In context: With every passing quarter, Apple announces a new record in services revenue, which has quickly grown to become the company's second biggest revenue stream after the iPhone. The problem -- at least in the eye of EU regulators and Apple's competitors in the services industry -- is that it managed to achieve this performance by gatekeeping the App Store and using unfair policies to keep any competition at bay.
Apple is currently facing several antitrust battles across the US, Europe, and Australia, for allegedly exerting monopolistic power over the App Store and using it to put competitors at a disadvantage. This has even led to the creation of a "Coalition for App Fairness" to promote freedom of choice and the idea of alternative app stores in the Apple ecosystem.
Following a complaint made by Spotify in 2019 regarding Apple's supposedly unfair licensing agreements for streaming app developers that operate in the App Store, the European Commission started an antitrust investigation into the matter. Today, it published the preliminary results, which are nothing short of bad news for Apple, who could be fined to the tune of 10 percent of its 2020 revenue, or around $27.5 billion.
The Commission found the Cupertino giant is in violation of EU competition rules, at least when it comes to the music streaming market. Regulators explain that Apple's App Store rules "distort competition in the market for music streaming services by raising the costs of competing music streaming app developers," leading to higher prices for consumers who purchase subscriptions using Apple's in-app system on iPhone and iPad.
This is only the beginning of a formal process where Apple will have 12 weeks to review the Commission's concerns, as detailed in a Statement of Objections. Notable among these concerns are the mandatory use of Apple's in-app purchase system, as well as the "anti-steering provisions" that severely limit developers in their ability to advertise alternative purchasing options outside apps.
Spotify CEO Daniel Ek welcomed the findings, noting that "fairness is the key to competition. With the European Commission's Statement of Objections, we are one step closer to creating a level playing field, which is so important for the entire ecosystem of European developers."
Understandably, Apple isn't so thrilled with the Commission's findings. In a statement, the company explained that "Spotify has become the largest music subscription service in the world, and we’re proud of the role we played in that. Spotify does not pay Apple any commission on over 99% of their subscribers, and only pays a 15% commission on those remaining subscribers that they acquired through the App Store."
The Cupertino company believes the antitrust case is rooted in Spotify's desire to advertise alternative deals for its premium service inside the iOS app, which would be "a practice that no store in the world allows." As for the Commission's preliminary conclusion, Apple believes the cut it takes on in-app subscriptions is essential in maintaining the App Store as a trusted and reliable place for consumers to discover apps and games.
However, this antitrust case against Apple is only one of several being investigated by the European Commission. Last year, Kobo subsidiary Rakuten complained about Apple taking a 30 percent cut on eBook sales while running a competing service -- Apple Books, which doesn't incur the same costs. Then there's the special deal that allows Amazon to bypass Apple's standard fee when it comes to selling content through its Amazon Prime Video app on iOS.
Apple's biggest antitrust headaches will likely be caused by the EU's growing interest in learning more on how Apple is using App Store rules to thwart its biggest competitors in the gaming space, namely Epic, Microsoft, Google, Facebook. To top it off, the exclusivity of Apple Pay, which makes up five percent of global card transactions and is set to double by 2025, is also on the EU regulator's crosshairs.
In an effort to deflect some of these antitrust complaints, Apple last year reduced the commission fee to 15 percent for App Store developers making less than $1 million, but that didn't change the public perception on the matter. The decision is estimated to impact 98 percent of developers, who also happen to account for less than five percent of the App Store's annual revenue.
We also know from court filings that Apple's main argument for acting like a gatekeeper in the case of its App Store is that developers can always create web apps to bypass it. Game streaming services are a great example of that, with services like Stadia and GeForce Now working well through their respective web-based clients, which could encourage more developers to adopt that distribution model.
In the meantime, EU regulators are working on sweeping new rules under the Digital Markets Act and the Digital Services Act. Both are expected to have a major impact in how tech giants like Apple operate, such as putting an end to practices like self-preferencing -- in the case of Apple, that would be using the App Store search rankings to upsell its own apps and bury the competitors down the list.