Supreme Court opens the legal floodgates on Apple

Apple is potentially on the verge of facing a tidal wave of lawsuits as the Supreme Court agrees the iLeader is allowed to be challenged on a potential abuse of power in the app economy.

The pivotal case the Supreme Court has been ruling on is Apple vs. Pepper. Robert Pepper and other plaintiffs, various iPhone owners, filed an antitrust lawsuit against Apple claiming the firm monopolised the app market through the App Store, with developer licence fees and the 30% commission ultimately driving the price up for consumers.

One the other side of the argument, Apple suggested iPhone owners were actually customers of the developers, while the developers were customers of Apple. This nuanced argument leans on legal precedent set in doctrine known as Illinois Brick where ‘indirect purchasers’ of a product don’t have the power to file antitrust cases. In distancing itself from the end-user in the app economy, Apple was hoping to protect itself.

In the first instance, the district court ruled in favour of Apple, dismissing the case, while the Ninth Circuit Court reversed the decision, ruling that consumers are purchasing from Apple not the developers. The fight was then escalated up to the Supreme Court, with the highest legal battleground in the US ruling 5-4 in favour of the iPhone owners.

What is worth noting is this is not a ruling which states Apple’s App Store is a monopoly, but a decision which allows users to file antitrust lawsuits against the iLeader. It’s a step towards another legal headache but is by no means a sign of guilt.

For Apple, this will come as an unwanted distraction as it attempts to scale it software and services business, in which the App Store is a key cog. The last few years have seen the Apple team attempt to create a more balanced business, with less of a reliance on the staggering hardware segment and reaping the rewards of the blossoming software world.

This decision from the Supreme Court might not assign guilt to Apple, but it certainly creates a monumental migraine. Such is the lawsuit culture in the US it won’t be long before miffed customers just on the bandwagon in pursuit of compensation.

Apple under more antitrust scrutiny in Europe

The Netherlands Authority for Consumers and Markets (ACM) has launched an investigation into whether Apple is abusing its power through the App Store, favouring its own apps over rivals.

The Dutch regulator has reported back after receiving several complaints regarding Apple’s behaviour surrounding the App Store, suggesting there might be some foul play afoot. The initial foray has led the ACM into a larger investigation to understand whether Apple, and Google for that matter, are abusing dominant positions in the app economy to drive more favourable positions for their own apps and services.

“To a large degree, app providers depend on Apple and Google for offering apps to users. In the market study, ACM has received indications from app providers, which seem to indicate that Apple abuses its position in the App Store,” said Henk Don, an ACM board member. “That is why ACM sees sufficient reason for launching a follow-up investigation, on the basis of competition law.”

The news will not be welcomed by Apple, which is also under investigation at European level following disagreement with music streaming app Spotify. Spotify is suggesting Apple deliberately disadvantages other app developers, and while the complaint lodged with the European Commission is confidential, it has created a website listed the five ways Apple does not play fair in the app economy:

  1. The 30% fee which is applied to in-app purchases
  2. Apple won’t allow developers to communicate deals and promotions directly to customers
  3. Users cannot upgrade to premium services in app
  4. Apple rejects app enhancements for unknown reasons
  5. Spotify cannot be installed on all devices in the Apple portfolio

Some of the reasons might sounds a little moany but Apple does not seem to be laying the same rules on its own apps and services. For example, Spotify cannot be played on the Homepod, but iTunes can. This point might be of interest to the Dutch authorities.

While the original complaints received by the Dutch regulator have mainly been directed towards Apple and the App Store, the ACM also notes the dominant position Google is currently in for the Android app ecosystem. This investigation will be wide enough to assess the position of both companies and their knock-on activities in the developing ecosystem.

The initial investigation, which the ACM admits has not been in-depth enough, has uncovered some worrying elements of the business, we can’t imagine it will be difficult to dig up much more dirt on the pair.

