January 2021. 49 Ben Thompson, ‘Apple, Epic, and the App Store’ (Stratechery, 17 markets is being restricted if not made impossible. August 2020) accessed 22 January 2021.
CoRe 1|2021 Blog Highlight 85 Evans50) and other big tech companies (Microsoft51 duced at zero marginal cost—is a 30% fee then re- and Facebook52). The hardest part may be figuring ally problematic? By contrast, firms like Spotify and out a suitable remedy. Netflix have high marginal costs—for them, the An excessive pricing perspective calls for lower- 30% fee can mean the difference between profitabil- ing App Store fees. A tying perspective would result ity and losses. However, drawing a clear dividing in the unbundling of the App Store and payment pro- line between these two categories of app is no easy cessing. In that case, however, Apple would be pro- feat. viding (even more) developers with free distribution. Finally, the solution may end up being a techno- Would it then start charging a separate distribution logical rather than legal. When Apple did not allow fee? Derive its profit from a more competitive com- cloud gaming services such as Microsoft’s xCloud in mission fee? Or increase its annual developer fee of the App Store, Microsoft decided to bring its service $99? (Of course, Apple also profits indirectly from to iOS as a web app.53 And even Fortnite is return- the App Store and the apps in it, through the sale of ing to iOS via a web app.54 However, while such in- iPhones.) novation should be applauded, it remains to be seen Some argue for a differentiated solution. After all, whether web apps can truly compete with native the digital goods sold by Fortnite (‘skins’) are pro- apps.55 50 Benedict Evans, ‘App stores, trust and anti-trust’ (Benedict Evans, enforcement decisions that privilege its own services and revenue 18 August 2020) accessed 22 January 2021. 53 Tom Warren, ‘Microsoft is bringing xCloud to iOS via the web’ 51 See the earlier declaration of support of Epic (n 25) and Steven (The Verge, 8 October 2020) accessed 22 January 2021. scrutiny of app stores’ (Politico, 18 June 2020) gaming web app’ (The Verge, 19 November 2020) accessed 22 January 2021. 52 See in particular the statements in the Facebook Response to the 55 In its market study, the ACM found that web apps cannot be EC Public Consultation on the Digital Services Act (DSA), 81–82 considered a realistic alternative to most native apps, although available via accessed 22 January 2021 (‘Apple has made policy and 42–44.
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