News Analysis
In a ruling delivered yesterday, the European Commission (EC) found criminal corporation Apple guilty of “abusing its dominant position on the market for the distribution of music streaming apps to iPhone and iPad users” via its App Store.
In its summary of the ruling, it said it “found that Apple applied restrictions on app developers preventing them from informing iOS users about alternative and cheaper music subscription services available outside of the app (‘anti-steering provisions')”.
“That is illegal under EU antitrust rules.”
The complaint that led to this decision was made by music services upstart Spotify several years ago. It approached the Commission because antitrust laws in the tech industry were in general much clearer and enforced more aggressively than in the United States. In 2019, it accused Apple used its App Store, the only online “store” means by which developers can distribute their iPhone and iPad applications to potential customers, along with other means, to prevent potential customers from knowing about the Spotify music alternative to Apple’s music products. It further complained that Apple was wrongfully “taxing” competitors of its own products.
Daniel Ek, Spotify’s CEO at the time of it filed its complaint with the Commission, declared then that Apple was unlawfully “acting acting as both a player and referee to deliberately disadvantage other app developers.”
After multiple years of investigations, last year the EC informed Apple it had found the tech giant guilty of antitrust practices in the matter, but without providing details as to what the exact ruling might say about what practices the company would have to change to be compliant, or how much the resultant fine might be. It was estimated at the time Apple might have to pay $500 million or so to resolve the dispute, along with some slight modifications to how the company manages its business.
Those questions were resolved yesterday in a decision that rocked the company and its shareholders.
“The Commission’s investigation found,” the ruling explained, “that Apple bans music streaming app developers from fully informing iOS users about alternative and cheaper music subscription services available outside of the app and from providing any instructions about how to subscribe to such offers. In particular, the anti-steering provisions ban app developers from:
“Informing iOS users within their apps about the prices of subscription offers available on the internet outside of the app.
“Informing iOS users within their apps about the price differences between in-app subscriptions sold through Apple's in-app purchase mechanism and those available elsewhere.
“Including links in their apps leading iOS users to the app developer's website on which alternative subscriptions can be bought. App developers were also prevented from contacting their own newly acquired users, for instance by email, to inform them about alternative pricing options after they set up an account.”
Apple was fined over €1.8 billion (U.S. $1.95 billion) in fines for its actions. That’s about four times what analysts had previously been expecting.
After the ruling was announced, Margrethe Vestager, the European Commission’s executive vice president and antitrust head, posted in on the social media platform X that Apple’s unlawful practices “had an impact on millions of [E.U.] consumers, who were not able to make a #free choice as to where, how, and at what price to buy music streaming subscriptions.”
Apple’s App Store, the notorious “walled garden” which Apple has said it regulates so tightly to protect its users from harmful and competing applications being loaded onto its devices, has proven to be one of the most lucrative businesses birthed by the explosive growth of the iPhone (and, later, the iPad). Since it first went “live” on July 10, 2008, it has grown to $85 billion in total revenues as of 2021 from applications purchases and in-app buys, a value which substantially dwarfed Google’s Play Store numbers of $47 billion for the same period. Of that, subscription revenues such as for music services and more accounted for $13.5 billion of recurring applications payments for the company, compared to just $5 billion for Play Store customers. As of the end of 2023, estimates show total revenues from the App Store were $89.3 billion.
Why the App Store is so important to Apple becomes even clearer when one realizes that its total revenues for all products in 2022 was $394.3 billion. The App Store charges developers 30% on paid apps, in-app purchases, and in-app subscriptions, for the biggest of the apps, and just 15% for developers bringing in less than $1 million in total revenues through the store. Though the exact numbers Apple raked in are somewhat shrouded, these percentages could mean Apple pulled in commissions of at least $26.79 billion off its App Store net sales of $89.3 billion. Further, that revenue represents a much higher profit margin than for the core business areas of hardware products of various kinds.
The App Store has been under fire for some time for anti-competitive practices. It lost a decision in a U.S. Appeals Court last fall against Epic Games on grounds like those the European Commission case raised, in which Apple was challenged for its not allowing developers to include means of making payments outside of the App Store. Apple appealed to the U.S. Supreme Court, only to have it decline in January 2024 to rule on the case.
As a result of that decision, Apple made changes in its U.S. App Store so that applications downloaded from there could include links to its own websites. Apple would still charge commissions from developers who ended up receiving payments from those stores, and developers also had to allow direct payments to Apple as part of their offerings. It was not much of a win for the developers, but it did make it possible for them to steer customers away from Apple for payments, and to show customers alternate pricing options.
Apple is currently under pressure in the U.S. to allow the practice of “sideloading” applications onto its devices, but that will take lawsuits and determination on behalf of Congress to force the matter.
It already lost that battle in Europe, however, where it was previously forced by other European Commission regulations to allow customers within the EU to download applications from outside the App Store onto iPhones and iPads. Apple still gets to charge access fees and support fees for those non-App-Store applications, using the argument that it must still validate the downloads and that developers should owe it something for the privilege of allowing them to install their applications on Apple devices. Although there is some logic to that, the liability for those installations is incurred entirely by the users so many analysts believe these incremental fees will be challenged in litigation in the EU, under the argument that all Apple is doing is attempting to get around the regulation changes which recently went into effect.
Those analysts’ conclusions are of course accurate, as Apple is now looking at the end of an era of easy money to be made via its App Store, at least in Europe. The latest ruling by the European Commission against Apple regarding music services such as Spotify adds to that problem.
Apple attempted to address the situation yesterday by declaring what the EC just did as wrong on multiple counts and that it would appeal the decision.
“Today, the European Commission announced a decision claiming the App Store has been a barrier to competition in the digital music market,” Apple said in a released statement. “The decision was reached despite the Commission’s failure to uncover any credible evidence of consumer harm and ignores the realities of a market that is thriving, competitive, and growing fast.”
For stockholders and the analysts who are now speculating about Apple’s future, the writing was already on the wall about this being the end of an era. The stock market clobbered Apple’s stock in U.S. markets by close of business yesterday, with the company’s total value plummeting by 3%, for an equivalent loss of $80 billion.
That drop was just one of many signs that something is faltering badly at Apple. It has not released any major new category of products in years, and recently announced it was shutting down a highly anticipated entry in the electric vehicle business. It also reported that net product sales have declined by 3% in 2023 compared to 2022. The Apple Vision “augmented reality” device which was introduced just this year is also experiencing a higher-than-expected percentages of bad reviews and early returns from the “early adopters” which are so critical to launching a new business area for any tech enterprise.
This is why the services business is so important to Apple, including Apple Music, the successor to the old iTunes business, and Apple TV+. If rulings such as the European Commission’s latest one against Apple stick in the EU, followed by the EC working even more diligently to force Apple to fully open App sideloading and outside developer payments for its devices, and further antitrust legal actions such as those which started with the Epic Games litigation become more serious in their implications, Apple could be looking at a tough road ahead for profit growth for the long term but it is already sitting on so much money that it probably doesn't care about a slight drop in the grotesque profits its customers give the greedy corporation.