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Friday, September 17, 2021

Judge orders Apple to ease restrictions on app developers

Apple counts on revenue from its app store to fuel its expansive profits, and the decision could eat away at that money. It was a damaging loss for the company, which is facing increasingly pointed questions from regulators and politicians around the world about its business.

By: New York Times |
Updated: September 11, 2021 8:58:18 am
3D printed Lady Justice figure is seen in front of displayed Apple and Epic Games logos in this illustration photo taken February 17, 2021. (REUTERS/Dado Ruvic/Illustration/File Photo)

Written by Jack Nicas and Kellen Browning

A federal judge Friday struck a serious blow to Apple’s control of its app store, giving companies a way to avoid handing Apple a cut of their app sales and potentially upending a $100 billion online market.

Apple counts on revenue from its app store to fuel its expansive profits, and the decision could eat away at that money. It was a damaging loss for the company, which is facing increasingly pointed questions from regulators and politicians around the world about its business.

Over the last month, regulators in Japan and South Korea have forced Apple to tweak how it manages the app store. In the United States, the Department of Justice has opened an antitrust investigation into the business. The Senate introduced antitrust legislation aimed at promoting app store competition after a House committee said last year that “Apple exerts monopoly power in the mobile app store market.” And the European Union, Britain and India also are investigating Apple’s app store dominance.

Together, the legal setbacks and the tighter regulatory controls indicate that Apple’s long run of calling all the shots on the app store — one of the linchpins of the internet economy — may be ending. That could represent one of the tech industry’s most substantial changes in years, as smaller companies keep more of their profits and Apple’s ability to be an unavoidable toll collector slips away.

Apple “was enjoying a tremendous advantage because of the popularity of its platform, and that advantage has been whittled away now,” said Jonathan Rubin, a partner at the antitrust law firm MoginRubin.

The order was part of the ruling in a prominent legal case between Apple and Epic Games, which makes the popular game Fortnite and sued Apple last year over its app store policies.

The judge, Yvonne Gonzalez Rogers of U.S. District Court for the Northern District of California, said Apple violated California’s laws against unfair competition by barring app developers from directing customers to other ways to pay for their services. She ordered Apple to start letting developers include links in their apps to other payment methods within 90 days.

That means when customers sign up for a subscription or buy a digital service or item in an iPhone app, companies can now steer those customers to outside websites to complete the transaction. That would allow those companies to avoid Apple’s commission on the sale, which can be as high as 30%.

But Gonzalez Rogers stopped short of declaring that Apple had a monopoly in the market of mobile games, which would have been a worst-case scenario for the company. She also said Epic had breached its contract with Apple when it allowed Fortnite users to pay it directly, instead of via Apple, inside its iPhone app last year.

Apple is widely expected to ask a judge to keep the order from going into effect. Either company could also appeal to the 9th U.S. Circuit Court of Appeals. In that court, a three-judge panel could review the decision, a process that could take a year or more. After a ruling there, Apple or Epic could appeal to the Supreme Court.

The ruling allows both sides to claim a partial victory. Apple now has a court ruling that says it does not run a monopoly in an important digital marketplace, which undercuts its opponents’ efforts to claim that it violates antitrust laws. But Epic’s lawsuit could also force Apple to crack open its airtight iPhone software to create an avenue for developers to avoid its commission.

Apple’s shares fell nearly 3% on the Nasdaq exchange after the ruling was announced.

“Today the court has affirmed what we’ve known all along: The app store is not in violation of antitrust law,” Apple said in a statement. “As the court recognized, ‘success is not illegal.’ Apple faces rigorous competition in every segment in which we do business, and we believe customers and developers choose us because our products and services are the best in the world.”

The ruling did uphold many of the principles of Apple’s app store business, including that it can prohibit third-party iPhone app marketplaces and can continue to charge a 30% commission on many transactions. Epic had challenged those practices.

“It puts an economic question mark around the app store, but at the same time, it affirms the principles” of the business, said Adam Kovacevich, a former Google lobbyist who now runs a tech-policy group that is in part sponsored by Apple.

Tim Sweeney, Epic’s CEO, said on Twitter that he was not satisfied with the ruling because it did not go far enough in allowing companies to complete in-app transactions with their own payment systems, versus having to direct customers to outside websites. He said Fortnite would not return to the app store until such rules were in place.

“Today’s ruling isn’t a win for developers or for consumers,” he said. “We will fight on.”

Rubin said that Apple would feel relieved to dodge being labeled a monopoly, but that the judge’s verdict would most likely do little to strengthen its standing in other investigations because antitrust lawsuits can vary. He said Apple might also have to consider lowering its commission now that it will be easier for developers to send customers elsewhere to make purchases.

Epic has sued Google for the same issues with app commissions on its Android operating system, and that case is expected to go to trial this year. Last month, 36 states and the District of Columbia also sued Google for forcing companies to use its payment system in exchange for access to its app store. Google’s public response said, in effect, that the states should instead be focused on Apple.

There are also other challenges ahead for Apple’s app store. Gonzalez Rogers is set to hear another lawsuit from consumers that is seeking class-action status and claims that the app store commission is illegal.

The app store generates roughly $20 billion a year for Apple, according to Sensor Tower, an app data firm. Apple has effectively forced companies to use its payment systems in exchange for access to the store, which is the only way to get an app on iPhones. That arrangement has allowed Apple to charge a commission on many transactions.

Last month, South Korea passed a law that requires app stores to allow customers to pay through multiple payment systems. Apple also settled another lawsuit over its commission with a group of smaller developers. In that settlement, Apple paid $100 million and agreed to allow developers to tell customers in an email about other ways to pay for their services, outside of Apple’s payment systems.

And last week, prompted by an investigation by the Japan Fair Trade Commission, Apple said it would allow a subset of apps known as reader apps, like Netflix and Spotify, to include a link within their apps directing users to external payment methods.

But the order Friday goes much further, because such reader apps account for very little of Apple’s app store revenue, analysts have said. The order applies to all apps, and Gonzalez Rodgers said gaming apps accounted for 70% of the sales on iPhone apps.

Apple instituted its 30% commission on many app sales shortly after introducing its app store in 2008. In recent years, as smartphones have become central to modern life and commerce, app makers began to balk at Apple’s cut. An executive at Match Group, the maker of dating apps like Tinder, testified to Congress this year that app-store fees were Match’s single largest expense and would soon exceed $500 million a year, or one-fifth of total sales.

In response to complaints, Apple halved its commission on developers that brought in $1 million or less from their apps in the previous year, charging them 15%. That move affected about 98% of developers that pay the commission, but it hardly affected Apple’s bottom line; those developers account for less than 5% of app store revenue, according to estimates from Sensor Tower.

A year ago, Epic began offering Fortnite players discounts if they used Epic’s payment system instead of those from Apple and Google. The tech giants quickly pulled Fortnite from their app stores. Epic responded by suing both. Apple’s efforts to dismiss the lawsuit failed. In the federal trial in Oakland, California, in May, Tim Cook took the stand for the first time as Apple’s CEO.

A main focus for lawyers in the trial was defining the market they were arguing over. Epic’s lawyers said the market was iPhone apps, over which Apple has a monopoly. Apple countered that people played games and used digital services on a wide variety of devices, from smartphones to gaming consoles to laptops, and that Apple controlled a small slice of that big market.

Gonzalez Rogers said that she sided with neither company and that the market in question was digital mobile gaming transactions. In that market, she said, Apple does not have a monopoly.

“While the court finds that Apple enjoys considerable market share of over 55% and extraordinarily high profit margins, these factors alone do not show antitrust conduct,” she said. “Success is not illegal.”

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