Demystifying the Conundrum of Commission Rates Through the Lens of Competition Law

[By Kunal Singh]

The author is a student at Vivekananda Institute of Professional Studies, GGSIPU.

Overview

Last year Apple announced to cut down the commission rates charged from developers, with less than $1 million revenue, from 30% to 15% on in-app purchases. Following the footsteps of Apple, Google recently announced that it would drop the rate of commission charged on in-app purchases from 30% to 15% for developers that sell in-app digital goods on its Play Store. This concession will be available to the developers for the first $1 million revenue earned utilizing the Play billing system each year. The truncated fee will apply to the developers starting July 1, 2021. While this move by Google, at first sight, may look benign and propitious for developers, it entails significant anti-competitive concerns with it.

In this article, the author argues that this move by Google qualifies as an abuse of the dominant position and analyses the probable outcomes against the backdrop of this announcement.

Identifying the Key Anti-competitive Issues

Albeit the announcements by both Apple and Google have caused a discourse among the startup community, they differ on the nature of charging commissions. Apple had announced that once a startup has crossed its $1 million revenue threshold, it would be charged 30% of the service fee; on the other hand, Google announced that it would provide $1 million revenue relaxation every year. Separating the variability between these two announcements, they coincide on one aspect that they foreclose the competition in the relevant market of in-app purchases (‘IAP’). Before establishing that both these tech giants have abused their dominant position, it would be prudent to delineate the relevant market of IAP in which they yield their influence.

In-app purchasing refers to purchasing of goods and services from within the mobile application on a mobile device. Initially, it sanctions developers to offer their goods and services for free, then later situate them in a position to charge for upgrades as paid feature unlocks and special items for sale. This IAP allows developers to accrue profit even if they sell their product for zero cost initially. Now, application stores such as Google’s Play Store and Apple’s App Store allow users to download applications with the inbuilt feature of IAP and simultaneously charge developers a particular portion of the sales, which is 30% in this case, made by them through IAP. Charging a particular portion of the total sales may not look anti-competitive, but the conditions precedent to it may draw the attention of antitrust watchdogs.

Both Google and Apple require developers to use their respective billing systems to give effect to transactions cognate to IAP. The author argues that binding developers to only use their respective billing systems for IAP tantamounts to directly imposing unfair and discriminatory conditions in the sale of goods or services, as provided under Section 4(2)(a) of the Competition Act, 2002 (‘The Act’). This arbitrary condition is three-pronged; firstly, it leaves developers with no choice but to use their respective billing systems; secondly, it denies the market access to other rival competitors in the relevant market of IAP; thirdly, both Google and Apple are using their dominant position in the market of operating systems (‘OS’) to influence and foreclose the competition in the separate and distinct market of IAP.

Is binding developers to use respective billing systems unfair?

The decision of Google making it mandatory for the application developers to use its billing system is a take-it-or-leave-it condition. It implicatively insinuates that if developers do not comply with this guideline, they might run the peril of losing access to a large number of users in India, thus being highly dependent on Google. This take-it-or-leave-it condition is in line with WhatsApp’s recent update regarding its privacy policy, where it mandated users to give their consent to the sharing of their data with Facebook if they wish to continue using WhatsApp. The Competition Commission of India (‘Commission’), in its order, noted that such conduct amounts to the imposition of unfair terms and conditions on the user as it leads to the degradation of non-price parameters such as quality, which violates Section 4(2)(a) of the Act which deals with abuse of dominance.

As of 2020, Google has about 95.23% of the market share in the relevant market of OS in India, making it a dominant entity in the market of OS. Since Google has a dominant position in the relevant market, it would be prudent to surmise that almost all the application developers have their applications hosted on the Play Store, which leaves them with no option but to accept the terms and conditions of Google if they do not want to lose their market share. It can be said that the acts of Google are in congruence with the prominent concept of leveraging. While one may argue that how this concept, which is related to stock markets, is related to Google, the core concept is still the same. Leveraging is borrowing extra capital or funds to increase the potential return from an investment thus causing an advantage to the stakeholder. In the case of Google, the dominant position is the extra capital, which it uses to gain an advantage over the other market players. As has already been discussed that Google has about 95.23% market share in the relevant market of OS in India, it is thus leveraging its dominant position to gain an unfair advantage over the industry players in the relevant market of OS.

