The DMA and alternative in-app payments: too early to celebrate

Bloomberg reported this week that Apple is making the required modifications to iOS to allow for third-party app stores and alternative in-app payments. These changes are needed to achieve compliance with the Digital Markets Act (DMA), which is EU regulation that pertains to digital platform competition and was signed into law in September 2022. The regulation went into force on November 1st of this year and is currently in a review process, with compliance to the regulation’s “dos and donts” being required at some point in the first half of 2024.

Given the relatively abridged timeline for compliance, it’s no surprise that Apple has begun accommodating these new restrictions and rules. The DMA prevents “gatekeepers” — in this case, major mobile platform operators — from disallowing the use of alternative payment systems, among other services and features. The relevant text for this topic, which is broad and fairly unprescribed, comes from Article 5, Section 7:

The gatekeeper shall not require end users to use, or business users to use, to offer, or to interoperate with, an identification service, a web browser engine or a payment service, or technical services that support the provision of payment services, such as payment systems for in-app purchases, of that gatekeeper in the context of services provided by the business users using that gatekeeper’s core platform services.

Apple has already built the infrastructure needed to facilitate alternative in-app payments, and indeed it currently supports alternative in-app payments — for dating apps in the Netherlands. See this article for the background on this odd case, but briefly: just before Christmas in 2021, the Dutch competition authority, the ACM, ruled that Apple must allow dating apps to utilize alternative in-app payments. The scope of the ruling was narrowed specifically to dating apps from the original investigation, which was lodged in 2019. In January 2021, Apple announced that developers would need to utilize two new entitlements in order to process payments either from web stores or through alternative in-app payment processors. These entitlements would allow Apple to register off-platform purchases; Apple announced at that time that it would collect a platform fee for that revenue, but it didn’t specify the size of the fee. And the next month, Apple shared the platform fee it would charge for off-platform payments: 27%, down from the standard fee of 30%.

In addition to the platform fee, developers must also expose a modal to users informing them that Apple will not be processing the off-platform payments, and developers must file revenue reporting with Apple for accounting purposes. The use of alternative payments — again, both on the web and in-app — is likely prohibitively complex to be taken seriously by developers, given the limited economic benefit (it should be noted that both Google and Apple reduce their platform fees by 4% to 26% in South Korea, where legislation was passed related to alternative payments).

I don’t read anything in the text from the DMA above that would render Apple’s approach to alternative in-app payments for dating apps in the Netherlands insufficient for compliance. And in fact, the effort that Apple has already expended to build two new entitlements and establish a policy related to alternative in-app payments suggests that it didn’t undertake that work with only dating apps in the Netherlands in mind. The DMA was first proposed in 2020; a collective lobbying effort from Big Tech spent lavishly on advocacy efforts, so the largest platforms were obviously aware of the scale of the DMA’s impact.

Given the timeline, it seems unlikely that Apple wasn’t using the case of dating apps in the Netherlands to test the boundaries of compliance with alternative payment rules. Because Apple’s first attempt at allowing for alternative in-app payments was deemed non-compliant by the Dutch competition authority, and Apple was fined €5MM per week until the fine reached a total of €50MM. Apple ultimately softened its policy and was cleared for compliance by the ACM in June 2022. I describe the original terms, which were deemed non-compliant, here.

If the ACM cleared the current approach to alternative in-app payments — which requires the use of entitlements, which still levies a 27% platform fee, and which requires regular revenue reporting — then would the CMA apply a stricter standard? And if Apple’s current approach to facilitating alternative payments for dating apps in the Netherlands is viewed as compliant with the DMA and applied to the whole of Europe, then alternative payments may not materially impact the app economy.

Photo by James Yarema on Unsplash