The Problem:

Due to their dominance of smartphone operating systems, nearly every app that is downloaded onto a mobile device comes via Apple’s App Store or the Google Play Store. These monopolies use that gatekeeping ability to charge high fees – as much as 30 percent – to app creators. By comparison, a typical credit card network charges around 3 percent in transaction fees. Apple made $64 billion of revenue last year on app store charges alone.[1]

Apple and Google are able to collect those fees because they require app developers who sell in their stores to use in-house payment systems that Apple and Google control. Use of an alternative payment system results in expulsion from the store entirely, as was the case with Epic Games’ Fortnite. Apple also prevents iPhone users from downloading an alternative store to the App Store, ensuring that every app downloaded on an iPhone is subject to Apple’s gatekeeping power.

Apple and Google also implement a gag rule that prevents developers from communicating to users in the stores that prices for the app might be cheaper elsewhere, such as on the developer’s own website. This harms developers – who have to turn over up to nearly a third of their revenue to a gatekeeper – as well as consumers, who face higher prices. In a recent court case, Apple was told it must cease maintaining this gag order, a ruling it has appealed.

The Policy:

State lawmakers can advance legislation to address this multifaceted problem:

• Ban app distributors from requiring developers to use in-house payment systems, thereby opening up competition that could result in lower fees.
• Make it illegal to prevent users from downloading alternatives to preloaded app stores.
• Make it illegal to prohibit app developers from communicating with potential users about fees and costs. (A judge recently ruled that these gag orders are illegal under California’s unfair business practices law.[2])
• Prohibit retaliation by dominant corporations if a developer pursues any of the above options.

These measures will enable small and mid-sized developers to communicate effectively with their customers about prices, use the payment systems of their choice, and not be locked into particular distribution networks, as well as give consumers the choice to use alternative app stores.

Model bill: HB518, Louisiana, 2021

The Pushback:

Apple claims that its high fees are warranted because it evaluates apps to ensure they comply with basic rules against scamming consumers. However, several investigative reports have found that’s not true.[3] Apple and Google also note that they’ve responded to criticism of their fees by lowering them for certain small businesses that earn under specific revenue thresholds. But that the corporations face no competitive pressure to reduce fees and only did so as a public relations move – and roughly in concert – reinforces that they have monopolized the market for app distribution and require further regulation.

Notes:

[1] Matthew Stoller and Pat Garofalo, “States Are Right to Rebel Against Big Tech,” The New York Times, March 18, 2021, https://www.nytimes.com/2021/03/18/opinion/apple-google-app-monopoly.html.

[2] United States District Court, Northern District of California, Epic Inc. vs. Apple Inc., CaseNo. 4:20-cv-05640-YGR, Link. https://storage.courtlistener.com/recap

[3] Reed Albergotti and Chris Alcantara, “Apple’s tightly controlled App Store is teeming with scams,” The Washington Post, June 6, 2021, https://www.washingtonpost.com/technology/2021/06/06/apple-app-store-scams-fraud/; Sean Hollister, “Apple’s $64 Billion-A-Year App Store Isn’t Catching the Most Egregious Scams,” The Verge, April 21, 2021, https://www.theverge.com/2021/4/21/22385859/apple-app-store-scams-fraud-review-enforcement-top-grossing-kosta-eleftheriou.