Depending on how you look at it, Apple gets another chance to explain why the fees it charges on the App Store are reasonable, or regulators get a chance to decide what the future shape of online business will be by define what constitutes an acceptable profit margin in digital sales.
In either case, these decisions set precedents that can presumably be applied against other forms of business and retail. After all, if regulators define acceptable profit margins for one industry, they must adopt a consistent approach that can be applied across all industries. Right now, Apple seems to believe that for most transactions, the fair figure is zero or 15%, with those with the broadest shoulders paying more to support others.
Two sides to every story
What’s going on is that the UK Competition Appeal Tribunal has decided to allow a Collective Procedure Order (CPO, basically equivalent to a class action) to go to trial.
The promotion was initiated in May 2021 by Dr. Rachael Kent, Lecturer in Digital Economy and Society Education at King’s College, London. It states that Apple engages in unfair business practices by forcing developers to use its own payment systems and collect up to 30% commission. If the case succeeds, around 19.6 million UK customers who bought apps from the App Store will be awarded damages of up to £1.5 billion. More information on the background of this case is available on the Apple App Store Claim site in the UK.
At its simplest, the allegations are that the company has broken the law by excluding competition and charging an illegal level of commission for digital purchases on the App Store. These allegations amount to a combination of three charges:
- Unfair prices (the 30% commission)
- Unfair tying (by requiring app purchases to use Apple’s own payment systems)
- Exclusive deal (by only supporting App Store purchases on its platforms)
Apple had tried to withdraw some of its claims that allegedly unfair pricing was being withdrawn, but was willing to challenge allegations of exclusive dealing and tying in court.
Apple faces increasing global scrutiny
The cost of Apple’s App Store continues to face challenges worldwide. Among which:
Maybe history matters too
The strange thing about many of these challenges is that Apple isn’t unique in raising its fees to 30%. Almost every platform operator charges something similar, some charge more.
Historically, Apple’s App Store turned the then-existing models of software distribution on its head. Developers had coughed up much higher percentages for retail distribution and also had to risk manufacturing CDs and boxes, as well as distribution costs.
Apple’s store offered developers a much better deal and mirrored existing digital service charges. Developers gained access to international markets, tools and Apple platforms. Developers who didn’t charge anything paid no commission at all. More recently, those who make less than $1,000,000 a year pay 15%.
Apple, meanwhile, invests in platform development, software development, fraud protection, payment systems, server and other marketing/infrastructure costs to support its booth. That Apple’s 30% commission represents profit margin is a myth — the company’s margins are definitely smaller.
What does winning look like?
To win, prosecutors must prove that Apple’s commission is excessive and that its business practices are unfair.
That comes with the usual roll call of Apple developer critics making statements to the courts, and no doubt there will be talks about Apple’s cost versus revenue and the extent to which the App Store’s profits have increased.
To most people, many of these arguments will be as interesting as a discussion of Rockall’s geology or the opportunity to buy NFTs in the (yawn) ‘metavers’, but for the tech industry there is a real critical look at cold, hard cash.
After all, in order to reach a decision on what is a fair price that Apple charges, the courts must also define what is a fair price in more general terms. You can’t arbitrarily set such rules, meaning any global entity that offers online stores for digital services may be affected by the decision.
And of course, since every business is also an online business these days, the ramifications can affect any business. Think about it: In the context of an inflationary economy and growing wealth inequality, a decision that effectively defines a fair profit margin in an industry sets a precedent for similar discussions in any industry.
It also seems likely that if such a decision is made, other global digital software stores will be sucked into the discussion and may have to anticipate similar actions against them.
Does the consumer win? Maybe a little, but since running online services comes with real costs and the decision won’t be between 30% and free, but more likely between 30% and some other figure probably higher than 10%, the benefit for consumers are limited at best.
The trial is set to take place on an unspecified date, believed to be in 2023.
What the protagonists say
In a statement, Dr. Kent: “A claim of this magnitude will always be heavily defended. The anticompetitive practices we allege against Apple go to the heart of Apple’s business strategy, and with its nearly limitless resources, it will always make this a challenging battle.”
While Apple hasn’t made a new comment at this time, the company said last year, “The commissions charged by the App Store are broadly comparable to all other digital marketplaces. In fact, 84 percent of apps in the App Store is free and developers don’t pay Apple anything, and the vast majority of developers who do pay Apple a commission for selling a digital good or service are eligible for a 15 percent commission.”
Apple introduced reduced commissions for most developers in late 2020. Developers who earn less than a million dollars annually pay a 15% commission, while those who offer apps for free pay nothing at all. Despite these and other changes, the level of challenge and scrutiny Apple faces continues to increase, and it’s hard to predict what the overall impact of these decisions will be on Apple’s business.
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