App Store: Bridge between Users and Developers or Market Monopoliser?

[Amiya Krishna Upadhyay and Arnab Chakraborty are 4th Year B.A., LL.B. (Hons.) and B.B.A., LL.B. (Hons.) students respectively at National Law University Odisha]

On 31 December, 2021, the Competition Commission of India (CCI) directed the Director General to probe into the functioning of the App Store and corresponding in-app purchases (IAP) of the Silicon Valley giant. The allegations of the Informant, Together We Fight Society, were primarily threefold: a) monopolisation of the App Store through enforcement of unilateral contracts with app developers; b) mandating the use of IAP for distribution of paid digital content, thereby restricting the right of the app developers to deploy their preferred payment processing system; and c) Apple engaging in unfair tie-in scheme to monetarily benefit from the increased downloads of their own applications

Relevant Market Definition In A Two-Sided Market

The CCI thoroughly examined the allegations and the corresponding replies by Apple before ordering further investigation. In its analysis, the CCI took it upon itself to eliminate all kinds of confusion pertaining to the definition of relevant market. Attempts to increase the size of relevant market by the firm alleged of engaging in abuse have been an extremely common practice. In this case, Apple tried to adopt a similar approach by trying to define the ‘overall market for smartphones’ as the relevant market (see paragraph 10.3 of the CCI Order). However, the CCI was quick to spot the inaccurate delineation and, therefore, correctly determined the ‘market for app stores for iOS in India’ as the relevant market for examining Apple’s dominance with regard to its association with app developers (paragraph 18). Even though the relevant market was accurately identified, the CCI did not delve into the reasons behind its conclusion.

It is important to understand that the process of defining relevant markets in a single-sided market varies significantly from a two-sided or a multi-sided market. In two-sided markets, the difference between transaction and non-transaction markets needs to be established before allegations of dominance or subsequent abuse can be entertained. Two-sided non-transaction markets are characterised by the absence of any observable interaction between the two sides of the market. Therefore, there is no per-interaction fee or a two-part tariff, and it requires delineation of two inter-related markets. On the other hand, a two-sided transaction market displays active interaction between two groups of platform users, thereby allowing the intermediate platform to charge a two-part tariff. The features of the App Store with developers on one side and users on the other can be suitably traced to two-sided transaction markets. Additionally, two-sided transaction markets only call for defining a single market, which is probably the principle that the CCI resorted to while defining the relevant market.

Are App Store Guidelines Unilateral Contracts?

The orchestrator in a two-sided market is always in a superior position to understand market behaviour. The priority for any firm acting as the cohesive link between stakeholders on either side of the market is to get both sets of consumers on board, that is, by creating a positive indirect network effect. However, the way Apple has got the two sides of the market to substantially boost their revenue has left a series of pertinent questions. The most important consideration was reflected in Apple v. Pepper where the United States Supreme Court did not bite into Apple’s strategy of deflecting their liability while retaining all the benefits from the transactions between app developers and users of the App Store.

As evident from App Store’s Review Guidelines, the app developers are required to operate with severe limitations. Moreover, the fact that Apple also preserves the users’ response to the apps made available on the App Store gives them a position of leverage using which they can further monopolise the downstream market. This strategy not only helps them consolidate their status as the only platform connecting iOS users and developers, but also pave way for introducing their own applications in the downstream market. Kaspersky found themselves at crossroads with Apple’s monopolistic ambitions in Russia when the digital antivirus developer launched a complaint against the tech behemoth for being unfairly asked to curb the functionality of Kaspersky Safe Kids (KSK) by deleting some unique features. Unsurprisingly, this development coincided with the introduction of Apple’s own app with similar features, Screen Time in the iOS ecosystem. Music streaming app, Spotify, also decided to call out the anti-competitive practices of the App Store to unfairly popularise Apple Music. Their tussle in the app market has been a key battle which has managed to get several key competition law regulators involved in the debate. These developments clearly indicate how Apple have used their position as the orchestrator-in-chief to maximise their profits on both sides of the ecosystem.

