Apple may win a court battle but lose a regulatory war

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IS APPLE’S ONLINE store for smartphone apps akin to a private club, where the firm can set the rules no matter what, even if this means it can exclude people it does not like and overcharge the rest? Or is the app store more like a town market square, meaning among other things that any firm is allowed to do business there?

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The devilish details of antitrust law aside, this is the main question before a judge in California in a trial that started on May 3rd. It will be a battle royal between Epic Games, the maker of Fortnite, a popular online video game, and Apple, the world’s most valuable technology company. Epic accuses the tech giant of having abused its dominance when it kicked Fortnite off the app store last year after Epic attempted to offer a separate payment system. Apple counters that the games firm is just trying to avoid paying its commission rate of up to 30% and free ride on the tech giant’s inventions.

An Epic win would up-end the economics of smartphone apps. Epic, and others, would probably be allowed to use their own payment systems in iPhone apps and perhaps even offer alternative app stores. Both would put pressure on the profitability of Apple’s services business, of which the app store is a large part—estimates put its margins at well above 70%.

Yet legal experts expect Apple to prevail: antitrust precedent is stacked against Epic and the judge has voiced scepticism about the firm’s position. Even if she indeed sides with Apple, however, the victory may well turn out to be a setback for the firm. It would add further fuel to a debate among regulators around the world: how durably to rein in the biggest tech firms, which are increasingly seen not just as powerful platforms, but as gatekeepers for growing parts of the economy.

Gatekeepers are as old as the economy itself. Toll bridges qualify, as do railways and even nationwide supermarket chains such as Walmart. Nor are they necessarily bad. Without Apple’s largely effective policing of its platform, the app business would be much smaller: users would have to worry a great deal more about scams and system crashes. And allowing rival app stores, which Epic wants, may increase competition, but with the risk of causing security problems.

Digital gatekeepers come with drawbacks, too, says Tommaso Valletti of Imperial College in London. For starters, they never seem to stop growing, as last week’s round of blockbuster financial results again shows, although pandemic-induced digital demand also played a big role (see chart). Gatekeepers benefit from strong network effects which mean that size begets size. As the economy becomes increasingly digitised, they can also move more easily into adjacent markets than their analogue brethren.

The bigger problem, however, is that digital gatekeepers are not the benevolent dictators they pretend to be. To protect its commission (or “take rate”) of up to 30%, Apple forces app developers to use its payment system and prohibits any links to their websites, where they might offer customers a better deal. This is the core complaint in another case against the iPhone-maker, brought by Spotify, an audio-streaming service, and taken up by the European Commission on April 30th. Apple’s rule book is also getting hellishly complex and seems arbitrarily enforced. “Every developer can tell a horror story,” says Benedict Evans, who publishes a widely read tech newsletter.

In its defence, Apple argues that it is well within its rights: it built the app store, can make its rules and, crucially, is not a monopoly. If developers do not like the rules, they can go to Android’s Play Store or create an app that runs in a browser. Not so, counter the firm’s critics. Any developer that wants to make good money needs to be in the App Store. As for consumers, switching from an iPhone to an Android device is in most cases tricky—in any case harder than changing supermarkets, a comparison Apple’s defenders often draw. And in America the iPhone is now dominant, boasting a market share of nearly two-thirds.

Such back and forth about the “relevant market” and other wonkish concepts is at the centre of most antitrust cases. In Epic’s suit against Apple, predicts William Kovacic of George Washington University, this will be enlightening: arguments have to be made in public over a few weeks. But most other cases drag on forever. And once a verdict is finally reached and a remedy is found, it is often too late, as the European Commission in particular has found in recent years. It has convicted Alphabet, Google’s parent company, three times, imposed fines of more than €8bn ($10bn) and demanded far-reaching remedies—only to see that not much has changed. Although European Android users are now asked to pick their default search engine on a “choice screen”, Google’s market share has hardly budged.

Understandably, the commission is now trying to go down another path. Proposed in December, its Digital Markets Act (DMA) avoids lengthy debates about such things as the “relevant market” by explicitly defining a gatekeeper: firms that have annual revenues in the EU of at least €6.5bn in the past three financial years and have at least 45m users in at least three member states. Any company that meets these criteria will have to follow a set of strict rules. Among many other things, barring app developers from linking to their own website would be prohibited, as would be efforts by gatekeepers to give their own offerings a leg up (which Apple stands accused of doing with its music-streaming service).

Although they think along similar lines, regulators in other countries are not as convinced a thick rule book will do the trick. Britain, for instance, is likely to go for more flexibility, paired with a strong regulatory agency, called the Digital Markets Unit (DMU). In America the Federal Trade Commission could become a DMU, although Congress may yet turn growing bipartisan tech hostility into action and pass a DMA-like law.

It will still take several years before this is settled, but it would come as a surprise if digital gatekeepers, like many of their analogue predecessors, do not end up being regulated in some manner. Even if it wins its fight with Epic, Apple may want to start changing some of its policies. This may be good business anyway, Bill Gurley, a noted venture capitalist in Silicon Valley, has long argued. Maximising the take rate may backfire because it tends to weaken a platform, he wrote a few years back in a blog post. “There is a big difference between what you can extract versus what you should extract.”

A version of this article was published online on May 4th, 2021

This article appeared in the Business section of the print edition under the headline “Battle royal”



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