APPLE PUSHED DEEPER INTO ANTITRUST WATERS: EPIC GAMES SPEARHEADS NEW ANTITRUST CHALLENGE IN U.S.

[Reuben Philip is a Daksha Fellowship holder, graduated from Tamil Nadu National Law University, Trichy]


Introduction


Recently on 13th August 2020, Epic Games announced their move to challenge Apple, through a “1984” parody video of Apple’s own famous Superbowl ad back in 1984. Interestingly, such ad was televised before launching Apple’s first Macintosh computers claiming to be challenger and revolutionary force to break IBM’s monopoly in the computer technology market. Fast forward 36 years down the lane, Epic Games has portrayed itself as the new age challenger in this parody video to break Apple’s monopoly. Noteworthy herein is that the Apple is the most valuable company in the world at $2 trillion and over the past year, it has garnered revenue of around $19 billion of which $63.4 billion has come from sales of digital goods and services on iPad and iPhone apps.

On 13th August 2020, in response to the bold move of Epic Games to introduce a new mode of payment providing a cheaper option to consumers by circumventing payments made through Apple’s own In-App Payments (‘IAP’), wherein Apple takes 30% commission (or 15% in the case of recurring subscriptions), Apple proceeded to remove Fortnite from its App Store since it violated its developer guidelines. Instantly, Epic Games filed a legal complaint in the U.S. District Court for the Northern District of California seeking injunctive relief against Apple’s anti-competitive actions.

Spotify’s complaint before European Commission

In this background it is pertinent to note that Spotify, one of the world’s leading music streaming platforms had already filed a complaint against Apple with the European Commission (‘EC’) back in 11th March 2019 alleging that the Apple’s 30% commission is stifling innovation and limiting consumer choice coupled with their discriminatory conduct towards Apple’s own music streaming platform, Apple Music. A similar complaint was also made by Japanese tech giant, Rakuten on 5th March 2020 complaining about the Apple 30% commission on every purchase in its ebook app, Kobo while the same is not applicable for its competitor, Apple Books. On the basis of these two complaints, on 16th June 2020, EC decided to initiate an investigation on Apple’s rules for app developers on the distribution of apps via the App Store to confirm whether they violate E.U. competition laws. Interestingly on 11th April 2019 itself, the Dutch Authority of Consumers and Markets had also launched an investigation into abuse of dominance by Apple in its App Store.

Analysis of Anti-Competitive issues

Foreclosure of competition and denial of market access to the iOS App Distribution Market through contractual restrictions

First, Apple users are completely restrained by Apple from downloading any apps or app stores directly from websites and have the only choice of relying on App Store to gain access to any apps. Additionally, the app developers in order to access the iOS user base has to contractually agree to distribute their apps in iOS only through the Apple’s app store nor distribute apps which is a storefront for third-party apps. Such restrictions does not exist in Google’s Android OS and even in Apple’s own Mac OS used in PCs wherein liberty is provided to app developers to distribute apps through other app stores and also users to directly download them from websites.

Nevertheless, an important point of consideration will be whether the iOS or Apple app store can be categorised as an essential facility for app developers as it is a large and crucial user market for app developers to gain access to. In such a case, foreclosure of market for app developers and denial of market access to potential app store competitors can definitely harm developers drastically, since they would have to now face increasing costs and lesser profits with Apple charging a 30% commission. Undoubtedly, it also stifles innovation and creation in these markets and denies consumer’s fair choices, consequently increasing their costs too arising from the same 30% commission, which the developer in all probability will be forced to pass on to the consumer. Considering the exclusive practices and Apple to Apple sharing benefits in the iOS ecosystem, there is existence of high switching costs and lock-in effects for Apple Users which further strengthens their argument against Apple’s anti-competitive conduct.

Foreclosure of competition and denial of market access to iOS App Payment Processing System through unlawful tying of In-App Purchase to its App Store

Even after contractually restraining app developers to distribute their apps only through the Apple app store, Apple subsequently mandates the app developers to use Apple’s own In-App Purchase (‘IAP’) system for the purpose of facilitating any purchases for unlocking any app content or functionality. App developers are forced to embed this IAP system into the apps, contractually restricting them from using any third-party payment platforms or even providing for any external links or button directing the users to any other purchasing system other than IAP. Apple goes even further to gag the developers by denying them to allow for any general communication of merely informing the users of payment/subscription methods outside the app which effectively discourage the users from using the IAP in any way.

Apple has successfully foreclosed a downstream market through its monopoly and control in the upstream market of iOS app distribution. It has denied market access to various potential competing third party payment platforms such as PayPal, Stripe, Braintree etc which charges around 2.9% base U.S. rate viz. 10 times less than Apple’s 30% commission and consequently restricting consumer’s choices. Apple’s conduct definitely harms the developers by stifling their innovation and creative ideas for various payment methods and also forces them to face higher costs and lesser profits because of the sizeable 30% Apple commission as applicable for every single transaction while the same rule is also not applicable to apps that sell services and physical goods such as Uber, Amazon or Airbnb wherein they could use third party payment platforms too. Forcing developers to either agree to use the IAP having an unreasonably high commission or lose access to the app store completely could qualify to tying.

Abuse of Dominance for giving illegal advantage to own Music streaming and e-book service

Other than the above two issues, there is another pertinent question that is particularly relevant in the case of Spotify and Rakuten. While the aforesaid issues could potentially fall foul of Article 101 of the Treaty of the Functioning of the European Union (‘TFEU’) which prohibits anti-competitive agreements, this particular issue clearly attracts Article 102 of the TFEU which prohibits abuse of dominant position.

The issue as highlighted by Spotify is with respect to how Apple is disrupting the competition in the music streaming market wherein the rules and policies of the app store besides causing a dent in the pockets of the developers and consumers, provides an unfair advantage to Apple’s own music streaming service, Apple Music. The facts are slightly similar to that of EC’s case against Google wherein Google was fined 2.42 billion euros for abusing dominance as a search engine by giving illegal advantage to its own comparison shopping service. Spotify has also raised complaints against the mandatory use of IAP which could be a potential case of tying similar to another EC’s case against Google, wherein Google was fined 4.34 billion euros inclusive of illegal tying of Google’s search and browser apps with the sale of the Android OS to Android mobile manufacturers.. Spotify has also started a campaign ‘Time to Play Fair’ against Apple, wherein they have clearly outlined Apple’s abusive and unfair conduct favouring its own music service against app store’s rules that was used to restrict Spotify.

Conclusion

With Facebook and Google facing antitrust probes and fines in U.S. and E.U., the time is ripe for Apple to take a cue. First, it can be safely considered that Apple is in a position of absolute monopoly or dominance in the jurisdictions of USA and EU respectively in the iOS app distribution market and iOS in-app payment system. Apple will have a tough task at hand to prove that the contractual restrictions imposed on developers do not amount to unreasonable restraints of trade as mentioned thereunder section 1 of Sherman Act, 1890. With respect to the Epic Games’ suit, as they are seeking only for an injunctive relief, a permanent behavioural solution cannot be expected unless the Department of Justice in U.S. takes up the issue. Whereas, the independent EC investigation could prove to be a landmark decision for the most valuable company in the world and one can expect Apple to be slapped with a huge fine if such allegations are proved. In the previous years, app developers have been reluctant to challenge the power exercised by Apple as they are largely dependent on Apple for their revenue, but its high time the rules of game changed, for the better.

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©2020 by The Competition and Commercial Law Review.