Apple’s App Store approval policies were placed under a public microscope last week when the executive team at Basecamp, the web application development company behind the eponymously-named team productivity suite, revealed that Apple had rejected updates to their recently-launched consumer email product called Hey.
In a series of tweets, the CTO of Basecamp laid out the issue:
- Users must create a Hey account before they are able to meaningfully use the Hey app: upon opening the app, a user is presented with only a login form, meaning that no functionality is available to users* unless they have already registered an account on the Hey.com website;
- Hey does not offer in-app purchases (IAPs). A Hey account can only be paid for on the Hey.com website;
- Other email clients are available on the App Store that likewise require external accounts and don’t offer IAPs;
The reaction to the tweet storm was mostly fierce criticism of Apple, with objections falling across three general themes:
- Apple should enforce its App Store terms consistently and not selectively sanction specific apps;
- The 30% platform fee that Apple charges is too high and should be reduced;
- Apple should not be in a position to block any app from being used on an iOS device.
Outspoken criticism of Apple’s App Store policies tends to prevail in these types of debates from a very vocal minority of developers that feel aggrieved. The problem with claiming that Apple enforces App Store rules inconsistently is that it’s difficult to know how Apple classifies certain apps that appear to flaunt those rules, and what logic it uses in doing so. For instance, Apple exempts “Reader” apps from the rule that apps must feature functionality upon initial open without a pre-existing paid account, but it also classifies Netflix and Spotify as “Reader” apps, which isn’t necessarily the core use case one might associate with those products.
Nevertheless, Apple does seem to have a thoughtful — albeit opaque — rule system that is uniformly applied, as explained in this article that dissects a recent interview with Apple Marketing VP Phil Schiller.
As regards the second and third themes that dominate criticism of Apple, the 30% platform fee being “too high” is completely subjective: obviously there is no “right” or “appropriate” fee that a platform can charge its developers. And the idea that the App Store should not be a closed ecosystem is simply misguided; Apple’s control over the App Store ecosystem (exercised through app review and its ability to reject apps) is unambiguously good for consumers. While the app review process can certainly be frustrating, ultimately consumers care most about safety and quality, which the process facilitates.
One galling accusation that surfaces incessantly in these developer complaints is that of Apple as a monopoly engaging in anti-competitive behavior that should be remedied by anti-trust law. I believe the term monopoly is being abused when applied to Apple, as I discuss in this podcast with developer advocate David Barnard and in this article. In this post, I intend to refute the three most common arguments made when accusing Apple of having monopoly power: I will do my best to present Steel Man interpretations of these points — or generous, good-faith representations that capture their true intent (a Steel Man argument is the opposite of a Straw Man argument).
Apple’s 30% platform fee is directly born by and is thus harmful to consumers.
It’s important in this discussion to distinguish between an economic monopoly, which is the sole provider of a good, and monopoly power, which is the ability of a firm to set prices so as to capture outsized, supracompetitive profits on the basis of its control of the market in a way that harms the consumer. Nobel Prize-winning economist Joseph Stigler describes the economic argument against monopolies as:
Rather, the purely “economic” case against monopoly is that it reduces aggregate economic welfare (as opposed to simply making some people worse off and others better off by an equal amount). When the monopolist raises prices above the competitive level in order to reap his monopoly profits, customers buy less of the product, less is produced, and society as a whole is worse off. In short, monopoly reduces society’s income.
Note that there is a distinction between the economic and legal definitions of the term monopoly: the legal definition, in the US, is enshrined in the collective anti-trust legislation of the Sherman Act, the Clayton Act, and the Federal Trade Commission Act. The US anti-trust law does not treat monopolies as de facto illegal, but rather classifies their behaviors as illegal when those behaviors are anti-competitive measures taken by a firm or when those behaviors willfully result in anti-competitive market conditions.
Focusing specifically on consumer harm through pricing: can Apple “charge prices above what they would be with competition” with the App Store, as per the definition from above? If a competing app store existed on iOS, would app prices be different than what they are now?
I argue that they would not be: app publishers sell digital goods with no marginal cost of production or distribution. If an app developer sells its app for some price, or prices its app at $0 and sells digital goods within the app for some set of prices, those prices are determined by consumer demand — the developer is incentivized to maximize revenue by setting prices at whatever level produces the most absolute revenue.
The 30% platform fee that the developer pays to Apple doesn’t impact the underlying prices attached to apps and digital goods. The consumer doesn’t feel the platform fee because the market prices of apps and digital goods would not correct by 30% if the App Store platform fee was abolished — rather, developers would simply retain that revenue, because market forces still control price setting.
This would be different if the platform fee was a fixed price — say, $0.99 per sale, regardless of the cost of the app or in-app digital good. If this were the case, then developers would have to bake this price into their products just to clear that absolute cost hurdle and make money on a sale, and thus the platform fee would be passed on to consumers. But because the platform fee is a percentage of revenue, developers are incentivized to set prices at whatever level maximizes total revenue, which would still be the case if the platform fee was done away with.
Apple is a monopoly because the App Store is the only means by which a developer can distribute apps to iOS users.
