When Apple takes the European Commission for fools: An initial overview of Apple’s new terms and conditions for iOS app distribution in the EU
Damien Geradin Uncategorized January 26, 2024 9 Minutes
Yesterday, Apple made an important announcement regarding changes to iOS, Safari, and the App Store in the European Union in response to the Digital Markets Act (“DMA”). This announcement covers a lot of ground and should be read in parallel with a number of accompanying documents.
In this blog post, I discuss my first (and therefore provisional) reactions to this announcement as it concerns Apple’s new terms for the distribution of iOS apps in the EU. App distribution is a subject we have dealt with on many occasions on this blog to express our frustration with Apple’s unwillingness to accommodate developers’ legitimate requests for greater competition in its mobile ecosystem. The announcement covers additional issues, such as browsers, gaming, etc., which I do not address here.
With the adoption of the DMA, Apple is forced to modify its model, but it does it with rage (the announcement is combative and shows Apple’s distaste for the will of the EU legislator) and in a largely unsatisfactory manner. This is not surprising. In courts, investigations and elsewhere, Apple’s stance has been to defend its practices to the fullest extent against change. It takes the view that only Apple can protect users’ security and privacy, and only Apple can innovate in these markets.
Against this background, here are some initial reactions:
First, Apple has no choice but to allow alternative app stores, but wants to retain a large degree of control. While the various steps that will need to be met by aspiring app store providers are not entirely clear, they are likely to be onerous. Apple has in multiple instances sought to introduce friction to make changes difficult (e.g., for instance in response to the Dutch Competition Authority’s findings it committed an abuse of dominance). The same approach is to be expected here. But in any event, alternative third party app stores will face serious challenges I discuss below.
Second, Apple is also under an obligation to allow “sideloading” (i.e., the ability to download apps directly from a website, as software can be downloaded from websites on PCs), but interprets this obligation in an extremely narrow way: “sideloading refers to downloading iOS apps outside of an official app marketplace — and in the EU, users will have the option to download alternative marketplaces that offer apps for download.” In other words, direct downloading of apps will not be possible from the web (although this is perfectly possible from PCs, including iMacs). Curiously, Apple claims that “sideloading is one of many reasons why in the EU, the DMA’s changes will result in a system that’s less secure than the model we have in place in the rest of the world,” and uses this as an excuse to introduce a host of controls that will obfuscate its obligations under Article 6(4) the DMA. For instance, apps will have to be notarized with notarization being defined “a baseline review that applies to all apps, regardless of their distribution channel, focused on platform policies for security and privacy and to maintain device integrity.” If that is the case, it is not clear why notarized apps can’t be downloaded straight from the web.
Third, Apple has been investigated by various competition authorities for mandating app developers that sell digital products and services to use its in-app payment solution. Apple has failed to convinced regulators that mandatory IAP is necessary, and Article 5(7) of the DMA now makes it illegal. Thus, Apple has no choice, but to allow app developers to use an alternative payment service provider (“PSP”) or linking out to purchase. But this is subject to a variety of conditions that will disincentivize app developers from using alternative PSPs.
- First, Apple has decided to make the use of such options difficult by forcing app developers willing to use alternative PSPs to go through multiple steps. Apple introduces warnings designed to scare away users from using apps.
- Second, app developers using alternative payment options will still be subject to Apple’s full commission (discussed below). This will financially disincentivize app developers from using these options because there is very little (if anything) to gain doing so.
- Finally, and most importantly, developers will not be allowed to “offer both In-App Purchase and alternative PSPs and/or link out to purchase to users in their App Store app on the same storefront.” So much for user choice. This also places app developers in a difficult position. If they decide to use an alternative payment option, they will not only have no financial incentives to do so, but they will probably lose revenues through the reduced conversion rate associated with friction.
Fourth, Apple offers new alternative business terms for iOS apps in the EU. These have three primary elements:
- “Reduced commission — iOS apps on the App Store will pay a reduced commission of either 10% (for the vast majority of developers, and for subscriptions after their first year) or 17% on transactions for digital goods and services, regardless of payment processing system selected”;
- “Payment processing fee — iOS apps on the App Store can use the App Store’s payment processing for an additional 3% fee. Developers can use a Payment Service Provider within their app or link users to a website to process payments for no additional fee from Apple”;
- “Core Technology Fee (CTF) — For very high volume iOS apps distributed from the App Store and/or an alternative app marketplace, developers will pay €0.50 for each first annual install per year over a 1 million threshold. Under the new business terms for EU apps, Apple estimates that less than 1% of developers would pay a Core Technology Fee on their EU apps.”
Thus, for developers that use IAP, as most will continue to do for the reasons expressed above, the total fee will be 17%/10% + 3% + the core technology fee.
