Under Pressure: Antitrust and Competition Authorities are Now Focusing on Apple

It is fair to say Apple has been under the regulatory microscope lately. This is quite a departure for the company that has largely escaped the ire of policymakers compared to its counterparts, including Google, Amazon, and Facebook. Both in the US and EU, Apple has come up against suits from Spotify Technology SA. and Epic Games Inc., as well as orders to make product changes to increase interoperability.

The biggest changes are a result of the new European law, the Digital Markets Act (DMA), which aims to create fairer and more contestable marketplaces. The law, in sum, mandates that Apple allow for more interoperability, such as allowing third-party App Stores and in-app payments to be made via link-out rather than through Apple Pay.

Yesterday, the company’s legal and regulatory problems got worse. The Department of Justice and 16 state attorneys general sued Apple, alleging the company “has used its power over app distribution on the iPhone to thwart innovations that would have made it easier for consumers to switch phones,” Leah Nylen and Samuel Stolton reported for Bloomberg.

The US case is just beginning, and Apple has confirmed its intention to appeal the European Commission’s decision, so the company may yet still evade any significant penalties in the US and Europe. (Though, Google tried to do the same with a €4 billion fine levied by the Commission on the company, but failed to get it thrown out by the courts.) Do the recent fine and case signal an evolution in antitrust? Antitrust and competition enforcers in Europe and the US were late to the game, enabling big tech to reach its current state of influence and power, but are the respective governments finally catching up?

Apple’s Model and the ‘Consumer Welfare’ Facade

Apple’s response to the European Commission’s decision was published in a scathing blog post on the Newsroom section of its corporate website, characterizing Spotify as the dominant company in music streaming whose business success is thanks to Apple The blog post states that Spotify pays Apple nothing for the “continuous effort and a lot of investment for Apple to make the tools, the technology, and the marketplace that Spotify uses every day.”

Apple further contends that over eight years of various investigations, the Commission has not been able to prove either consumer harm or“a viable theory explaining how Apple has thwarted competition in a market that is so clearly thriving.” Rather, Apple argues “[t]he reality is that European consumers have more choices than ever,” and “[i]ronically, in the name of competition, [the Commission’s] decision just cements the dominant position of a successful European company that is the digital music market’s runaway leader.”

Is Apple’s response to the Commission’s decision a case of crocodile tears by a trillion-dollar tech giant, or does it have any merit? Taking apart this response, Apple's first claim that “Spotify pays nothing” is somewhat misleading. Alex Hern of the Guardian points out that Spotify, like every other developer, indeed pays Apple a “$99 annual fee to be part of the Apple Developer Program” as well as “millions of dollars a year for the devices it uses to create software for the company’s App Store. You cannot develop iOS apps without a Mac.” Apple is also rolling out its core technology fee of “€0.50 for each first annual install over one million in the past 12 months” beginning March 2024.

Apple’s blog post states that 86 percent of apps do not pay Apple a commission because they are free to download and don’t offer in-app payments, but this picture excludes the ad revenue Apple earns from Apple Search Ads (ASA), which has greatly benefited from App Tracking Transparency (ATT) which cuts off access to a device’s advertising identifier. As a Forbes article details, “other ad networks get less data on consumers, impairing their ability to track devices and target people. Apple Search Ads, however, does not use ATT” as Apple’s own services are not considered to be “tracking” users.

Related Reading:

• Regulating the Walled Garden: The Challenge of Taking on the Gatekeepers
• The Digital Markets Act Deadline Has Arrived. What Does That Mean?

Apple also points to the fact that the Commission has not been able to find evidence of consumer harm over the past eight years, and insists the app market is healthy and thriving. This, on the surface, is true. It is difficult to prove consumer harm thanks to the prevalence of Chicago School economics in the US, which argues that consumer welfare equates to lower prices and, absent clear evidence of higher prices, leaving free markets alone is better than government intervention. Tim Wu, in his book The Curse of Bigness, writes that from the 1990s, the European Commission “embrace[d] an interpretation of its own law that also elevated ‘consumer welfare’ as a goal to be considered above any other.”

According to Statista, 95 percent of apps on the iOS App Store are free, so taken together, price harm or harm to the consumer is hard to prove. To that end, it is significant that the penalty against Apple is premised on the fact that many consumers are still paying a higher price due to Apple’s anti-steering rules. Moreover, Apple’s argument that the app market is thriving can be supported by statistics showing apps on the App Store steadily increasing year on year. But those stats do not say much about competition or the structure of the market. Researchers Reinhold Kesler and Ding Li and Hsin-Tien Tiffany Tsai, respectively, find that new start-up apps have decreased, likely due to monetization challenges as a result of ATT, reducing the market overall. Smaller apps have come to depend more on Apple’s in-app payment system for monetization and ad networks for marketing.

