I. Introduction

In the previous post, we saw how once the relevant market is defined, Apple could be found to hold a dominant position. This post will highlight the different abuses under Article 102 of TFEU that Apple could be guilty of, and the tests to be fulfilled for each. It is important to note that the offences listed under Article 102 are not exhaustive, and allegations against Apple may give rise to new categories of harm.

Spotify’s grievances relate to two categories: commission fees and access to users. It has alleged that the 30% fees for using the in-app purchase feature is discriminatory, since Apple Music does not have to pay it. Apple also does not allow Spotify complete integration into Apple devices, routinely tightens its app guidelines and rejects updates for the Spotify app. ACM’s market study identified problematic practices such as favoring of own apps by Apple and Google, lack of transparency and unequal treatment. It would be interesting to assess where these allegations Spotify and by the ACM figure in the existing categories of abuse. Furthermore, competition law also recognizes certain efficiency justifications for anticompetitive conduct which would have to be addressed.

II. Types of Abuse

These allegations stem from the fact Apple is vertically integrated in the app store market, that is, it is present at two stages—it controls where apps are downloaded from, while also making the apps. In Spotify’s words, Apple acts as “both referee and player”. Therefore, Apple’s conduct would fall under those anticompetitive practices which involve these two different markets. For the 30% fees, Apple could be liable for discrimination and margin squeeze; for other practices, it could be liable for refusal to deal and tying.

A) Discrimination

Drawing from the Google Shopping case, Apple’s conduct with respect to third-party app developers could be discriminatory. In Google, it was held that Google was using its market power in the search engine market to give its own shopping service a prominent place and demoting rival shopping services in its search results. Essentially, Google gave differential treatment to its own downstream service and tried to drive out its competitors, using its upstream market power. This can be analogically applied to Apple’s conduct.

Spotify and Apple Music are direct competitors, but only Spotify is made to pay the 30% commission on subscriptions. While Apple Music can freely communicate with its users, Spotify isn’t allowed to the same or at least do it as effectively as Apple Music. Thus, Apple treats Spotify less favorably than Apple Music. The Dutch Competition Authority’s decision to investigate Apple also reveals that such discriminatory practices extend beyond the music streaming market. The investigation will first focus on Dutch apps for news media offered on the App Store; here as well, Apple plays a dual role as it recently started a news service called Apple News Plus. This could also be the reason Scandinavian news publishers have supported Spotify’s battle against Apple.

B) Margin Squeeze

In the past, the concept of margin squeeze has been applied in the telecommunications in cases like Deutsche Telekom and TeliaSonera. However, the theory of margin squeeze can be extended to online platforms as well. A margin squeeze can occur when a firm is dominant in an upstream market and supplies a key input to its competitors in a downstream market.[1] As explained previously, this is the situation with Apple and its dominance in the upstream app store market. By charging the 30% commission from Spotify and other music streaming apps, it can be said that Apple leaves a narrow margin for Spotify to make profits in the downstream market.

The constitutive elements of margin squeeze theory are dominance in the upstream market, the as-efficient-competitor test and the requirement of anti-competitive effect. The first element has already been explained. The pivotal question that would then have to be answered is whether Spotify is an ‘as efficient competitor’. Traditionally, the test is whether the vertically integrated undertaking could compete profitably in the downstream market if it were made to pay its own upstream prices. However, as pointed out here, this test may not be applicable since neither app is profitable to begin with. As a result, the two would have to be compared on parameters such as comparing their losses. Nonetheless, the test may be applied and Spotify could be deemed an as-efficient competitors. Even then, the potential anticompetitive effects of margin squeeze would have to be checked. Although Apple’s practices do not force its competitors to exit the market, reduction of innovation and increased prices could constitute anticompetitive effects.