Excluding the core technology fee or CTF, the standard commission for app developers using IAP has thus been reduced by 10%, although for smaller app developers and subscriptions after their first year, the reduction is just 2%. For app developers using alternative payment methods, the standard commission is reduced by 13% and the commission for small app developers and subscriptions after the first year by 5%, but they have to pay the payment processing fee to their own PSP. The payment processing fee will vary depending on a variety of considerations. Using alternative PSPs won’t generate much savings.
As to the core technology fee, this is a new “junk” fee, which will disproportionately affect those app developers that have limited revenues, but whose apps are widely downloaded. It looks like a clever way by Apple to recoup the reduced commissions. Note that developers of alternative app marketplaces will pay the CTF for every first annual install of the app, including installs that occur before the 1 million threshold is met. Thus, if an app developer decides to distribute its apps through a third party app store, it will not pay any commission to Apple, except the CTF, plus the commission that will be charged by the app store in question.
The question, of course, is whether app developers should be happy with the reduced commissions and whether such commissions are FRAND (and thus compliant with the Article 6(12) of the DMA).
As to whether app developers should be pleased with the reduced commissions, the question is yes and no. Yes, because some of them will in theory pay less (although in the case of those paying the reduced commission, the further reduction is small). But they now have to pay the CTF, which will represent a heavy burden for apps that have limited revenues, but whose apps are heavily downloaded. These app developers could be worse off than under the existing terms (and will thus stick to them, which is a possibility offered by Apple; but in that case they cannot use alternative payment methods). Now, even a reduced commission still means a lot of money. A medium size app developers with $5 million in revenue will still need to pay $1 million in commission, just for the sake of being in the App Store without even counting the CTF.
This also ignores the fact that the app developers offer immense value to Apple. But for the presence of millions of apps on its App Store, Apple would not be able to sell many iPhones. To illustrate why 20% is excessive use the following thought experiment. Would Apple maintain an App Store if the standard commission was reduced to 5%? It would. And what if the commission was 0%. It still would because it would have no choice. People expect to be able to download Netflix, Uber, Tinder, Spotify and many other apps on their iPhones. No apps mean no iPhone sales, which represent the bulk of Apple’s revenue. In other words, the commission is nothing but an illustration of Apple’s bottleneck power.
I should also add that for app developers that use the App Store and pay a commission, the CTC appears to be a pure junk fee as, per Apple’s description, both the commission and the CTF will effectively cover the same costs. This looks like double charging.
As to whether the reduced commissions comply with FRAND. The answer is an unequivocal no. These commissions are not fair and reasonable for the reasons described in the preceding paragraph. But they are also discriminatory. The reason is that app developers whose apps sell digital goods and services and those whose apps don’t, effectively use the same app store services, but are treated differently. Only the former pay a commission. As mentioned elsewhere, it is hard to understand why Tinder will need to pay a 17% commission, while Uber pays zero percent. Widely successful apps such as Facebook, Amazon, etc. will pay no commission although they surely consume more App Store services than, for instance, a moderately successful news app. That makes no sense at all.
Of course, Apple might say that if app developers are not happy with Apple’s commissions, they can decide to distribute their apps through a third-party app store, since such app stores will now be allowed on iOS devices. But this is too simple a proposition. First, it will take time for such app stores to be up and running as they have to be developed and are subject to constraining processes. Second, there is no guarantee that these app stores will succeed as they will have to start from scratch and compete with the App Store, which benefits from large network effects. Finally, app developers will still need to pay a commission to these alternative app stores (they won’t operate for free), plus the CTF “for every first annual install of the app, including installs that occur before the 1 million threshold is met.” Thus, even if the alternative app store they select charge a lower standard commission (e.g., 15% instead of Apple’s 17%), they could end paying as much (or more) than if they kept their app into the App Store. Most app developers will not bother.
Fifth, because the new business terms are onerous and don’t move the needle, it is not clear how many developers will sign in to these terms. I suppose that app developers that need to use IAP (and may pay large commissions in the process) may be tempted to accept these new terms to save some money (although the extent to which they are able to save money depends on the impact of the CTF). Other app developers may decide that the deal is not sufficiently attractive to accept it or that they may be worse off that under existing terms (if, for instance, they are able to attract users to their web payment platforms without steering them from the app). One should not forget that this would also require app developers operating across the globe to have different apps within the EU if they want to take advantage of the alternative payment solutions that are now offered (in addition to the fact Apple makes them deeply unattractive).
Thus, my initial reaction to Apple’s announcement (and related documentation) is that Apple is not seriously complying with the DMA. The objectives of the DMA are to bring contestability and fairness in digital markets, and this is not achieved here. Apple shows disdain for both the DMA and app developers. Its approach to DMA implementation appears to do little for users, other than to deprive them from meaningful choice on the need for protection. That should not be tolerated. Unless Apple make significant changes to its implementation plans, which it will likely not do, the EC should open infringement proceedings on 7 March 2024. Apple’s proposed plans are so at odds with the company’s obligations under the DMA, that EC officials will have no choice. If competition law does not deliver and the DMA fails, what are they left with?