Depending on how you see it, Apple has a new opportunity to explain why the fees it takes from the App Store are fair, or regulators have a chance to decide what the future shape of e-commerce will be by defining what constitutes a profit margin in digital sales.
In both cases, these decisions establish precedents that can, presumably, be applied to other forms of business and retail trade. After all, if regulators define acceptable profit margins for one industry, they need to adopt a consistent approach that can be applied across industries. Right now, Apple seems to believe that for most transactions the fair number is zero or 15%, with those with the broadest shoulders paying more to support the others.
Two versions of each story
What is happening is that the UK Competition Appeal Tribunal has decided to allow a Collective Procedural Order (CPO, basically equivalent to a class action) to go to trial.
The action was brought in May 2021 by Dr Rachael Kent, Senior Lecturer in Digital Economics and Social Education at King’s College London. He argues that Apple engages in unfair business practices by forcing developers to use its own payment systems and taking up to 30% commission. If the deal is successful, around 19.6 million UK customers who have purchased apps from the App Store will receive a share of up to £1.5 billion. More information regarding the background to this case is available on Apple’s UK App Store complaints site.
In their simplest form, the allegations are that the company broke the law by excluding competition and charging an illegal level of commission on digital purchases in the App Store. These allegations boil down to a combination of three counts:
- Unfair pricing (the 30% commission)
- Unfair linking (by requiring in-app purchases to use Apple’s own payment systems)
- Exclusive deal (supporting only App Store purchases on its platforms)
Apple had tried to get some of the claim that the alleged unfair pricing was removed, but was prepared to challenge the exclusivity and tied selling claims in court.
Apple faces growing global scrutiny
Apple’s App Store fees continue to face challenges around the world. These include:
Maybe the story matters too
What’s odd about many of these challenges is that Apple isn’t the only one charging up to 30% in fees. Most platform operators charge something similar, with some charging more.
Historically, Apple’s App Store disrupted then-existing software distribution models. The developers had coughed up much higher percentages for distribution to retail stores and also had to take the risk of making CDs and cases as well as distribution costs.
Apple’s store offered developers a much better deal and mirrored existing digital service fees. Developers gained access to international markets, Apple tools and platforms. Developers who did not charge did not pay any commission. More recently, those earning 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 stand. That Apple’s 30% commission represents its profit margin is a myth – the company’s margins are certainly thinner.
What does victory look like?
To win, the accusers must prove that Apple’s commission is excessive and that its business practices are unfair.
This will involve the usual roll call of critics of Apple developers providing statements to the courts and will no doubt see conversations regarding Apple’s costs versus revenue and the extent to which App Store profits have grown.
For most humans, many of these arguments will be as interesting as a discussion of Rockall’s geology or the possibility of buying NFTs in the (yawn) “metaverse”, but for the tech industry, what’s really under scrutiny is hard cash.
After all, for the courts to reach a decision on what is a fair price to charge Apple, they will also need to define what constitutes a fair price in more general terms. You cannot set such rules arbitrarily, which means that any global entity offering online stores for digital services could possibly be affected by the decision.
And, of course, with every business today also being an online business, the repercussions could impact all businesses. Think about it: in the context of an inflationary economy and growing wealth inequality, a decision that effectively defines a fair profit margin in one industry becomes a precedent for similar discussions in all industries.
It also seems likely that if such a move is made, other global digital software stores will be sucked into the discussion and perhaps should anticipate similar actions against them.
Are consumers winning? Maybe a little, but since running online services has a real cost and the decision won’t be between 30% and free, but more likely between 30% and some other number probably above 10 %, the benefit for the consumer will be limited at best.
The legal battle will take place on an unspecified date, likely in 2023.
What the protagonists say
In a statement, Dr Kent said: ‘A claim of this magnitude will always be strongly defended. The anticompetitive practices we blame Apple for are core to Apple’s business strategy, and with its nearly limitless resources, that will always make it an uphill battle.
While Apple hasn’t commented further at this time, the company said last year, “Commissions charged by the App Store are well within the average of those charged by all other marketplaces. digital. In fact, 84% of apps on the App Store are free and developers don’t pay Apple anything. And for the vast majority of developers who pay a commission to Apple because they sell a digital good or service, they qualify for a 15% commission rate.
Apple introduced reduced commissions for most developers at the end of 2020. Developers earning less than $1 million annually pay 15% commission, while those offering apps for free pay nothing at all. Despite these and other changes, the level of challenge and scrutiny facing Apple continues to escalate, and it is difficult to predict what the overall impact of these decisions will be on Apple’s business.
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