C) Refusal to Supply

In some circumstances, refusal by a dominant firm to supply goods or services can amount to an abuse of dominant position. Most refusal to supply cases in EU law concern a vertically integrated undertaking that is dominant in an upstream market and which refuses to supply an existing or new customer in a downstream market on which the dominant firm is also present.[2] The refusal to deal can be constructive, i.e. where supply is offered on unreasonable terms. Thus, if Apple does not allow its downstream competitors like Spotify access to the App Store, it could be liable for refusal to supply.

Currently, the standard to be met in refusal to supply cases is strict. The first condition to be satisfied is that the product to which access is sought should be indispensable to downstream competitors. This is also known as the ‘essential facilities doctrine’.[3] Therefore, app developers would first have to prove that the App Store is indispensable for them to reach consumers. It is not sufficient that it would be convenient or useful for app developers to have access to the app store; access must be essential.[4] The market study shed some light on this by finding that no realistic alternatives to the App Store and the Play Store exist and therefore, the App Store forms a bottleneck for app providers to reach iOS users. This concept of the bottleneck would be helpful in ascertaining Apple’s liability. Another requirement is that the refusal should lead to ‘elimination of effective competition’,[5] which would require more information about the market.

D) Tying

Tying is the practice of a supplier of one product, the tying product, requiring a buyer to also buy a second product, the tied product.[6] The dominance needs to be proved in the tying market, which in our case is the market for app stores. The dominant firm must be guilty of tying two distinct products,[7] and this is where difficulties arise since it is necessary for the two products to be distinct. In Apple’s case, Spotify would be hard-pressed to prove that Apple is guilty of tying iOS and Apple Music.

However, there is also the question of coercing app developers to use Apple’s in-app payment feature. Apps that deal in digital goods must use Apple’s IAP service and pay the 30% commission. If they decide to bypass this, Apple allegedly imposes unfair conditions on them by, inter alia, restricting their access to the users. Therefore, an argument for tying could be made with respect to the IAP.

III. Are there any ‘Objective Justifications’?

Finally, a balancing act between harm and efficiency would have to be carried out. If Apple can show that its practices ultimately enhance efficiency, it could escape liability. In its response to Spotify’s allegations, Apple pointed out that after using the App Store to expand its business, Spotify seemed to want to enjoy the benefits of the App Store without paying for it. This is like the free-rider criticism of the essential facilities doctrine; imposing an obligation on dominant firms to supply to their competitors would lead to ‘free-riders’ taking advantage of investments made by the dominant firm.[8] The downstream firm could also be dis-incentivized from making similar investments. Other factors such as consumer welfare would also need to be investigated; Apple’s entire business model is based on safety, security and privacy of its users, and not allowing Apple to regulate its own App Store could ultimately be detrimental to consumers.

IV. Conclusion

In conclusion, there appears to be a strong case to be made against Apple for using the App Store to tilt competition in its favor, as evidenced by at least 3 different jurisdictions deciding to investigate Apple’s conduct. However, once the allegations are tested against existing legal doctrine and case law, several issues are yet to be resolved and traditional concepts need to be evolved further. For these reasons, Spotify’s case, Apple v. Pepper and the ACM’s investigation will be followed closely across the world for they mark a new era in the interplay between technology and competition law.

To go back to Part I, click here.

[1] R Whish & D Bailey, Competition Law, 754 (7th Ed., 2012).

[2] R Whish & D Bailey, Competition Law, 698 (7th Ed., 2012).

[3] Ibid at 701.

[4] Ibid at 703.

[5] Ibid at 707.

[6] Ibid at 689.

[7] Ibid at 692.

[8] Supra note 2 at 697.

Introduction

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.

Market Definition

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.[1] 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.’

Dominance

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.[2] 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.[3] 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.[4] 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.

Conclusion

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.

[1] R Whish & D Bailey, Competition Law, 180 (7th Ed., 2012).

[2] United Brands v. Commission, [1978] 1 CMLR 429.

[3] Supra note 1 at 183.

[4] Ibid at 185.