Competition Foreclosure in the App Economy by Apple and Google

[By Sharia Shoaib]

The author is a student at the National Law University, Jodhpur.

The Competition Commission of India (CCI) has recently probed into alleged abuse of the dominant position by Google for discriminately enforcing their payment systems on app developers. Google’s Play Store billing policy makes it mandatory for app developers to pay a hefty commission fee of up to 30 percent from the in-app earnings on the sale of digital goods and services. Additionally, the inability of app developers to use any third-party payment systems for marketing their digital content seems like a restrictive and unfair condition violating Section 4(2)(a)(i) of the Competition Act 2022.

Around the same time, the European Commission (EC) had also begun its initial investigation into competition concerns related to iOS App Store’s conduct in the market for music streaming services, upon a complaint filed by Spotify. Similarly, the Spotify v. Apple music debacle also involves Spotify paying a 30% Commission to Apple on digital purchases made through Apple’s in-app purchase system (IAP) which raises Spotify’s costs and that of Spotify users indirectly. It is often argued that this exclusionary behavior by the twin mobile giants is capable of foreclosing effective competition, and profitable access to a market, resulting in high barriers to entry and other anticompetitive effects[i].

Are Google and Apple dominant entities?

The two-sided transaction intermediary role an app store plays is essential to understand the competitive constraints for third-party app developers and app users in the relevant markets. Google Play and Apple App Store serve as sole gatekeepers for access to app-based services on mobile phones running their smartphone operating systems, Android OS and iOS respectively, by prohibiting sideloading of third-party applications. As a result, it forms a “closed ecosystem” that locks in developers as well as app users once they buy an Android or Apple device.

Apple app store enjoys a prominent presence in the European Union (EU) market by virtue of ‘network effects’ and a high consumer base in the smartphone market. Moreover, the Court of Justice of the European Union (CJEU) has, in various instances, like in  NV Nederlandsche Banden Industrie Michelin v Commission and Eurofix-Bauco v Hilti used conduct that acts as a barrier of entry for new entrants or constraints to competitors’ expansion as a factor indicating dominance. This is further affirmed by EC in its preliminary view in Apple v. Spotify, wherein it concluded that Apple has distorted competition by “abusing its dominant position in the market for music streaming apps through its App Store platform.

Likewise, the judgment in Umar Javeed v. Google LLC assumes significance while determining Google’s dominant position in the relevant market using factors mentioned under Section19(4) of the Act. By exercising the powers vested in it under Section 26 of the Act, the CCI found it to be dominant in the “smartphone OS market”.

What is the abusive conduct?

As the primary channel for app discovery and distribution, dominant app stores have a special responsibility to maintain a healthy app ecosystem and not impair undistorted competition by engaging in conduct falling outside the competition on merits. In Fast Track Call Cab Pvt Ltd v. ANI Technologies Pvt Ltd, the CCI extended the ambit of special responsibility to include online platforms and digital markets. As a result, an important platform functionality of such app stores is to ensure equality of opportunity and a level playing field to compete for various economic operators i.e. app developers.

Google and Apple’s conduct to make their own IAP a mandatory payment gateway can qualify as a “tie-in arrangement,” according to competition laws around the globe. In India, Google’s conduct would prima facie be considered violative of Sections 4(2)(d) and 4(2)(e) of the Act whereas in the European jurisdiction, abusive tying would amount to a violation of Article 102(d) of Treaty of Functioning of European Union (TFEU).

Legal position of abuse of tying in India and EU

In the Indian case of Sonam Sharma v. Apple, the CCI laid down the conditions that amounted to anti-competitive tying:

  1. The presence of two separate products or services capable of being tied;
  2. The seller must have sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product; and
  3. The tying arrangement must affect a “not insubstantial” amount of commerce.

While the Microsoft case (2004), establishes that for tying to infringe Article 102 TFEU, there must be

  1. two separate products;
  2. dominance in the tying market;
  3. coercion of customers who have no option to obtain the tying product alone; and
  4. foreclosure of competition as a result.

Upon a bare perusal of the aforementioned conditions, it can be ascertained that the elements of tying are similar in both jurisdictions. Now, the distinctness of products is established if there exists independent consumer demand for tying and tied products[ii]. By charging up to 30% commission through their own payment service, Apple and Google in an attempt to leverage their market power have unlawfully tied their payment processing service to the app distribution market, both offering different functionalities, hence, separate products. For instance, Google Pay has an independent demand in the payment services market and the existence of independent companies specializing in payment services, such as Paytm, is ‘serious evidence’ of the distinction of products.

Apple and Google, disregarding the special responsibility owed to them due to their dominance in app store market, prohibit app developers from offering information about alternative payment mechanisms, which are usually cheaper, amounting to coercion and deprivation of choice. To affirm the view, an anti-circumvention rule this rigid making it difficult to profitably market services was found to be anticompetitive by the European Commission in Apple v. Epic games.

The conduct of such app stores not mandating the use of their IAP for some of their own apps is discriminatory and gives a competitive edge to their own activities. In other words, app store’s fees hurt competition by raising costs for app developers and indirectly for app users, affecting a substantial volume of commerce and foreclosing effective competition. Further, this denial of market access also deprives the app stores of a key competitive variable i.e. scope of innovation, capable of bringing about anti-competitive effects in the market in contravention of the provisions of Section 4(2)(c) of the Act.

Does a liability for exclusionary behavior really accrue?

According to Salmond, a right must be against individuals upon whom a duty is imposed. Consequently, it is argued that the extent of ‘special responsibility’ towards ensuring effective competition ought to be construed in a restricted manner so as to not undermine the economic freedom of such app stores as an economic undertaking, neutralize their competitive advantages, and frustrate their incentives to innovate and invest.

App stores in question have defended that their policies reflect their commitment to improving user experience by facilitating secure transactions between users and apps. The 30% commission is often cited as the price for using the app distribution platform, since operating such multi-sided platforms incurs significant costs. This fee also keeps in check the potential free rider problem by only charging when the purchase is through the app store and not any other avenue from where developers can monetize their apps bypassing the app store entirely.

Conclusion

Over the past several years, app distribution networks have grown in size, complexity, and power, with some becoming so large and powerful that they have the ability to abuse their market position and restrict competition. Thus arises the challenge to strike the right balance between the right of economic freedom of a commercial undertaking and its special responsibility to not abuse its dominance. It is also a challenge to draw boundaries that ensure that competition is fostered and consumer choice is protected.

Resultantly, antitrust regulators in a variety of jurisdictions have turned their attention to the anti-competitive practices of dominant app stores. The Anti google bill of South Korea requiring app stores to allow for other payment mechanisms has turned out to be a ray of hope for Indian app developers in the Google investigation. It is a step towards fair regulation of the app distribution network so as to prevent harm to the app economy as a whole. Observing and analyzing international developments in mature competition law jurisdictions will be beneficial for developing a much-warranted regulatory framework for the digital platform economy in India.

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