There are a number of forces operating in parallel in the case of the App Store that muddy the picture from an anti-trust perspective related to existing case law:
- Apple operates a digital storefront, or marketplace, that interfaces with both consumers (iPhone and iPad users that purchase developer content from the App Store) and merchants (developers that sell content directly to consumers via the App Store);
- Each party in the three-party system has a direct relationship with the other two parties. Merchants sell their apps and digital goods directly to users; if this weren’t true, then developers wouldn’t engage in direct-response marketing to users, and developers wouldn’t directly handle eg. customer service requests;
- iPhone and iPad users are consumers of Apple’s hardware and software products, and Apple publishes apps directly to its own App Store (and also pre-loads some of its apps on its own devices);
- The vast majority of apps in the App Store are available for free and feature digital goods that can be purchased (in-app purchases, or IAPs).
As I described in Is Apple a monopoly because of its 30% App Store fee?, the US Supreme Court case of Illinois Brick prohibits anti-trust claims by indirect purchasers (this defense was challenged in a suit against Apple and the Supreme Court determined that an anti-trust case could be leveled, and that case is ongoing). Putting aside the legal precedent, I believe that it’s important with this particular accusation to consider what exactly an “app” is.
If the accusation was rephrased as, “Apple is a monopoly because the App Store is the only means by which a developer can distribute content to iOS users,” then it’d be dismissed as patently false: iOS users can freely consume content via the web or bluetooth or wifi in a way that is not at all gated by the App Store. An “app” within the context of iOS is just content that is saved in the .ipa file format for upload to the App Store.
Modern tools like Unity3D, a cross-platform game development engine, and React Native, a cross-platform app development framework, allow developers to build software products once and publish them to many platforms, including, in some cases, the web. If a developer builds a software product, publishes it both to the mobile web and the App Store by exporting separate files, is the App Store really the only means by which that developer can reach consumers? Applying the “app” label here only to products that are published via the App Store makes the initial statement tautologically true but not meaningful.
This website is not an app, yet 30% of the people that read this website do so on their smartphones. If I were to re-build this site in React, export it as an .ipa file, and publish that file to the App Store, has access suddenly been monopolized by Apple? What about a game developer that publishes to both Google Play and the App Store simultaneously from the same core Unity3D file: is access to the game now monopolized by Apple?
And, again, the welfare of the consumer has to be considered (if not prioritized) when applying the anti-trust logic. Epic Games famously sidestepped the Google Play store with Fortnite, opting to distribute the game on Android via a stand-alone download, and that launch was plagued with fraud and scams. Epic ultimately opted to publish Fortnite to the Google Play store.
Apple engages in rent seeking by charging a 30% platform fee.
Economic rent in the context of neoclassical economics refers to returns taken on some resource above opportunity cost that derive from ownership and not competitive advantage. Economic rent is usually the result of scarcity and an imbalance between supply and demand: the test for whether profit is the result of competitive advantage or economic rent is whether the owner of the resource could make just as much money renting out the asset as it does using it to produce some service or good. Rent seeking is any behavior that seeks to optimize for economic rent.
Apple provides tremendous value to developers via the App Store: payments processing, editorial curation and discovery, fraud prevention and general security, etc. But perhaps the most valuable benefit that the App Store provides to developers is a frictionless, straightforward path for users to engage with apps. The combination of these things — the tools that app developers have at their disposal, plus access to a very large user base — is self-reinforcing and creates value. More users download apps than otherwise would because that process is simple and straightforward . And more developers publish apps than otherwise would because that process is simple and straightforward. Apple’s unique expertise in designing simple, easy-to-use and consumer friendly experiences has been a significant factor behind the success of the mobile app paradigm. The App Store is absolutely economically constructive
For the App Store’s 30% platform to qualify as rent seeking, it would have to be true that Apple could simply rent out the App Store as a business and make just as much money. That is, another company pays some yearly fee to Apple in exchange for operating the app store and earning the platform fee as income, and Apple is indifferent to either case. This is clearly farcical.
Apple is one of the most consumer-obsessed companies in the world, with a fanatical devotion to consumer happiness, ease of use, and aesthetics. The App Store is valuable because Apple runs it: Apple’s unique domain expertise with respect to elegant simplicity allowed the iOS ecosystem to flourish. Whether the 30% platform fee is too high is a separate topic, and perhaps the size of the fee needs revisiting. But the notion that the 30% platform fee represents non-productive economic rent simply doesn’t hold up to intellectual scrutiny.
I have only focused on the three specific allegations I see made most commonly against Apple as an anti-trust violator; others exist.
I believe Apple is soon to face a reckoning: does it accept that the scale and success achieved by the App Store requires a more evolved perspective than the company possessed when it was launched in 2008? I do believe that the opacity with which Apple approaches terms of service enforcement decisions needs to be addressed: Apple should be more transparent with developers around the circumstances under which certain behaviors, especially those related to out-of-app pricing, are acceptable.
But I do not believe that Apple has violated anti-trust law; I do not believe that Apple’s policies harm consumers; and I do not believe that charging a platform fee is morally or ethically indefensible.
*Update Monday, June 22nd: after this post was published, Basecamp revealed that it had implemented a free tier in Hey and subsequently its app update had been approved by Apple.
Photo by BP Miller on Unsplash