As pointed out already, most apps are free and thus ad-supported, which further deepens dependency on Apple Search Ads as well as Apple’s ad attribution network, the SKAdNetwork. The most popular app category on the App Store are gaming apps which “usually generate the majority of their revenue through advertising and in-app purchases,” both of which Apple gains from monetarily. But more importantly, the app market is conducted exclusively under Apple’s control through “the terms and conditions of app review protocols, App Store policies, and privacy policies. Apple centralizes peripheries by hoarding both first-party data via its own apps and services while collecting information on third-party apps through its app review process, transaction data obtained through in-app purchases, and app download data through the App Store.” So while the app market might be “thriving,” it can only exist within Apple’s walls.

Too Big To Ignore

Apple’s tight grip over its ecosystem is usually defended as protecting privacy and security. In a company blog post announcing new product changes to increase interoperability to meet DMA mandates, Apple makes it clear that such changes pose “new risks” to security. On the surface, maintaining closed systems to create a seamless ecosystem of products, and, as Apple argues, to maintain security and privacy may not appear to be anti-competitive. Apple lauds itself as a privacy leader, and CEO Tim Cook has publicly spoken out against the data brokerage industry, often relying on the narrative of privacy and security as justification for maintaining a walled garden.

Compared to many of its big tech counterparts, Apple’s model is more privacy-friendly, and yet, those practices have had anti-competitive effects, with competitors and would-be competitors urging antitrust authorities in the EU to investigate the company’s practices.

In its complaint to the Commission, Spotify alleged that not only does Apple take a 30 percent cut of subscription fees for featuring the app in the App Store, but Apple does not allow Spotify to notify users that other, cheaper ways to subscribe are available. Though Spotify can offer subscriptions on its website, iOS apps are banned from offering information about how to get a cheaper subscription outside of the App Store. The Commission launched an investigation in 2020, and found in March 2023 that “Apple's anti-steering provisions amount to unfair trading conditions, in breach of Article 102(a) of the Treaty on the Functioning of the European Union (‘TFEU').”

On the same day, it launched the investigation into Apple for its App Store practices, the European Commission also began looking at “Apple's limitation of access to the Near Field Communication (NFC) functionality (‘tap and go’) on iPhones for payments.” The company only allows payment through Apple Wallet and does not allow third-party wallets, despite NFC being a standards-based, non-proprietary technology. In response, Apple has offered to allow third-party mobile wallet and payment service providers through an Application Programming Interface, meaning Apple would be finally opening up its NFC functionality. The Commission opened a request for feedback on this proposal in January 2024.

Concerning Apple’s ATT policy, in 2021, a group of German industry associations representing media, tech, and advertising companies, filed an antitrust complaint against Apple to Germany’s Federal Cartel Office, the Bundeskartellamt. The complaint concerned online advertising restrictions on iOS after launching ATT. Journalists Luca Bertuzzi and Nathalie Weatherald from Euractiv reported last year that the Bundeskartellamt “decided that Apple is a company of paramount significance for competition across several markets, meaning that the authority can now prohibit the company from engaging in what are deemed anti-competitive practices.”

Despite such investigations and complaints, the €1.8 billion fine is the first – and one of the largest. The fine, rather symbolically, came days before the DMA entered enforcement in the EU. The law is an attempt to remedy such limiting definitions of consumer harm as price harm and broadens the meaning of anti-competitive practices. Some have argued Apple is complying merely with the letter of the law and not the spirit, with Spotify publishing an open letter to the Commission signed by 34 companies and associations pointing out Apple’s lackluster compliance with the law.

Moreover, Leslie Hannah and Sofie Edwards from Hausfieldoffer that Apple’s fine “only equates to half a percent (0.5%) of Apple’s worldwide turnover,” though they “hope that this decision indicates that the European Commission will not shy away from fines of even greater magnitude” such as those articulated in the DMA. As expected, Apple is appealing the fine, and it will be important to see how the Commission handles the appeal. On the issue of appeal, Tripp Mickle and Adam Satariano from the New York Times note, “[t]he fine is the most severe penalty against Apple since 2016, when the European Commission ordered the company to turn over €13 billion for unpaid taxes to Ireland. In a sign of how long the appeal process can drag out, that case is still winding its way through E.U. courts.”

Whether or not Apple’s appeal will follow the path of other cases, which typically take years to conclude, or if the Commission will be able to squash Apple’s appeal remains to be seen. However, in comparison to the unpaid taxes example above from 2016, the regulatory environment is significantly different. In the spring of 2016, the EU had just passed the General Data Protection Regulation, which would later go into effect in 2018. Since then, the EU has also learned some important lessons that appear to have influenced the DMA.

The effectiveness of the GDPR, in particular, was hampered by issues with enforcement. As the Economist summarizes: “Cases that cross borders are handled by the data-protection authority in the country in which a firm is based. This should make Ireland’s Data Protection Commission the EU’s most powerful privacy watchdog: all of big tech’s European headquarters [...] are based in the Emerald Isle. Yet to the dismay of privacy advocates, the country has proved to be a bottleneck.”

Too often, complaints ended up with Ireland’s Data Protection Commission which lacked the resources and potentially the will to go after firms that were contributing local jobs and tax revenues. This explains why the DMA will be enforced centrally by the European Commission and why the law mandates a shift in the burden of proof, where designated gatekeepers must prove compliance rather than individual consumers making complaints and proving an infringement.

