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).
The emergence of the digital economy has brought about increased competition across a wide range of products and services. The digital economy has provided businesses with the opportunity to produce new categories of goods and services with the aid of artificial intelligence. This new digital era has also been beneficial for consumers who now have greater choice and access to often higher-quality products at lower prices.
But while the digital revolution has facilitated greater competition, it also presents some challenges for competition law enforcement. Competition agencies continue to intensify their scrutiny of the digital economy as they try to get to grips with both the opportunities and challenges.
The role of regulation
Many agencies are aware that regulatory overreach could have negative effects on the development of digital markets. Therefore, any competition enforcement in this area needs to be evidenced-based.
A number of agencies have commissioned market studies or appointed experts in the digital field to prepare industry reports. While many of these reports and studies have found that existing competition rules generally continue to provide a solid basis for protecting competition in the digital age, there is growing demand for various changes to regulation. The reports have generally noted that the traditional tools for competition analysis may require some adaptation or refinement to address better the specificities of online markets, such as the multisided nature of platforms, network effects, zero-price markets, ‘big data’ and the increased use of algorithms.
Tech giants and online platforms, in particular, have been a focus of recent intervention by competition authorities. Investigations and intervention have related to a range of practices, including self-preferencing in the ranking of search results, the bundling of apps (and other alleged anti-competitive leveraging strategies), the collection, usage and sharing of data, and the setting of access conditions to mobile ecosystems and app stores.
The duration and complexity of these investigations have been met with concerns that competition authorities are not sufficiently equipped to protect competition in fast-moving digital markets. These concerns have been amplified by the growth in size and importance of online platforms, their significant economies of scale and network effects, and the risk that market power in digital markets can become quickly entrenched.
In addition to the commissioned reports, some agencies have established or appointed specialist digital markets units or officers. The aim of such units is to develop expertise and regulation to deal with fast-paced digital markets. In Europe, The Digital Markets Act (DMA) was adopted by the EU in response to these concerns to establish a uniform ex-ante regulatory regime to make digital markets fairer and more competitive, and to prevent a fragmentation of the EU’s internal market.
A recent case concerns Apple. Because of the Digital Markets Act, Apple has been required to allow app store competitors onto its products. This will come into effect in 2024.
UK policy
In the UK, the government has been concerned that ‘the unprecedented concentration of power amongst a small number of digital firms is holding back innovation and growth’. UK competition rules are thus set to change significantly, with the government setting out the framework for an entirely new ‘pro-competition regime’ for digital markets. As it states in the Executive Summary to its proposals for such a regime (see linked UK official publication below):
The size and presence of ‘big’ digital firms is not inherently bad. Nonetheless, there is growing evidence that the particular features of some digital markets can cause them to ‘tip’ in favour of one or two incumbents… This market power can become entrenched, leading to higher prices, barriers to entry for entrepreneurs, less innovation, and less choice and control for consumers.
It has established a new Digital Markets Unit (DMU) within the Competition and Markets Authority (CMA). It was launched in ‘shadow form’ in April 2021, pending the introduction of the UK’s new digital regulatory regime. Under the proposals, the new regime will focus on companies that the DMU designates as having ‘strategic market status’.
The government is expected to publish its much-awaited Digital Markets, Competition and Consumer Bill, which, according to legal experts, will represent the most significant reform of UK competition and consumer protection laws in years.
It is expected that the Bill will result in important reforms for competition law, but it is also expected to give the DMU powers to enforce a new regulatory regime. This new regime will apply to UK digital firms that have ‘strategic market status’ (SMS). This will be similar to the EU’s Digital Markets Act in how it applies to certain ‘gatekeeper’ digital firms. However, the UK regulations are intended to be more nuanced than the EU regime in terms of how SMS firms are designated and the specific obligations they will have to comply with.
A report by MPs on the influential Business, Energy and Industrial Strategy Committee published in October, urged the Government to publish a draft Digital Markets Bill that would help deter predatory practices by big tech firms ‘without delay’.
On 17th November 2022, the UK Government announced in its Autumn Statement 2022 that it will bring forward the Bill in the third Parliamentary session. There has been no specific date announced yet for the first reading of the Bill, but it will probably be in Spring 2023. Current expectations are that the new DMU regime and reforms to competition and consumer protection laws could be effective as early as October 2023.
Proposals for the Bill were trailed by the Government in the Queen’s Speech. It announced measures that would empower the Competition and Markets Authority’s (CMA) Digital Markets Unit (DMU) to rein in abusive tech giants by dropping the turnover threshold for immunity from financial penalties from £50 million to £20 million and hiking potential maximum fines to 10% of global annual income. Jeremy Hunt, the Chancellor of the Exchequer, said that the Bill, once enacted, would ‘tackle anti-competitive practice in digital markets’ and provide consumers with higher quality products and greater choice. The strategy includes tailored codes of conduct for certain digital companies and a bespoke merger control regime for designated firms.
The Bill is also expected to include a wide range of reforms to the competition and consumer law regimes in the UK, in particular:
- wide-ranging changes to the CMA’s Competition Act 1998 and market study/investigation powers, including significant penalties for non-compliance with market investigation orders;
- significant strengthening of the consumer law enforcement regime by enabling the CMA directly to enforce consumer law through the imposition of fines;
- changes to UK consumer laws to tackle subscription traps and fake reviews and to enhance protections for savings schemes.
Competition law expert Alan Davis of Pinsent Masons said:
Importantly, the Bill will bring about major reforms to consumer protection law, substantially strengthening the CMA’s enforcement powers to mirror those it already uses in antitrust cases, as well as important changes to merger control and competition rules.
It is anticipated that the Bill will announce the most significant reforms of UK competition and consumer protection laws in years and is expected to have an impact on all business in the UK to varying degrees. It is advised, therefore, that businesses need to review their approach to sales and marketing given the expected new powers of the CMA to impose significant fines in relation to consumer law breaches.
Conclusions
Technological innovation is largely pro-competitive. However, competition rules must be flexible and robust enough to deal with the challenges of the online world. A globally co-ordinated approach to the challenges raised in competition law by the digital age remains important wherever possible. Under the EU’s Digital Markets Act, firms that are designated as gatekeepers, and those defined as having strategic market status under the UK regime, will be required to undertake significant work to ensure compliance with the new rules.
Articles
UK official publications
Questions
- For what reasons may digital markets be more competitive than traditional ones?
- What types of anti-competitive behaviour are likely in digital markets?
- Explain what are meant by ‘network economies’? What are their implications for competition and market power?
- Explain what is meant by ‘bundling’? How is this likely to occur in digital markets?
- Give some examples where traditional markets are combined with online ones. Does this make it difficult to pursue an effective competition policy?
- Give some examples of ways in which firms can mislead or otherwise take advantage of consumers in an e-commerce environment.