[Ed Note: The following is the first part of a two-part post authored by Mohini Parghi, a third year student of NALSAR University of Law. This post has been authored as part of the TLF Editorial Board Test 2019-20. Part II can be found here.]
Recent developments have seen a significant amount of discussion on the activities of tech giants such as Google and Apple and their anti-competitive effects. One of the focal points of these discussions has been the app store. Last month, Spotify’s allegations against Apple for, inter alia, imposing unfair conditions and giving preferential treatment to Spotify’s competitor Apple Music brought these issues into the limelight. In addition to this, the Dutch Competition Authority launched an investigation into app store related competition law concerns. Across the Atlantic, the US Supreme Court also ruled against Apple when it held that customers could sue Apple for the 30% commission it charges, even though it is paid by the app developers. Clearly, the case against Apple for using its App Store to stifle competition has gained traction. Such cases would prove to be instructive for future action against tech giants for using online platforms to abuse their dominance and the purpose of this post is to provide a brief idea of how such cases could proceed.
There are two steps for finding abuse of dominant position in any Competition Law jurisdiction: first, establishing that the firm has a dominant position in the relevant market and second, establishing that it has abused this dominance. Consequently, Part I of this post focuses on the first step i.e. market definition and dominance while Part II will examine what activities of Apple could be abusive, their impact on consumers and whether there is any justification for these.
This May, Swedish music streaming app Spotify filed a complaint with the European Commission against Apple, stating that the latter used its ownership of the App Store to distort competition in favor of Apple Music. The complaint specifically dealt with the 30% commission charged by Apple for subscriptions to Spotify made using the App Store. The argument appears simple enough: by not imposing the same conditions on Apple Music, Apple is stifling its competitors and forcing Spotify to inflate its prices.
Now, before we define the relevant market, it is important to note that in these cases, two markets are generally involved: the upstream market and the downstream market. The upstream market is the market for app store-like platforms and the downstream market is where the platform owner tries to drive out competition. In Spotify’s case, for example, the downstream market could be the market for music streaming apps where Apple Music is also a competitor. This distinction will prove important in Part II.
Relevant Product Market
The starting point for market definition is the identification of the product or service with respect to which the undertaking is alleged to be dominant. Defining the relevant product market is important, because it gives a clear picture of who the competitors of a firm are and how it holds a dominant position. To take a simple example, in United Brands v. Commission, the Commission defined the relevant market as the market for bananas, since bananas and other fruits are not substitutable.
Online platforms such as app stores bring together smartphone owners and app providers; they introduce the user to various apps and the app provider to numerous consumers. The core product or service they provide is, therefore, facilitation of the interaction between different customer groups. When Spotify says that Apple is using the App Store to abuse its dominance, it means to say that Apple enjoys market power over the interaction between app developers and consumers, which enables Apple to impose unfair conditions on its downstream competitors. Now, the relevant product market is predominantly defined based on demand side substitutability. For this purpose, let us start broad by including all platforms for smartphone apps.
Network Effects & Substitutability
But all platforms can be included only when realistic alternatives to app stores exist. Otherwise, the market would have to be defined as the market for app stores. In this context, an important phenomenon is network effects. Network effects emerge when the value of a product increases as more consumers use it. Two-sided markets, which cater to two different sets of consumers, are characterized by indirect network effects. Here, the value of the product or service increases as the size of either set of customers (users and app developers) increases. Both Apple and Google allow third-party app developers to create and offer apps for Google’s Android and Apple’s iOS. This activates indirect network effects; as more people start downloading apps from an app store, more app developers provide their apps on that store, and this attracts more customers and so on. One of the implications of this is that once an established app store is in place, neither set of customers would be willing to switch to an alternative.
While alternatives to app stores exist, they do not provide the same features as app stores and could even be risky. The question then boils down to substitutability: whether consumers and app developers could readily turn to these alternatives. Clearly, app stores have certain distinguishing features, the most important being discoverability for app developers. Other methods for downloading apps can be used only when one knows about the app and seeks it out specifically. On app stores, consumers generally discover new apps by browsing and this gives the app developers a wide reach. The app store gives security, automatic updates, and allows customers to compare different apps based on ratings, reviews, etc. For this reason, the upstream market should be defined as the market for app stores
Apple v. Google
The next and final issue that would have to be addressed is whether the App Store and the Play Store can be in the same market. When buying a smartphone, iPhones and Android phones are perhaps substitutable. Some Android phones these days are as sophisticated as the iPhone. Popular apps such as Facebook, WhatsApp, Instagram etc. are available on both app stores. However, once you buy the smartphone, you can’t change the OS and thus cannot change the app store. An iOS user has only one option for downloading apps: App Store. If Apple acts unfairly, users can’t easily switch to another app store without buying an entirely new phone.
Even from the perspective of app developers, the two are different markets. If the app developer submits an app only on the App Store, he is entirely cutoff from Play Store users and vice versa. In other words, to reach iOS users the app developer must go through the App Store and to reach Android users, he must go through the Play Store. This is only possible when App developers can multi-home, that is, develop apps for both sets of users. Multi-homing, however, is very costly since it involves developing two different versions of the app. Therefore, a more appropriate definition in Spotify’s case would be the ‘market for app stores for iOS users.’
When firms act unilaterally, they can be held liable under competition law only when they enjoy a dominant position. Dominant position relates to a firm’s power to behave independently of its competitors and its customers. The Google Shopping case could be instructive for assessing Apple’s dominance. If the relevant market is defined as above, Apple naturally enjoys a dominant position since the App Store has no competitors in the relevant market.
However, if App Store and Play Store are in the same market. the argument becomes more nuanced. The European Commission has repeatedly stressed that high market shares can in themselves be indicative of dominance. The market share of Android is around 75% while that of iOS is around 22%. A market share of 50% or even 40-45% has been held to indicate dominance, and the only occasion on which an undertaking with lower than 40% market share was held to be dominant was Virgin/British Airways. Nonetheless, Apple could still be held liable.
Market shares only indicate actual competition, and do not represent the competitive pressure exerted by firms which could potentially enter the market. These include economic advantages such as control of an essential facility, superior technology and integration. As discussed previously, network effects can also be a barrier to entry as noted in Microsoft. Taking these into account, iOS may still be found to be enjoying a dominant position.
Therefore, before Apple and Google are found to be abusing their dominant position, a careful market analysis would need to be undertaken. The next part will focus on the types of abuse under Article 102 of TFEU which correspond to Apple’s activities, and the defenses that could be taken by the company.
Part II can be found here.
 R Whish & D Bailey, Competition Law, 180 (7th Ed., 2012).
 United Brands v. Commission,  1 CMLR 429.
 Supra note 1 at 183.
 Ibid at 185.