High-tech firms, such as Google, Amazon, Meta and Apple, have increasingly been gaining the attention of competition authorities across the world, and not in a good way! Over the past few years, competition authorities in the UK, USA and Europe have all opened various cases against Apple, with particular focus on its App Store (see, for example, a blog post on this site from 2021 about the Epic v. Apple case in the USA).
The lead-up to the €1.8 billion fine issued by the European Commission (Europe’s competition regulator) on the 4th March 2024, began in 2019 when music streaming provider, Spotify, filed a complaint against Apple, after years of being bound by the ‘unfair’ App Store rules imposed by Apple.1
Apple’s App Store has traditionally served as the only platform through which application developers can distribute their apps to iOS users, and app developers have had no choice but to adhere to whatever rules are set by Apple. As iPhone and iPad users know, the App Store is the only way in which users can download apps to their iOS devices, establishing Apple’s App Store as a ‘gatekeeper’, as described in the European Commission’s (EC) press release expressing their initial concerns in April 2021.2 When it comes to music streaming apps, Apple not only serves as the exclusive platform for downloading these apps, but also has its own music streaming app, Apple Music, that competes with other music-streaming providers.
This means that Apple holds a dominant position in the market for the distribution of music streaming apps to iOS users through its App Store. Being a dominant firm is not necessarily a problem. However, firms which hold a dominant position do have a special responsibility not to abuse their position. The EC found that Apple was abusing its dominant position in this market, with particular concerns about the rules it imposed on music streaming app developers.
Apple requires that app developers use Apple’s own in-app purchase system. This means that users must make any in-app purchases or subscriptions to music streaming apps through Apple’s system, subsequently subjecting app developers to a 30% commission fee. The EC found that this often led app developers to pass on these costs to consumers through an increase in prices.
Although users could still purchase subscriptions outside of the app, which may be cheaper for users as these payments will not be subject to commission, the EC found that Apple limits the ability for app developers to inform users about these alternative methods. For example, Apple prevented app developers from including links within their apps to their websites, where users could purchase subscriptions. The implications of this extends beyond increased prices for consumers, potentially resulting in a degraded user experience as well.
These restrictions imposed by Apple are examples of what are known as ‘anti-steering provisions’, and it is this conduct that led the Commission to issue the fine for the abuse of a dominant market position.
Whilst this case has now been concluded, the spotlight is not off of Apple yet. The European Commission had required that all ‘gatekeepers’ must comply with their Digital Markets Act (DMA) by the 7 March 2024.3 One implication of this for Apple, is the requirement to allow third-party app stores on iOS devices.
Whilst Apple has agreed to this requirement, concerns have been raised about the accompanying measures which Apple will introduce. This includes varying terms for app developers based on whether or not they offer their app exclusively through Apple’s App Store. As outlined in a recent article,4 one implication is that app developers exceeding 1 million existing downloads through the Apple App Store will incur a fee of €0.50 per additional user if they opt to distribute their app also through a competing app store. This may act as a deterrent to popular app developers to offer their app through a competing store.
The success of a platform like an app store, relies greatly on generating ‘network effects’ – more users attract more developers, leading to more users, and so on. Therefore, not being able to offer some of the most popular apps would make it challenging for a new app store to compete effectively with Apple’s App Store.
Recently, Spotify, along with game developer Epic and others, have expressed various concerns about Apple’s compliance with the DMA in a letter to the EC.5 It will be interesting to see whether the EC is satisfied with Apple’s approach to comply with the requirements of the DMA.
References
- A Timeline: How we got here
Time to Play Fair (Spotify) (updated March 2024)
- Antitrust: Commission sends Statement of Objections to Apple on App Store rules for music streaming providers
EC Press Release (30/4/21)
- The Digital Markets Act
EC: Business, Economy, Euro DG
- Apple’s exclusionary app store scheme: An existential moment for the Digital Markets Act
VOXEU, Jacques Crémer, Paul Heidhues, Monika Schnitzer and Fiona Scott Morton (6/3/24)
- A Letter to the European Commission on Apple’s Lack of DMA Compliance
Time to Play Fair (Spotify) (1/3/24)
Articles
Questions
- Why might ‘anti-steering provisions’ that limit the ability of app developers to inform users of alternative purchasing methods be harmful to consumers?
- Why is the existence of Apple’s own music streaming service, Apple Music, particularly significant in the context of its role as the operator of the App Store?
- Reflect on the potential advantages and disadvantages of allowing third-party app stores on iOS devices, as mandated by the Digital Markets Act (DMA).
In a recent blog post on this site about the Microsoft/ Activision Blizzard merger, the European Commission had just reached a decision to approve the merger subject to remedies, but the investigations in the USA and UK were still ongoing. Since then, the merger has been approved by competition authorities around the world, including in the USA and UK, and thus the merger has gone through.
However, there were some differences in the way the case unfolded under the regulation of these three competition authorities.
The European Commission’s (EC) decision
The European Commission (EC) was the first to give the merger the green light. The EC’s in-depth investigation revealed concerns about the market for the distribution of games via cloud game streaming services. In particular, the concern was related to the possibility that Microsoft might make Activision’s games exclusive to its own cloud game streaming service (Game Pass Ultimate) and restrict access from competing cloud game streaming providers.