The US and EU converge on antitrust enforcement

The EU is not the only country pursuing competition and antitrust remedies to diminish Big Tech's power. The United Kingdom is currently finalizing the Digital Markets, Competition and Consumers Bill, penned as the UK’s answer to the DMA. However, some commentators see the Apple penalty and the DMA as a battlefield between EU regulation and US innovation.

Anurag Rana, Bloomberg Intelligence Senior Technology Analyst, paints the Apple penalty as “the European Union, who has always been tough on US technology, I think, 20 to 25 years ago with Microsoft and this thing called Windows, and they’re still beating up on US companies.” Whilst this mischaracterizes the Microsoft lawsuit to which they refer, the EU Commission’s suit against Microsoft filed in 2004, which was preceded in the US by a similar antitrust case US v Microsoft (2000), it is fair to say the EU is currently the “activist tech regulator in the world.”

But the US itself is now carrying out its own enforcement actions focused on Apple that mirror both the Spotify ruling as well as some of the issues the DMA intends to tackle. Particularly regarding the latter, the DOJ, 15 states, and the District of Columbia sued Apple under Section 2 of the Sherman Act on grounds of anticompetitive “practices that were intended to keep customers reliant on their iPhones and less likely to switch to a competing device.” The Justice Department had been investigating Apple’s monopoly powers since 2019, looking at the potential for self-preferencing in the App Store, and, more broadly, investigating “whether Apple has used its operating system to favor its own products, including hardware.” The investigation focused on the Apple Watch, Apple Pay and iMessage interoperability limitations outside of iOS.

Nylen and Stolton highlight that “super apps, cloud streaming game apps, messaging apps, smartwatches and digital wallets” are key technologies where competition has been stifled. This has damaged competing businesses, particularly smaller competitors, as well as customers who have limited choice. David McCabe and Tripp Mickle for the New York Times point out that it is within the rights of the DOJ to ask for a structural breakup, depending on whether the court finds Apple guilty of breaking the law.

McCabe and Mickle further report that “Apple plans to file a motion to dismiss the case in the next 60 days. In its filing, the company plans to emphasize that competition laws permit it to adopt policies or designs that its competitors oppose, particularly when those designs would make using an iPhone a better experience.” So the point of contention will be whether the DOJ can prove that stifled competition and innovation have led to consumer harm or if Apple can prove that its products benefit consumers, relying on its usual security and privacy defenses.

On top of this, Leah Nylen, Greg Stohr, and Mark Gurman report for Bloomberg that Apple has been ordered to open its “US App Store to allow outside payment options after the Supreme Court refused to consider the company’s appeal” in an antitrust suit brought against Apple by Epic Games. Epic Games had similar complaints to Spotify, arguing that Apple’s anti-steering rules were anticompetitive. The “decision by the Supreme Court found Apple’s business model didn’t violate antitrust laws, but that it did flout California’s Unfair Competition Law by limiting the developers ability to communicate about alternate payment systems that may cost less.” Even so, the provisions made by Apple to allow payment link-outs come with heavy commission fees, up to 27 percent, meaning that such changes are unlikely to be adopted by developers. As a result, Epic is accusing Apple of failing to comply with the court’s ruling.

Discussing the EU fine against Apple, Epic Games CEO Tim Sweeney “suggested that the [European Commission’s] decision has relevance to his case in the US, as it describes ‘lawbreaking by Apple.’” Indeed, the antitrust case against Apple by the DOJ may also “be affected by the details of how Apple complies with European regulations,” as the Department reportedly has been monitoring Apple’s product changes and compliance with the DMA.

The Beginning of A New Era?

In addition to the US, the “DMA in particular is being closely monitored by other jurisdictions that are contemplating their own rules—including Japan, South Korea, Turkey and the UK,” write Stolton and Deutsch, potentially signaling a global interest in contesting these corporate giants. While antitrust, particularly in the digital marketplace, has been in a slumber, the antitrust and competition policy landscape is now moving toward change.

Sandeep Vaheesan writes for Democracy Journal that the seeds of change are being cultivated with “[a]ntitrust officials [...] set[tting] in motion positive changes in enforcement priorities and challenged practices that likely would have escaped scrutiny in the past. And even more importantly, they have articulated the principles of fairness and democracy as alternatives to consumer welfare.”

It is also worth acknowledging, as Wu does in his book, that lax enforcement and regulation hasn’t always been the norm. Whilst the last “decade and counting” the “officials who are supposed to control competition [...] gave the major tech players a pass,” prior to the rise of the neoliberal ideology of the 1970s and 80s, America was the leading trustbusting nation in the world. After World War II, in Japan and across Europe, particularly Germany, regulators ushered in several antitrust laws and, as Wu argues, “it is noticeable that the peak of anti-monopoly enforcement coincided with a period of extraordinary gains in prosperity in the industrialized world, and also gains in wealth and income equality.”

Such lessons are important to bear in mind as the world watches how laws like the DMA, and antitrust enforcement against the tech giants, play out