End Big Tech's App Store Abuses

Congress or state lawmakers have a golden opportunity to rein in Apple and Google.

Photo credit: Daniel Go

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A U.S. District Court judge in California this week approved a class action lawsuit against Google. The allegation in the suit is that Google is abusing its power over app distribution through its Google Play app store in ways that harm competition and raise prices for app purchasers.

This is the latest twist in a long-running court, policy, and press battle between developers who make and sell apps and Apple and Google, who distribute them via, respectively, the App Store on Apple devices and Google Play on Android. While cases churn through the courts, on the policy side, there’s a great opportunity now for Congress — or failing that, state governments — to rein in some of the worst of Apple and Google’s abuses.

This all can get a bit complicated, so first I’m going to explain what behaviors Apple and Google engage in that are of concern, then summarize where things stand in the courts, and finally explain the policy opportunity lawmakers have to fix some real problems caused by Big Tech’s power.

The Problem

As anyone who regularly uses a smart phone knows, you can download apps from, generally, two sources: Google Play if you’re on an Android phone, and the Apple App Store if you’re on an iPhone. Many apps are free, but many others require payments of some kind. For most apps — think Uber, AirBnb, or Amazon — you can download the app, enter your credit card information directly, and order and pay as you see fit directly from the developer.

But for a minority of apps that are designated as “digital” goods — think fitness trackers, music streaming, subscriptions to publications, or mobile gaming — Apple and Google prevent users from directly entering payment information. Instead, the Big Tech firms require those apps to use payment systems owned by Apple and Google themselves; this allows Apple and Google to take a 15 to 30 percent cut of every transaction.

Yes, each time you pay a monthly subscription to one of these services, Apple or Google take 15 to 30 cents of every dollar. (The rate is 15 percent for apps that make less than $1 million annually, and 30 percent for those that make more.) This is often referred to as the “Apple tax.” And since, for all intents and purposes, every app purchase happens through one of those two stores, there’s little alternative for those developers or consumers who pay them, because they can’t access consumers any other way.

This fee is only levied on a small subset of apps in the app stores — estimates from court cases place it at about 15 percent — and it can be a real burden, nearly one-third of revenue for a moderately successful app. And to be clear, this is a fee that’s distinct from the annual licensing fee every app developer pays to be listed in the App Store: That latter fee makes sense, as Apple and Google built the infrastructure and charge for it.

The 15-30 percent cut of every transaction is an extra fee levied on a subset of apps that have, somewhat arbitrarily been deemed “digital.” (For example, meeting up with someone for a car ride on Uber is not “digital,” but meeting up with someone for a date on the Match.com app is “digital.”)

The real reason Apple and Google can levy these fees is simple power: They control the gateway between consumers and developers — which is your phone, its operating software, and the app store — and built a toll booth on it, which they use to charge the developers most vulnerable to being severed from their own customers were acess to the app store closed off. And indeed, when companies attempt to circumvent that toll booth, they get cut off from the system entirely.

Apple and Google also implement a gag rule of sorts, preventing app developers from communicating to users that, if they were to travel to a developer’s own website rather than paying through the app directly, they might be able to pay lower prices (because developers can charge 30 percent less and receive the same amount). And finally, Apple — but not Google — prevents phone owners from downloading an alternative to its own App Store, thereby controlling what consumers do with their own devices.

Now, the tech titans claim all this is necessary to provide safety and security in their app stores. But leaving aside that they make plenty of money off of the licensing fees alone, there are still scams and nonsense galore in there. Also, if the fees are so critical, why are they only levied on a tiny subset of apps?

The answer is because the fees are about power — Big Tech having it, while developers, especially those most dependent on their products being on mobile devices, don’t.

Most of the loudest voices against these abuses are also the most obnoxious, including Elon Musk, who was complaining recently about the 30 percent fees that would be levied on his new toy, Twitter, were he to start charging for subscriptions. (To be clear, this is separate from Musk’s whinging that Twitter might get booted from the app store over its moderation policies.)

But while that notorious grifter would be a beneficiary of clipping Apple and Google’s wings, the real winners of reining in Google and Apple would be the small developers — and I’ve spoken to many of them — who see a huge chunk of their revenue vanish into the maw of Big Tech, but who don’t have the resources to make a big fuss or launch lawsuits and who have a very real fear of retaliation should they publicly challenge Apple and Google. That 15 percent, for them, is the difference between hiring a new employee or moving to a real office and not doing those things.

The Court Cases

If you happened to have heard of a court case examining these issues, it likely isn’t the class action against Google I mentioned up top, but Epic Games versus Apple. Epic, the makers of the very popular game Fortnite, sued Apple after Epic intentionally circumvented Apple’s payment systems, in violation of its contract with Apple, to avoid the 30 percent fee. Google, in addition to facing the consumer-led class action, has also been sued by the Match Group, the makers of a line of dating apps.

The common allegation across these cases is that Apple and Google have monopolized the market for app distribution, in violation of antitrust law, and are using that power to unfairly extract fees from businesses and raise prices for consumers.

Of these cases, the only one that has actually advanced to a ruling on the merits is Epic versus Apple. In that case, the judge made two decisions: Apple won on the antitrust claims regarding monopolizing the app market, with the judge kind of absurdly ruling that the relevant market is not app distribution on mobile devices, but instead digital gaming, which broadened the market to include the likes of Nintendo and made Apple seem much less powerful than it is.

However, the judge did rule that Apple violated California’s state unfair business practices law with its gag rule that prevents app developers from informing consumers they can make purchases outside the App Store.

All of these rulings have been appealed; the appeal hearing was a couple of weeks ago, with a ruling not expected for many months.

The Policy Opportunity

Instead of waiting for a very uncertain outcome in the courts from a judiciary generally hostile to antitrust claims, policymakers have a huge opportunity to reform the law so that Apple and Google can no longer foist these fees onto developers for no real reason. The most direct avenue would be for Congress to approve the Open App Markets Act. That bill would make it illegal for app distributor to require any developer to use an in-house payment system, as well as require cell phone makers to allow users to download alternative app stores.

There’s been considerable pressure on Senate Majority Leader Chuck Schumer to bring that bill up for a vote during the upcoming congressional lame duck session, which will occur before a new Congress is sworn in in January and everything resets. The bill already passed out of the Senate Judiciary Committee on a 20-2 vote, a rare bipartisan showing in this day and age.

If that doesn’t happen, state governments can step up, and at least set new rules for developers who reside within their own borders. There have been bills similar to the Open App Markets Act introduced in several states over the last couple of years, including in Illinois, Arizona, New York, Louisiana, Florida, North Dakota, and Massachusetts. And I’m willing to bet if one state goes first, others will follow.

Already, this pressure had paid some dividends: Apple and Google both created the 15 percent payment tier due to the pressure the mere existence of these bills put on them. (Previously, every developer, no matter what size, paid 30 percent.) And Google has cut deals with some specific larger players, including Spotify, to get them off its back.

But again, small developers don’t have the heft or ability to get those specific side deals. They need lawmakers to set new rules. This is an opportunity to do some real work to rein in a specific abuse of Big Tech firms, to benefit small businesses and consumers. If Congress can’t get it done, states absolutely should.

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— Pat Garofalo