Apple’s Walled Garden: The Battle over Closed Ecosystem

[By Soujanya Boxy & Shourya Mitra]

The authors are students of National Law University, Odisha and Jindal Global Law School, Sonipat, Haryana respectively.

 

Introduction 

The new-age digital world is increasingly embroiled in a complex interplay between tech giants and market fairness regulators. Striking a balance between effective regulation and fostering innovation has become more crucial than ever. Apple, designated as a “gatekeeper” under the European Union’s (EU) Digital Markets Act (DMA’), faces scrutiny for its closed mobile ecosystem. Critics and competitors argue that this closed ecosystem stifles their ability to reach users, limiting user choice and stifling competition.  

However, the burning question is whether proponents of reforms can solely justify their demands for an open mobile ecosystem by highlighting its tangible benefits, without acknowledging the advantages of closed ecosystems to users and competition. In this post, the authors explore the multifaceted impact of Apple’s closed ecosystem on competition and consumers.  

Biting the Apple: A Look at Antitrust Issues 

Apple, a leading tech company, has cemented its footing in the market for personal devices through its unique walled garden-like ecosystem, which remains a source of contention within the mobile ecosystem for being restrictive and anti-competitive. A mobile ecosystem is the interconnected world of a mobile device company’s products and services, including hardware, software, apps, and user accounts. 

While many antitrust lawsuits are already pushing Apple to revamp its model or ecosystem, new laws like the much-discussed the EU’s DMA and South Korea’s recent amendment to its Telecommunication Business Act are adding pressure to open up Apple’s ecosystem, aiming to restore fairness and competitiveness in the market. In response to the EU’s DMA designating Apple as a gatekeeper, the company has announced changes to its operating system (iOS), App Store, and web browser (Safari). These changes loosen restrictions on its devices, particularly regarding payment processing and app distribution. Apple is opening its previously walled garden-like ecosystem to rival app developers and marketplaces, and introducing new terms for using alternative payment methods and distributing apps. While the changes have their criticisms, they represent a major shift for Apple and an attempt to comply with the DMA. 

A common thread runs through antitrust debates on Apple’s practices as several jurisdictions including the EU, United States (‘US’), Russia, and China share concerns about similar anti-competitive practices. App developers argue that Apple’s high fees and control over the App Store are causing them substantial financial losses. Countries, such as Japan and South Korea, have already taken action by requiring Apple to modify its App Store practices. Similarly, the US Justice Department is in the final stages of a probe examining Apple’s practices related to its hardware and software integration, specifically how these practices may limit competition and discourage users from switching to alternative platforms. Specifically, the investigation is looking into how Apple’s practices, such as restrictions on iMessage and the enhanced functionality of Apple Watch when paired with iPhones, may stifle competition in the mobile device market. 

As global antitrust regulators tighten their scrutiny and enact stricter laws to control Apple’s alleged monopolistic practices, concerns are mounting that these regulatory measures may go beyond achieving fairness and could inadvertently hinder the company’s ability to generate profits. 

Further, antitrust legislative reforms are aimed at controlling the platforms’ ability to offer and integrate their own apps and services alongside of their competitors, which could unfairly incentivise their own offerings. Competing app developers express concerns over Apple’s excessive app fees and its practice of integrating its own services, like the music-streaming service, with its features like SharePlay and Photos. Additionally, Apple exempts its own services from the app fees payment, enabling them to undercut their competitors on price.
 

The European Commission (EC’) ruled that Apple is in preliminary violation of antitrust laws, citing antitrust concerns in the mobile wallet market. Apple was found abusing its dominant position by restricting mobile wallet app developers’ access to necessary software and hardware on iOS devices, thereby reducing competition in the mobile payments space. As a response to these concerns raised in the European Economic Area (‘EEA’), Apple came up with the proposal, allowing third-party developers to provide the option to their users to make Near-Field Communication (‘NFC’) contactless payments on their iOS apps, without relying on Apple Wallet and Apple Pay. 

Walled Garden or Secure Oasis? 

Apple is worried about the negative impact on its user privacy and security as some regulations have begun to mandate the inclusion of third-party App Stores and apps on its devices. Currently, all apps distributed through its own App Store go through a standard vetting process. On top of that, the company maintains a closed ecosystem, wherein apps are downloaded only through its App Store to ensure user privacy and security. Despite this, it faces increasing pressure to open up its ecosystem, allowing alternative App Stores and “side-loading”, which could pose challenges for upholding the existing user privacy and security standards. 

While Apple’s robust vetting process and closed ecosystem build a perception of enhanced-level user privacy and security, vulnerabilities do still exist. Yet, Apple’s comprehensive approach, including close scrutiny of apps and ongoing security improvements, helps to safeguard its devices from malware intrusion. The Apple devices are built in such a way that the users even accidently can’t fall prey to any malicious sites or apps.  