Status-Quo Bias

The iOS ecosystem has been characterized by exclusive integration into Apple’s devices. The monopolistic features of the App Store can be perfectly portrayed by one of the primary allegations in Apple v. Pepper, which stated that the users are coerced into buying the application from App Store or not buying the application at all. To further reflect on their sway in the market, it is imperative to look at how the software giant engage in ‘self-preferencing’. While there can be various ways of engaging in self-preferencing, the most prominent involvement of Apple happens to be in the form of pre-installing their software applications on their hardware devices. For instance, if an iOS user already has Apple Music installed on his or her smartphone, the person would hesitate to shift to Spotify for availing minor advantages giving life to what is called the status quo bias (see: Google Android Case, paragraph 782). This implies that the consumers would become locked in, making the process of switching to other competitors difficult and Apple would reap its benefits.

IAP Obligations – Influencing Third Party Products?

Apple serves a dual purpose as a platform: firstly, it distributes its own apps (such as Apple Music and Safari) and, secondly, it also serves as a marketplace for third-party app developers (App store) to sell their products directly to smartphone users. App developers must adhere to the App Store review guidelines, which require them to mandatorily use the Apple’s in-app purchase system for any purchases made on the App Store or any future in-app purchases made by users on the apps. As a result, the CCI believes that Apple’s exclusive IAP system unfairly limits app developers’ option to use any payment system they want, as it noted in the present order (paragraph 27). Further, there is also a 30 percent commission on all such payments which increases the cost, not only for the app developers but also for the consumers (since the app developers will increase the cost of the apps to recoup the extra amount that they have paid as commission). This rise in the cost of Apple’s downstream market competitors (video, audio streaming, etc.) will impact their competitiveness against its proprietary apps too. Previously, the CCI has dealt with similar actions in XYZ v. Google where Google was held liable followed by a recent fine imposed on Apple by the Dutch competition regulator for failing to allow dating apps to use third-party payment systems.

The only option left with the developers to dodge the 30 percent commission is to use alternative payment methods, i.e., via apps’ websites (For instance, Amazon dodging App store guidelines by launching cloud gaming via web). However, there are certain limitations to this method. It is not viable for apps which do not have any websites in the first place. Moreover, maintaining an external payment website may be expensive for a lot of app developers.

Tying-In Arrangement And Foreclosure Of Competition: Is App Distribution Tied To Payment Processing?

The informant in the present case alleged that Apple is employing a tie-in strategy (i.e., customers are essentially “obliged” to buy additional products after purchasing a specific product) by forcing the app developers to use its IAP system if they want to distribute their apps via the App store. The European Commission in Microsoft has laid down certain conditions to determine whether the conduct of the enterprise amounts to abusive tying. First, the tying and the tied products are separate in nature. In this case, the tying (App Store) is separate from tied (payment processing) product because the app developers have a choice to use other in-app payment processing options and would rather select from them regardless of how the developer’s iOS apps are distributed. Secondly, with regards to Apple being dominant in the market for tying product, the CCI has held that prima facie Apple holds a dominant position in the market for App stores for iOS in India (paragraph 19). Thirdly, when it comes to giving the app developers a choice to obtain the tying product without the tied product, Apple prevents it contractually via its review guidelines, as discussed above in detail. With regards to foreclosure, the CCI has agreed that the restrictions imposed by Apple forecloses the market for app stores for iOS and leads to denial of market access for app developers (paragraph 33).

Conclusion

These actions must be considered for any objective justifications as well. However, even after considering the defence of objective justification put forth by Apple, the CCI would be wary of Apple’s exerting influence in the market. The question that should be key in reaching a conclusion is whether these justifications outweigh the excessive pricing and imposed restrictions. Although the case has not reached its finality yet, it prima facie appears that a strong case has been made out against Apple. The outcome of these proceedings will have strong implications since it will most likely establish a precedent in the CCI’s approach towards regulating big tech. 

Amiya Krishna Upadhyay & Arnab Chakraborty

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