A classic example of losing the market share due to non-compliance happened in the late last year when Epic Games allowed users to purchase Fortnite’s in-game currency directly, thus bypassing Apple’s IAP framework and the substantial 30% cut that Apple takes, which led to Apple banning the game from App Store. As of now, Google has not taken such action against any developers, but it could be a probable course of action if developers do not comply. Thus, the author believes that the take-it-or-leave-it nature of the condition is an imposition of an unfair condition on developers which does not allow them to use third parties for IAP and is an apparent infringement of Section 4(2)(a) of The Act.

An Exorbitant 30% Fee and Denial of Market Access

In the current scenario, market players compete not only on the pricing strategies but also on many non-price parameters of competition, such as quality, customer satisfaction, and innovation, which are equally important if not more than price. A substantial 30% cut leads to difficulties in the continuation of businesses by small or entry-level developers and acts as a barrier for the entry of new developers. Charging such an exorbitant fee, in the long run, will only allow established developers to sustain, thereby restricting consumer freedom as consumers will have to choose from a selected band of developers.

For instance, when Apple introduced its 30% fee on applications, Treehouse, an online platform, developed an online reader, iFlow Reader, which soon fell victim to the exorbitant 30% fee and had to shut its operations. The ultimate brunt has to be faced by consumers either in the form of reduced quality and innovation or incremented costs of applications owing to a sizably voluminous 30% fee. The ultimate objective of The Act is to ascertain fair competition by restricting practices having an Appreciable Adverse Effect on Competition (‘AAEC’) and thus promoting consumer welfare.

In regard to this, the European Commission, recently, found Apple to be violative of Article 102 of the Treaty of the Functioning of the European Union (‘TFEU’). Article 102 of TFEU prohibits anticompetitive activities resulting from the abuse of the dominant position. According to the European Commission, charging the exorbitant 30% fee results in higher prices for consumers as most developers recover their cost, by charging higher prices from the end-users. The European Commission, in its statement of objections to Apple, has concluded that Apple enjoys a dominant position in the market of application stores and it has exploited its dominant position to the disadvantage of the application developers and it is likely that Apple could elicit a fine as high as $27 billion.

Charging a 30% fee does not seem to serve the objective of the Act. Like truncation in non-price parameters, denial of market access is a serious form of abuse of the dominant position. In Shamsher Singh v. Honda Siel Cars India Ltd., some car manufacturers mandated the authorized dealers to source spare parts from approved vendors and Original Equipment Manufacturers (‘OEMs’). OEMs did not allow independent service providers or third-party access to their spare parts market, thereby denying the market access. The Competition Appellate Tribunal held that car manufacturers abused their dominant position by denying the market access to third-party service providers.

In the instant case also, by mandating developers to use its billing system, Google denies market access to third parties in the relevant market of IAP such as PayPal, Razor Pay, and Braintree, which can also provide the feature of IAP even at a lower rate of commission. As it has been already established that Google is a dominant entity in the market of OS, Google is capable of using its dominance in the market of OS to enter and foreclose the competition in the separate and distinct market of IAPs by not allowing third-party service providers to offer their services. The author argues that Google is simultaneously infringing Section 4(2)(c) and Section 4(2)(e) of The Act. Thus, the author believes that the Commission, in line with the findings of the European Commission, should take cognizance of this unreasonable and discriminatory condition imposed by Google, thereby foreclosing the competition in the relevant market of IAP, and take appropriate steps to tackle this situation.

Conclusion

Following the announcement by Google, more than 150 Indian startups, including RazorPay, MakeMyTrip, ShareChat, and PolicyBazaar,  are looking to forge a coalition and contemplating the idea to launch an indigenous app store that will probably reduce their reliance on Play Store. This move came in the wake of app makers’ announcements, including Spotify, Tile, and Epic Games, who came together against Apple’s App Store to form the ‘coalition for app fairness.’ While this move by developers has been coming for a long time, Google should reconsider lowering down its commission rates if not abolishing it. The notion of developing an indigenous application store is a far-fetched idea as it will require a tremendous duration of time to supersede the Play Store, and even if an indigenous application store is introduced, the odds are very less that Google will host such an application store on Android.

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