Although both the App Store and Play Store are critical gateways in connecting developers to millions of consumers, that doesn’t mean developers need to be happy about the terms. Many are becoming increasingly frustrated with conditions, notably the 30% commission, with the larger developers looking to avoid working with the pair entirely.

There are few titles which have the brand recognition to achieve success without the reach of the App Store or Play Store, but Fortnite is one. Last August, Fortnite announced it would only offer downloads through its own website as opposed to the app stores. Estimates suggest it would save the firm $50 million in commission paid to Apple and Google.

The ACM has been keen to point out it has not come to a conclusion, despite some worrying findings in the initial investigation, and it may well find no antitrust violations. Despite pleas of impartiality, Apple and Google should certainly be worried; Europe has been pretty hot on antitrust cases recently.

Apple issues weak response to Spotify’s claims of discrimination

Apple has presented its side of the dispute with Spotify, claiming it is treating the latter the same as other apps and it is reasonable to charge 30% of premium payment to apps.

Shortly after Spotify filed a claim at the EU against Apple for being discriminated by the latter’s App Store rules and practices, Apple released a statement to deny these claims and throw the accusations back at Spotify.

Apple argued for the 30% charge of premium paid to apps on App Store platform with a few justifications. “Apple connects Spotify to our users. We provide the platform by which users download and update their app. We share critical software development tools to support Spotify’s app building. And we built a secure payment system — no small undertaking — which allows users to have faith in in-app transactions,” the statement said. Apple also hastened to add that Spotify has left out policy that the revenue share will drop to 15% from the second year on.

On Spotify’s argument that Apple has restricted payment methods to Apple’s own payment system only, Apple retorted that it demands all “digital goods and services that are purchased inside the app using our secure in-app purchase system”.

There are a few layers in the reading of the attrition when each side is only talking its own side’s truth, but there are also bigger questions related to the whole digital economy. There are minor inconsistencies in Apple’s statement, for example it claimed that Spotify has made “substantial revenue that they draw from the App Store’s customers”, only to contradict a few lines below by playing down the App Store’s significance by saying “only a tiny fraction of their subscriptions fall (sic.) under Apple’s revenue-sharing model.” And there is no need for Apple to use the dubious accusation that Spotify is suing music creators. They (Spotify, Google, Pandora, Amazon) are not. They are appealing to overturn a court decision to increase royalty payment by 44%.

There is as much left unsaid as said. For example, Apple failed to address Spotify’s concern that Apple is both operating a platform and distributing its own competing products, in this case Apple Music. This was a point brought up in a conversation The Verge had with Sen. Elizabeth Warren, who did not include in her first list of companies to “break up”. “It’s got to be one or the other,” Warren told The Verge referring to Apple. “Either they run the platform or they play in the store. They don’t get to do both at the same time.” This resonates with Spotify’s accusation that Apple is being both the referee and a player.

It also does not give out the reason why Spotify, or any apps, should not have the option to handle payments within the app with equally safe payment system (e.g. credit cards).

Then there is the broader question whether app stores should be allowed to collect a commission fee for apps distributed on its platform. Technically Apple, and other applications stores like Google’s Play Store, could argue that they are a distribution channel and a retail outlet. Like other channels and retailers, they must charge a fee to sell the products. This side of the business would not be so significant for Apple earlier, as it was mainly using the app ecosystem to sell, and lock consumers in, iPhones. It is getting more meaning for the company now that the iPhone sales are slowing down while “Services” has become a meaningful part of the business. That is also a key reason why both Apple and Google are actively encouraging apps to move to subscription model to generate recurring income for the platforms.

But there has never been any justification why the fee should be as high as 30%, and Apple and Google have been well synchronised with their charge level (as well as dropping the fee from second year onward to 15%). This has become a significant additional cost for the app developers. Some with deeper pockets could absorb the cost and keep the retail price similar to other platforms (e.g. The Economist magazine). Those businesses operating on low margin or on a loss have to move the additional cost to users who opt to pay for the premium inside the app (e.g. Spotify). Other businesses simply choose to disable the option to upgrade to premium inside their iOS app to avoid the fee (e.g. the Financial Times newspaper).

