Posted on July 20, 2020
Authored by Tanya Garg, recent law graduate from Symbiosis Law School Pune.
Image Source: techcrunch.com
Apple Inc. has been under fire several times before for the preferential way in which it operates marketplaces by setting rules in a way that benefits the company at the expense of others. After many years of discriminatory practices faced on the Apple App Store (“App Store”), Spotify Technology S.A. (“Spotify”) filed a formal antitrust Complaint against Apple, on 13 March 2019. Over a year after the Complaint was filed, on 16 June 2020, the European Commission (“Commission”) opened formal antitrust investigations to determine whether the App Store’s rules for app developers on the distribution of apps violate the European Union’s competition rules. The Commission’s ruling will give clarity on the issue of online platforms’ accountability while providing preferential treatment and pave the way for a level playing field.
In a press release, Spotify founder, Daniel Ek said that Apple has been acting both player and referee to deliberately disadvantage other app developers. This was evident when Apple eliminated its payment system choice and replaced it with a mandatory purchase system built in the App Store itself and charging 30% commission on the payment transactions limited to content-based apps like Spotify. Thus, for Spotify to use Apple’s billing system in order to allow its customers to upgrade to its ‘Premium’ service (which is an ad-free subscription-based), Spotify and others would have to pay 30% of any subscription fees. This is the first of many moves made by Apple to dissuade customers from subscribing to Spotify. According to Spotify, this action has only been taken after attempting to unsuccessfully to resolve the issues directly with Apple. In response to Spotify’s claims, Apple has stated that Spotify, while owing much of its success today to the App Store ecosystem, has not contributed enough to the maintenance and development of that marketplace.
This investigation will also help address the broader discussion on reviewing the suitability of the legal framework in the E-Commerce Directive for digital services in the European Single Market.
Investigation
The Commission shall investigate whether App Store restrictions imposed by the App Store breaches EU competition rules under Article 101 and/or Article 102 of the Treaty on the Functioning of the European Union (“TFEU”).
Article 101 TFEU prohibits restrictive agreements between independent undertakings which may affect trade between Member States with object or effect the prevention or restriction of competition in the market, where that effect is appreciable. Such agreements include those between independent market operators acting either at the same level of the economy, as potential competitors or at different levels, as a manufacturer and distributor.\
On the other hand, Article 102 TFEU prohibits dominant undertakings from abusing their market power by imposing unfair prices or trading provisions. However, it is pertinent to note that Article 102 TFEU aims to protect effective and healthy competition in the internal market. Therefore, as laid down in Post Danmark, in order for Apple to dodge liability, it must demonstrate that its conduct is objectively necessary or that the exclusionary effect produced may be counterbalanced or even outweighed, by benefits via-a-vis efficiency and to consumers.
The Commission’s investigation will concentrate on the following three restrictions imposed by Apple on the distributors of apps in the App Store Guidelines:
The mandatory use of Apple’s in-app purchase system (“IAP”) for the distribution of paid digital content;
The 30% commission charged to app distributors by Apple for all subscription fees paid through IAP causing several competitors to disable in-app subscription features or raise their subscription fees and pass those costs onto consumers; and
Rules preventing developers from informing users of alternative purchasing possibilities outside of apps, such as on their websites, which are often cheaper.
The investigation will determine the following:
Whether the contractual obligations imposed by Apple on app developers has an appreciable effect on competition in the market for music streaming services and e-books, by giving Apple’s own apps an unfair advantage; and
Whether Apple has been abusing its dominance as the only app store supplier for iOS devices, by dictating the terms of the App Store, to manipulate competition in the market.
Anti-Competitive Agreement
It is pertinent to note that Article 101 of the TFEU prohibits agreements “which have as their object or effect the prevention, restriction or distortion of competition within the internal market”. It has been noted that an agreement restrictive by its ‘object’ depends on the content of the agreement itself and restrictiveness of the ‘effect’ depends upon the consequences of the agreement. The Commission has also previously taken the position that the complaining party may demonstrate either the restrictiveness of the object or the effect, and does not necessarily need to show those conditions cumulatively[1]. However, in some cases, the Commission has also noted that agreements restrictive by object may not be per se anti-competitive and the appropriate economic context must be taken into account[2].
Nonetheless, there appears to be a strong argument in favour of Spotify to demonstrate that the App Store Guidelines are restrictive by their object, i.e., they provide discriminatory and favourable treatment to certain apps owned by Apple and thereby result in ‘prevention, restriction, or distortion of competition within the internal market’.
Abuse of Dominant Position
It becomes essential for the Commission to define the relevant market in question to establish whether an appreciable impact on competition has occurred and whether Apple holds a dominant position in that market. While doing so, a point of debate may be whether the relevant market in which Apple is allegedly abusing its dominance is specifically the app store for iOS devices or whether it includes app stores for other operating systems as well.
The Commission focuses on cases where the probability of uncovering anti-competitive conduct is high; there exist a likelihood of harm to the consumer; and a significant impact on the functioning of competition in the market. Where an infringement is found, the Commission has the power to impose fines and orders to end the anti-competitive practices. The investigation is of interest as the Commission has been coming down heavily on companies like Google and Android by imposing a fine of €2.42 billion and €4.34 billion, respectively. The commission imposed hefty measures which includes €2.42 billion fine on Google for abusing its dominance as a search engine by giving an advantage to its own shopping service; and a fine of €4.34 billion for imposing illegal restrictions on Android device manufacturers and network operators to divert traffic to Google’s search engine.
Effect on the Industry
It is vital to acknowledge that Apple operates a platform that, for numerous people around the world, is the gateway to the internet. However, Apple has introduced rules to the App Store that influence consumers’ choice and suppress innovation. Being the owner of the iOS platform and the App Store and a competitor to services like Spotify, they grant themselves unfair advantages. This investigation stems from the long-standing rivalry between the music streaming services Spotify and Apple Music. At the core of Spotify’s case is that, obligation of App Store rules cast on competitors but not Apple Music. It is maintained that this is not about Apple Music vs Spotify, but about giving a fair footing to all players in the market. As a testament to this sentiment, several other music streaming services have echoed and backed Spotify’s complaints.
Apple’s behaviour is the subject of pending FTC investigations in US, and most recently in the Netherlands. According to data published by Spotify, it has more than 90 million monthly subscribers, a substantial portion of which undoubtedly use iOS. Due to the sheer volume of users, the consequences of a breach of the European Union competition rules may prove to have significant consequences for mobile app stores, should the European Commission find Apple’s behaviour anti-competitive. As avid users of both the iOS operating system and Spotify, the authors seek to provide an alternative line of reasoning to suggest that Apple may be breaching EU competition rules.
This decision will pave the path for fair and homogenous rules to all companies along fostering a healthy market. Additionally, consumers will be able to choose an app will be chosen purely on merits. Healthy competition and rivalry benefit all the players and their consumers by providing lowered entry barriers to the market, increased choices, lower subscription prices, and innovative music streaming services. Hopefully, after the Commission’s decision, new players will emerge in the market not only giving consumers a greater degree of selection by dismantling Apple’s dominance in the music streaming industry!
[1] Case 56/64, Consten SaRL and Grundig GmbH v Commission (1966).
[2] Case 382/12 P, MasterCard and Others v. Commission (2014).
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