The DMA and the Content Fortress-ification of the app economy

Yesterday, the European Parliament approved the Digital Markets Act (DMA) and the Digital Services Act (DSA), two pieces of sister legislation that relate to digital platform competition and content moderation, respectively. The terms of both pieces of legislation had previously been politically negotiated earlier this year and approval was seen as an inevitable formality.

To my mind, the two primary accomplishments of the DMA are that 1) it restricts the scope with which platform operators can compete directly with businesses that utilize their platforms, and 2) it forces choice and alternatives for core platform functionality for both consumers and businesses (eg. payments and discovery). The restrictions of the DMA apply to so-called “gatekeepers,” as defined through qualitative and quantitative criteria (eg. “annual EEA turnover equal to or above EUR 6.5 billion in the last three financial years or has an average market capitalization of EUR 65 billion or higher”). Penalties for non-compliance are stiff at 10% of global turnover for initial infractions and 20% for repeated breaches. I outlined the DSA’s impact on digital advertising back in April, but the DMA was the more popularly annotated and interpreted legislation, in part because of the quixotic and, in some cases, impractical or unworkable requirements it imposes on feature interoperability. This article provides a thorough and even-handed interpretation of the DMA and its impact on large consumer technology platforms.

I’ve expressed skepticism that regulations around alternative in-app payments can meaningfully change the commercial dynamics of the mobile platforms at this late stage, with consumer lock-in so concretely achieved through the native store status that Google and Apple enjoy. From Is app store regulation too little, too late?:

Consumers mostly don’t perceive the burdens placed upon developers by platform policies: they aren’t impacted by the 30% platform fees imposed on (a diminishing proportion of) developer revenues, and they can’t envision the counterfactual of an app economy free of payments and distribution exclusivity. And consumers have mostly been trained to use the default features of their hardware. Can consumers be explicitly re-trained to use alternative app stores and to share their credit card information with new payments systems? And even if they can, would they want to? What benefit awaits the consumer after inputting their credit card number into a new interface or in downloading a new app store onto their iPhone or Android device?

While I don’t think simply allowing payment alternatives will precipitate a meaningful shift in consumer behaviors or preferences — native solutions are difficult to surmount! — I do think the confluence of the DMA and privacy policies like Apple’s App Tracking Transparency (ATT) and Google’s forthcoming privacy policy changes on Android will create new operational norms that are interesting to consider.

The DMA requires platforms to allow for the direct installation (sideloading) of apps and for the use of third-party app stores. Google already grants this functionality and yet, outside of China, the Play Store remains the primary destination for developers as a result of its reach and native access to consumer payment methods. Fortnite infamously sidestepped the Google Play store for its launch on Android only to later relent and publish there.

Note that the DMA doesn’t explicitly force Apple to capitulate on its “No App Stores Within the App Store” restriction, which prevents any app from “displaying third party apps…similar to the App Store or as a general-interest collection.” If the DMA merely forces Apple to allow for alternative app stores to be sideloaded, and it doesn’t insist that alternative app stores be made available for download in the App Store, then the primacy of the App Store with respect to discovery and payments integrations will prevail similarly to the Play Store on Android.

A more likely outcome of the DMA than alternative app stores proliferating and gaining traction on either iOS and Android, where they are currently allowed, is the accelerated Content Fortress-ification of the app economy. The Content Fortresses concept, which I introduce here and expound upon here, is a direct consequence of the ATT privacy policy: with distribution via direct response marketing facing degraded efficiency as a result of the disruptions of ATT, developers must make the Hobson’s choice of integrating closely with a scaled product or simply not being able to reach customers. The canonical example I’ve used of Content Fortresses is that of retail / eCommerce direct sales tools on social platforms like Facebook, Snap, and TikTok. Instead of buying ads to direct customers to their websites — as was the operating model prior to ATT, supported by Shopify — retailers sell products directly on the social platforms, providing the platforms with access to transaction data with first-party privileges such that it can be fed into ads targeting machinery.

Coming back to the DMA: the provision for alternative app stores on the mobile platforms (but again: really just iOS) probably means that the largest existing social media companies will run them. The prospects of alternative app stores on iOS were questionable prior to ATT because of consumer preferences for native features; after ATT, the notion of upstart alternative app stores seems fanciful. From Does ATT wreck the prospect of alternative app stores?:

ATT also accomplishes something else: it deflates the appeal of third-party, alternative app stores on iOS should Apple ever be compelled to allow them. If the App Store dominates discovery on mobile once again because direct response advertising becomes ineffective or economically non-viable, then any alternative app store would face a much higher barrier to adoption. Developers would advertise their apps on these alternative app stores in exactly the same way as they advertise their App Store-hosted apps. If a developer can’t profitably advertise an app hosted on the App Store, which is native to the device and into which the user has already input their credit card information, is it realistic that they can profitably advertise their app on an alternative app store?

Just as the large social media platforms have the leverage and reach to subsume retail transactions onto their properties, they likewise possess — almost exclusively — the leverage and reach to launch alternative app stores. Because while the primary difficulty in achieving traction with alternative app stores on iOS previously was simply Apple’s obstinance to that model, it is now discoverability: alternative app store operators will need to drive traffic to their stores, and doing that through direct response advertising is challenged in the post-ATT environment. But the social media platforms possess the scale to drive adoption without needing to pay for distribution. The DMA allows social platforms to expand their Content Fortresses beyond retail into actual app distribution for categories like subscription apps, gaming, dating, travel, etc., and they are uniquely, if not exclusively, positioned to do that as a result of the distribution frictions presented by ATT.

The threat to Apple (and to a lesser extent, Google) from the DMA isn’t that apps will sidestep the App Store through direct consumer installs: ATT made sure of that by erecting barriers to reaching relevant audiences through direct response advertising. What the DMA will do is allow large social platforms and some other scaled businesses (eg. Epic Games) to launch stores that lure developers through lower processing fees and customers through existing relationships.

If Apple loses games, then it loses the preponderance of its in-app purchases services revenue, which is why it has provided carve-outs for off-platform monetization to almost every other app category (more on this in The App Store is the Games Store). Once these alternative stores have aggregated enough content, they can then introduce advertising placements that utilize first-party store data for targeting. While the DMA does prevent gatekeepers from using cross-product data for ads targeting, the data generated from an alternative store will probably be sufficient for targeting ads for app installs, and it’s not clear how these cross-product data prohibitions can effectively be enforced, anyway.