The EC argued that this in turn could strengthen Microsoft’s position in the market for PC operating systems, as Microsoft may have an incentive to limit or reduce the quality of the streaming of Activision’s games on PC’s which do not use the Windows operating system.
Thus, while the merger was approved, this was subject to remedies. These remedies included 10-year licensing commitments from Microsoft, as outlined in the EC’s press release:
These licenses will ensure that gamers that have purchased one or more Activision games on a PC or console store, or that have subscribed to a multi-game subscription service that includes Activision games, have the right to stream those games with any cloud game streaming service of their choice and play them on any device using any operating system.
This type of remedy is called a behavioural remedy and often requires the merging firms to commit to taking particular actions post-merger. Unlike structural remedies (which may for example, require the merging firms to sell off an entire business unit), behavioural remedies often require monitoring and enforcement by competition authorities. The EC argued that the deal, with these behavioural remedies, could strengthen competition in the market for cloud gaming.
The Federal Trade Commission’s (FTC) decision
The FTC, in the USA, had similar concerns to those of the EC related to the cloud gaming market. These were outlined in the FTC’s press release:
[The deal] would enable Microsoft to suppress competitors to its Xbox gaming consoles and its rapidly growing subscription content and cloud-gaming business.
The FTC also argued that when Microsoft had previously acquired gaming content, it had made this content exclusive to Microsoft consoles. This could result in higher prices, and reduced quality, choice and innovation. To this end, the FTC appealed in an attempt to block the deal, but the Court ruled in favour of the deal going ahead.
During this time, Microsoft announced that it had committed to keeping Call of Duty on Sony’s PlayStation after the merger, and this likely contributed towards the court’s decision. Hence, the FTC was unsuccessful in its attempt to halt the merger.
The Competition and Markets Authority’s (CMA) decision
The final hurdle remaining for Microsoft, was the CMA’s approval. As outlined in a previous blog post on this site, the CMA’s phase 2 investigation revealed similar concerns about the supply of cloud gaming services (amongst concerns related to the market for the supply of console gaming services, which were later dispelled), and whilst Microsoft offered some commitments similar to those accepted by the EC, the CMA did not deem these to be sufficient to address its concerns and thus prohibited the merger.
The CMA’s published remedies guidance suggests that the regulator has a preference for structural remedies over behavioural remedies. One of the reasons for this is because of the requirement to monitor and enforce the commitments, and this therefore formed part of the CMA’s reasons for not accepting the remedies. Unsurprisingly, Microsoft appealed this decision to the UK’s Competition Appeals Tribunal (CAT), probably partly driven by the fact that the EC accepted similar remedies to those rejected by the CMA. However, Microsoft and the CMA agreed that if the appeal was paused, Microsoft could propose a new deal.
The new deal: did the CMA make a U-turn?
In August 2023, Microsoft submitted a new restructured deal for the CMA to review. As described by the Chief Executive of the CMA, this deal was “substantially different from what was put on the table previously” and was therefore investigated as a separate merger case under the CMA’s phase 1 processes.
The new deal meant that Microsoft would no longer be purchasing the cloud streaming rights held by Activision. Instead, the cloud streaming rights would be sold to an independent third-party game publisher – Ubisoft. This means that Microsoft will not be in control of the cloud gaming rights for Activision’s gaming content (outside of the EEA), and therefore will not be able to restrict its competitors’ access to Activision’s games, which was one of the main concerns outlined by the CMA based on the initial merger proposal. The new deal also opens up the possibility that Activision’s games will be made available on cloud gaming services that run on a non-Windows operating system.
On 13 October, the CMA approved this deal, subject to the cloud gaming rights being sold to Ubisoft, and some subsequent commitments from Microsoft in relation to its relationship with Ubisoft post-merger, as outlined in the CMA’s final report. However, the Chief Executive of the CMA has emphasised that they are unhappy with the way that Microsoft dealt with negotiating the approval of the merger:
But businesses and their advisors should be in no doubt that the tactics employed by Microsoft are no way to engage with the CMA. Microsoft had the chance to restructure during our initial investigation but instead continued to insist on a package of measures that we told them simply wouldn’t work. Dragging out proceedings in this way only wastes time and money.
What’s next in big tech?
While the merger deal has now gone through, the FTC has recently re-opened its case against Microsoft, which will continue to unfold over the next couple of months until December when the case will appear in Court. This means it is possible that the FTC could attempt to undo the merger, though this would be challenging.
In the tech market more broadly, the CMA has recently launched a market investigation into cloud services. While the focus of this blog post was on cloud gaming, cloud services are now increasingly being used by many businesses. The CMA’s issues statement suggests that a key focus of its investigation will be on the ability for customers to switch between cloud service providers. Microsoft is one of the largest providers of cloud services in the UK, and therefore it is inevitable that it will be under scrutiny. Given all three regulators’ recent efforts to ‘crackdown’ on big tech, this is just one of a series of cases that will be interesting to see unfold.
Articles
Competition authorities documentation
Questions
- Discuss the effectiveness of behavioural remedies vs structural remedies for a merger.
- Why might the competition authorities have been concerned about the possibility of Microsoft making Activision’s games exclusive to its own cloud game streaming service? Is exclusive dealing always anti-competitive?
- Why was the transfer of the cloud game streaming rights to Ubisoft seen as a suitable remedy?