How regulations destroyed Apple’s App Store

Since launching the App Store in 2008, Apple has managed it largely the same way across 175 countries, down to the 30 percent commission it has collected on each app sold.

The company calls the result an economic miracle. The store has generated more than $1 trillion in sales, helped create more than seven million jobs and earned Apple billions of dollars in annual profits.

But as the App Store approaches its 16th anniversary, a patchwork of local rules is undermining Apple’s authority over it.

On Thursday, European Union regulators will begin enforcing the Digital Markets Act, a 2022 law that requires Apple to open iPhones to competing app marketplaces and alternative payment systems for in-app sales.

The changes follow similar demands in South Korea and the United States, where Apple has been forced to allow alternative payment processors. Similar concessions are being discussed Britain, Japan And Australia.

The rules ensure that what was once a single store is divided into a tangle of digital stores across national borders. The once uniform experience of buying software on an iPhone now differs depending on where people live.

“The App Store is becoming completely fragmented,” says Eric Seufert, who invests in app makers and runs Mobile Dev Memo, a blog about the app economy. “The approach to compliance is pretty much the same: ‘Let’s lower the fee a little bit.’ But it’s painful.”

Apple has worked hard to adapt to the changing regulatory landscape. An Apple spokesperson said the company had spent months talking to the European Commission about the Digital Markets Act and holding meetings with developers as it developed plans to change the App Store while minimizing the risks of malware, fraud and scams on iPhones .

Apple says its control over the App Store is critical to the security and quality of the apps it distributes. The company has not specified the 30 percent commission. But over time it has made some concessions to developers and regulators, lowering the commissions smaller app makers pay and allowing developers to link to their websites to directly charge users for subscriptions .

The changes are expected to reduce Apple’s sales and profits. According to Bernstein Research, the App Store generated an estimated $24.12 billion in revenue last year.

When the App Store first appeared, Apple co-founder Steve Jobs said the fee was “a great deal” because any developer – big or small – could deliver software to every single iPhone. But Apple’s fees have been a source of frustration for developers for years. Over time, regulators began to listen to these complaints.

In 2019, Spotify filed a complaint against Apple in Europe, accusing the company of anti-competitive practices for preventing streaming music services from advertising where and how users could subscribe to their app. A year later, Epic Games, the maker of Fortnite, filed a lawsuit in U.S. federal court accusing Apple of violating antitrust laws by forcing developers to use its payment system.

The complaints prompted developers around the world to lobby for changes in the app economy. In 2021, South Korean lawmakers were among the first to respond by passing legislation to force app store operators to allow alternative payment systems. Apple relaxed its requirement that developers use its in-app payment service, but said developers who used alternative services would owe Apple a fee 26 percent commission in sale.

Developers have argued that the new commission rate is the same as the 30 percent rate after credit card processing fees are added. Their criticism was echoed by regulators in South Korea, who said Apple’s plan undermined the purpose of the law. The country’s telecom regulator said this Apple could be fined $15.4 million for ‘unfair practices’.

Apple said it disagreed with the conclusion of regulators in South Korea and believed the changes complied with the law.

The company took a similar approach in the United States. During the Epic Games lawsuit, Apple CEO Tim Cook said that being forced to offer alternative payment systems “would be a mess.”

“We would have to come up with a different system for billing developers,” he said, adding that Apple would still charge a commission.

The federal judge in the case ruled in 2021 that Apple must allow alternative payments in the United States. Apple complied with this as well as in South Korea, except it said developers who used alternatives were required to do so a commission of 27 percent.

“It’s clearly window dressing,” said Colin Kass, an antitrust attorney at Proskauer Rose who has no connection to the case. “Does this satisfy the court? Maybe.”

Apple said the judge upheld the right to charge a commission, and that the resolution complied with the judge’s request to allow out-of-app purchases. Epic said it planned to file a motion to challenge the 27 percent fee and ask the court to intervene.

In 2022, the European Union passed the Digital Markets Act to, among other things, introduce competition in the App Store on iPhones. Apple had two years to comply.

The company’s engineers have spent thousands of hours creating more than 600 new software tools for developers. In January, the company introduced these tools and outlined three options for app makers in the European Union, where about 450 million people live.

Under Apple’s plan, developers could stick with the status quo App Store system and pay up to 30 percent commission on sales. They could reduce their commission to 17 percent, while adding a new fee of 50 euros to every download over a million per year. Or they can avoid Apple’s commission by selling through a competing app store and still paying the download fees.

Apple said the plan was in line with the law and meant 99 percent of developers in the European Union would reduce or maintain fees owed.

But app makers said the plan violated the letter and spirit of the law. Under the new rules, a tech giant like Apple must allow app makers to sell subscriptions and services outside their apps “for free,” said Damien Geradin, a European antitrust lawyer who advises app developers. He said Apple’s 50 cent fee and 17 percent commission violated that part of the law.

European regulators will not act on Apple’s proposal until Thursday after the effective date. Should they open a formal investigation, it could trigger a protracted legal battle that could force Apple to change or risk fines of up to 10 percent of its global annual revenue, which was nearly $400 billion last year.

Mr. Geradin said Apple is unlikely to succeed, but could continue to collect commissions in the meantime.

“It’s part of their tactics,” he said.