The EU’s Investigation into Apple’s App Store: A Double-Edged Sword for Innovation

The European Commission opened a non-compliance investigation into Apple’s new contractual terms for developers on its App Store in the European Union. The Commission accuses Apple of violating the Digital Markets Act (DMA) by preventing app developers from “steering consumers to alternative channels for offers and content”. This investigation could significantly impact the tech landscape in Europe.

"This investigation could significantly impact the tech landscape in Europe."

The European Commission will investigate the new contractual terms that Apple announced in January 2024. Apple introduced changes to iOS, Safari and the App Store in the European Union, providing new options for developers to distribute their apps and use alternative payment services. These changes were made to comply with the DMA, although Apple expressed concerns about the negative impact of these requirements, citing potential increases in malware, fraud and scams, illicit and harmful content, and other privacy and security threats.

Despite these changes, Apple’s new rules for the App Store seem that have not satisfied the EU, leading to the investigation into specific aspects of the new terms:

1. Apple’s Core Technology Fee (CTF) of €0.50 per installed app from third-party app stores, particularly for app developers launching marketplaces, which will not benefit from the zero fees in the first one million downloads.
2. The multi-step user journey required to download and install alternative app stores or apps on iPhones.
3. The eligibility requirements for developers to offer alternative app stores or distribute apps directly from the web on iPhones.

Apple claims that 99% of developers will continue to pay the same fees or less under the new program in the EU. However, the EU is concerned that the CTF might still deter developers from using alternative marketplaces. The European Commission seems to believe that access to alternative marketplaces on iOS and alternative payment services should be free of charge, and this is fundamentally wrong. It does disregard the investments a company makes to grow its business and improve its products and services.

Over the past few years, Apple has faced backlash from developers regarding its high in-app purchase fee of 30%. It has since introduced a reduced rate of 15% to developers for their first $1 million revenue, the majority of developers. However, large company developers continued to complain about the in-purchase fees and the restrictions on distributing their apps outside the App Store. In January 2020, Epic Games filed a lawsuit against Apple, but in September 2021, the court ruled in favour of Apple.

Apple is likely to fight this investigation due to the significant financial stakes involved. With 2.3 million apps available in the App Store and consumer spending reaching $89 billion in 2023*, Apple earned an estimated $14 billion in commissions last year. Although Europe represents only a fraction of this value, the implications could extend to the rest of the world, especially in the US, where the Department of Justice (DoJ) has filed an antitrust case against Apple.

Apple has never allowed any other marketplaces to be installed on the iPhone, restricting developers to distributing their iOS apps only through the App Store. The European Commission aims to determine if the steps users need to take to access apps from third-party marketplaces discourage them from seeking alternative marketplaces.

The eligibility requirements for developers to offer alternative marketplaces will also be scrutinized. These requirements are considered restrictive.

Apple’s tight controls and restrictions discourage developers from launching alternative marketplaces. While Apple’s control over its ecosystem ensures a superior user experience and security, the EU argues that it hinders competition and innovation.

This dispute is likely to end in court and may last for several years, similar to previous lawsuits against tech giants like Microsoft and Google. The DMA aims to level the playing field for smaller businesses and startups in Europe, but the EU fails to understand that achieving a certain market position requires more than just blocking competitors. It requires superior products and services.

"The EU fails to understand that achieving a certain market position requires more than just blocking competitors. It requires superior products and services."

Apple has never allowed app side-loading (installing apps outside the office App Store), arguing that it puts users at risk. In contrast, Google permits side-loading on Android, but the security and malware detection for these marketplaces are not as good as for the apps distributed through Google Play, effectively putting consumers at risk. The EU seems to overlook the importance of spending billions in R&D to offer the best and most secure products to end-users. While technological advancements offer new opportunities, they also pose risks, as many users are not tech-savvy to avoid malware and scams that can cause financial damage. Tech giants like Apple prioritize protecting consumers and ensuring they have the best possible experience, which has been paramount for Apple since it first launched the iPhone. Although Google has allowed other players to distribute apps through alternative marketplaces, Google Play remains the preferred choice for consumers on Android. Despite being available, alternative marketplaces offer a poorer experience and are a lot more limited compared to the nearly 3 billion apps available on Google Play.

"Despite the EU’s intentions to introduce new regulations, the reality is that these measures hinder innovation more than they help competition and choice for consumers."

Whether an agreement is reached or fines are imposed, consumers will continue to primarily download their apps from the App Store and Google Play, even if there were no controls from Apple or Google at all. Brands like Apple, Google, Amazon and Microsoft have become deeply entrenched in consumers’ lives due to their superior experiences, and this will not change regardless of any EU regulation that forces Apple or Google’s hand.

The EU wants to set a regulatory tone, but these restrictions will delay product launches or degrade services in Europe, which is particularly concerning when we look into the emergence of technologies like AI, where Europe is, once again, failing behind the US and China. Some of the key players are already reconsidering their European strategies due to the stringent regulatory environment.

Is it worth disincentivising innovation, delaying product launches, or delivering inferior products to EU citizens for the sake of helping a few smaller players who may never be able to offer products and services as advanced as those from the large brands?!

For more information please watch my comments on CNBC :

*Source: Business of Apps https://www.businessofapps.com/data/apple-app-store-statistics/