While critics of Apple’s ecosystem focus on its drawbacks, they should also consider the possible security risks that Apple has consistently highlighted for its users. Privacy and security concerns remain paramount in today’s digital landscape. It is not only unethical but eventually unsustainable to sacrifice users’ trust for the sake of perceived competitive fairness. 

The Fight for an Ecosystem 

A growing trend of building a closed ecosystem among tech giants like Apple, raises concerns about locking users into using a range of their products and services and potential self-preferencing. Self-preferencing is a practice by large digital platforms of favouring their own products or services over those offered by competitors operating on their platforms. The DMA currently cracks down on this practice. Previous year, a Sans Francisco Jury held Google to be in violation of antitrust law for restricting app developers from using their own payment systems. 

Likewise, Apple was recently fined a massive $1.8 billion for its alleged anti-competitive practices in the market for distribution of music-streaming apps. The company was found to prevent rivals like Spotify from displaying other forms of in-app payments and favour its own music streaming services. These restrictions primarily focused on preventing them from announcing prices of subscriptions offered outside the app; disclosing price differences between in-app subscriptions and other options; including links leading users to external websites for subscriptions; reaching users directly via email to inform them about alternative pricing options once they had set up their account. Such restrictions on app developers, known as anti-steering provisions, limit users from exploring alternative options outside the platform, ultimately limiting choice. 

Apple also acknowledged the fine imposed on them by the EC, stating that the fines were not justified. It alleged that by ignoring lack of credible evidence of “consumer harm” and existence of “thriving, competitive, and growing” market, the Commission’s decision rests on unsubstantiated claims. It further argued that Spotify, one of the biggest beneficiaries of this decision, pays Apple nothing for its key contributions to its brand recognition. In fact, nearly 86% of developers benefit from Apple’s free tier, avoiding commission payments. Nevertheless, Apple’s App Store has empowered developers of all sizes to create and launch thriving businesses, connecting them with a global audience. Spotify, in particular, has tremendously benefitted from Apple’s engineers ensuring its apps work seamlessly with AirPlay, Siri, Apple Watch, and other features. Spotify’s use of Apple’s beta-testing tool, TestFlight, has also facilitated its exploration of new features and functionalities. However, the fact that Spotify and multiple other app developers enjoy these benefits without any fees raises concerns about free riding for Apple. 

Developing new technologies and features involves important investment in research and development (R&D). If other companies can easily replicate these innovations without investing their own resources, it disincentivizes tech giants from making risky R&D investments. Network effects exacerbate this, as freeriders exploit established user bases without contributing to Apple’s growth and profitability. These freeriders may also prioritise cost-cutting over robust security, significantly compromising the original developer’s reputation. Traditionally, free-riding is also acknowledged as a valid objective justification for imposing restrictions. Throughout the various mobile operating systems, there are no credible alternatives to the App Store for iOS or Play Store for Android respectively, making them a secure choice for users. The security related justification was also considered by the US district court in the US v. Apple decision whereby the Court had considered Apple’s restrictions with respect to mobile app distribution. It largely agreed with Apple regarding valid security and Intellectual Property (IP)-related justifications barring the existence of some lesser restrictive means. 

Global lawsuits and strict regulations like the DMA threaten Apple’s ability to deliver efficiencies and security to app developers and users. Furthermore, revising the App Store, its core revenue stream, to comply with these regulations might limit the value it offers developers. The fact that as per Recital (23) of the preamble to Regulation (EU) 2022/1925, gatekeepers such as Apple cannot simply rely on objective justifications to defend their practices or oppose their designation as gatekeepers, leaves them with a very minimal room to substantiate their position, while being forced to open up their ecosystem.  

Conclusion 

Apple’s closed ecosystem fuels an antitrust debate and exemplifies the tension between overregulation and innovation. While critics allege that Apple’s conduct restricts competition and user choice, advocates cite the security and privacy advantages of a closed system. Enactment of stricter regulations like the EU’s DMA coupled with the imposition of fines on Apple highlights the regulatory nudge to open up its ecosystem. Although, Apple defends its ecosystem, stating that it has strengthened many developers’ success and excessive regulation could impede its ability to innovate and provide its users secure services. Therefore, it becomes essential to navigate a trade-off between these considerations to promote competition while also ensuring user privacy and security in the digital sphere. 

Moreover, the authors believe that the current scrutiny by antitrust regulators across the globe could enhance user choice, albeit at the expense of user experience and security. While integration of own products and self-preferencing practices might undoubtedly restrict competition, these practices could be validated based on security, IP, and free-riding concerns. As incumbent gatekeepers are left by the DMA in a precarious position where they may have to open their ecosystems without any opportunity to justify their actions, this could have severe repercussions for users. Gatekeepers would no longer be able to maintain the current security and user experience benchmarks. 

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