Apple used Spotify’s partnerships with carriers as a supporting argument for the charge, saying “a significant portion of Spotify’s customers come through partnerships with mobile carriers. (This) requires Spotify to pay a similar distribution fee to retailers and carriers.” This may or may not true as each carrier deal with OTT services is different. Even if this is accurate, mobile carriers most likely are following the Apple’s and Google’s benchmark rather than the other way round.

Apple finds the water is warming up in App Store legal battle

Apple has found itself in court once again, but Qualcomm is no-where to be seen. Instead, a few of its loyal iLifers are challenging the firm over whether the App Store is an illegal monopoly.

The case itself dates back to 2012 and will aim to understand whether Apple is operating an unjustified monopoly through the App Store. Right now the case is in front of the Supreme Court, where the nine judges will decide whether or not to allow the antitrust case to be heard by a District Court. The permission from five of the nine judges are needed for the case to proceed, and currently, it looks like only Chief Justice John Roberts is siding with the iGiant.

For Apple, this case could be a disaster. Permission to take the case to one of the District Courts, likely to be in one of the thirty states where the Attorney General is backing the iPhone users’ antitrust claims, and the door could be opened. Essentially anyone who has purchased an app from the App Store could claim grievances against Apple.

The case itself is relatively simple on the surface. As the App Store is the only place to download apps without breaking rules, should the 30% commission charged by Apple be viewed as the company unjustly profiting from a monopoly? One could argue prices are inflated due to the commission received by Apple, though its own counter-argument is based on legal precedent which dictates only those who have a direct billing relationship with a company can sue the firm.

In the Supreme Court’s 1977 decision in Illinois Brick Co. v. Illinois, the court stated only consumers who are direct purchasers of a product can bring a lawsuit seeking damages available for violations of federal antitrust laws. As customer purchase apps from developers, who in turn pay Apple the commission, Apple has argued there is no legal basis for iPhone users to sue the company, with the developers being the only ones who could make such claims. Chief Justice Roberts believes this argument, though spectators of the case have stated five of the judges are leaning the other direction. This could well develop into a very serious headache before too long.

On the other side of the aisle, the iPhone users, led by chief plaintiff Robert Pepper, argue prices would be lower if there were greater choices of app stores. This is a perfectly logical conclusion, though the developers might not like it. As it stands they have a captive audience with all iPhone users in one marketplace. Yes, they do have to pay Apple a premium, but this might well be a pill worth swallowing compared to the complications of working with multiple partners and a disaggregated audience.

As with many lawsuits in the digital economy, this is the first time such arguments are being considered by the courts. Precedent will be set which is what makes this case particularly interesting. Should the courts side with the iPhone users, the doors could be opened for lawsuits against other eCommerce giants such as Amazon or Facebook. Anyone who takes a commission based on a percentage could be viewed as falsely inflating prices in the pursuit of profit, or so the argument would be.

Apple has argued opening this door could stifle the growth of the burgeoning eCommerce sector, which is a negative consequence of course, but not an adequate reason for the case to be dismissed. Just because there is significant consequence does not mean unjust activities should be allowed to continue.

The App Store has started to generate some considerable income for Apple. On the financial side of things, over the last three months the services division, which include the App Store, produced revenues of $9.9 billion, up 17% year-on-year. With smartphone growth slowing globally, and the iPhone not proving the success some might have hoped in emerging markets, the services segment will become ever more important to the iChief.

A decision on whether the case can be heard by one of the District Courts will be made in the near future, though there will be quite a few eye balls on this one. The splash could be quite considerable for Apple, though the ripples through the rest of the digital ecosystem will be just as concerning.