Just before 2021 ended, Apple suffered a loss in the Netherlands where a national court in preliminary relief proceedings struck down its attempt to block the remedies imposed by the Dutch competition authority following a finding of abuse of dominance. As a result, as of last weekend, Apple is forced to accept third-party payment solutions implemented in (paid) dating apps in the Dutch storefront of the App Store. While this case may seem rather marginal, it may have significant implications for the entire discussion of the Apple App Store. This post will explore how this seemingly niche case may give rise to quite a few legal challenges for both Apple and (national) competition authorities.
The Apple case in the Netherlands
The abuse of dominance investigation against Apple in the Netherlands was initiated in 2019 by the Dutch competition authority (ACM). The initial investigation was aimed at a potential abuse of dominance by Apple regarding several categories of apps, with a focus on the Dutch market. Over time, for reasons that remain unknown, the investigation appears to have been slimmed down and limited to the case of (paid) dating apps. Within this scope, in the summer of 2021, the Dutch competition authority found that Apple abused its dominant position by prohibiting (paid) dating apps from making use of third party payment systems in their respective iOS apps, as well as prohibiting such apps from informing consumers about transaction modalities outside the apps (also known as Apple’s anti-steering prohibition). According to the ACM, this combination of obligations (or prohibitions) constitutes a form of unfair trading conditions.
In the context of the investigation, it was found that Apple had a dominant market position with respect to dating apps and their distribution to iOS device owners. The (narrow) scope of the relevant market, in this case, appears to be motivated by the fact that dating apps, by virtue of their service, need to reach as many users as possible. Thus, from the perspective of such apps, iOS and Android cannot be seen as substitutes but rather as two markets that need to be accessed in order to make the dating app service viable. From here, the finding of dominance is not hard to follow, as Apple’s App Store constitutes the only (realistic) distribution channel for iOS apps. Consequently, if dating apps wish to have access to iOS device owners, they must play by Apple’s rules, thus endowing Apple with a position of dominance with regard to such app category.
The remedies imposed by the ACM require Apple to allow dating apps to make use of alternative payment services in their iOS apps and lift the anti-steering prohibition that would otherwise apply. As expected, Apple has appealed the decision, which remains to be subject to a full judicial review by a Dutch administrative court. In addition to the appeal, Apple also initiated a preliminary relief proceeding in order to delay the implementation of the remedies imposed by the ACM until the appeal proceedings are finalized. In order to do so, Apple was required to show (among other things) that there is a realistic probability that the ACM decision on abuse will be annulled in the main appeal proceedings, which it failed to do and the decision of the Dutch court of 24 December 2021 was eventually delivered in favor of the ACM.
In the preliminary relief procedure, the court found that most of the ACM’s findings in the abuse procedure appeared to be sound and well-motivated. The findings of dominance as well as abuse with respect to dating apps were, according to the court well-substantiated and likely to withstand the judicial review stage during the main appeal proceedings. Consequently, the court found no reason to suspend the remedies imposed on Apple. The court seemed unconvinced of Apple’s arguments that implementing such remedies was technically overly cumbersome or that their implementation would undermine the reputation or security of iOS. The reason behind this doubt seems to stem mainly from the fact that many apps in the App Store (e.g. Uber, Booking.com) already make use of alternative payment solutions in line with Apple’s own App Store rules.
With the preliminary relief proceedings completed, Apple had to make the required adjustments as of 15 of January 2022. While the various dating apps directly affected by the decision will certainly be happy with the decision, its implications may extend (far) beyond this decision.
A narrow approach to finding dominance – a sword vs. a shield
The approach of the ACM for finding dominance, in this case, is quite interesting. Although the recent market study by the ACM on mobile app stores suggested that the iOS and Android operating systems and corresponding app stores belong to separate markets, the focus of its decision is far more specific. Instead of attempting to establish the dominance of Apple with respect to iOS app distribution as such (i.e. with respect to all app developers), the ACM only did so only with respect to dating apps. The choice of this app group is rather clever as the core service of such apps excludes the possibility that iOS and Android and their respective app stores are considered substitutes. Thus finding dominance with regard to dating apps is more feasible compared to news apps, for example, despite the fact that the App Store is the sole distribution channel for all iOS compatible apps. In this respect, the ACM approach to dominance serves as a sword that allows attacking the most vulnerable aspects of the App Store when it comes to establishing dominance. In fact, it may be quite a sharp sword, as other NCAs can replicate similar national proceedings throughout the EU with (relative) ease.
Nevertheless, this focused approach may come at a price. This approach raises the question of whether we will end up in a situation where the dominance of Apple may be established with respect to only certain app categories despite the fact that all iOS compatible apps are equally dependent on the App Store to reach iOS users? Intuitively, one may say that all apps are subject to the same power imbalance when it comes to distribution via the App Store (or even Play Store for this matter) and thus dominance should be possible to establish throughout all categories of apps. Apple’s stronghold on iOS app distribution alone may, however, not be enough in order to reach this conclusion if one looks at the ACM approach. Following the rationale behind the focus on dating apps seems to imply that establishing dominance would require showing the essence of the service provided by the respective app category prevents iOS and Android from being perceived as substitutes. This would, for example, often be the case with apps based on a business model that relies, to a significant extent, on direct network effects (such as dating apps, communication apps, social media apps, and gaming apps). In the case of other apps that are based on different business models, proving that iOS and Android and their respective app stores (and other distribution channels) cannot be considered substitutes may prove more cumbersome at times. In this regard, the ACM approach to dominance may serve as a shield for Apple against the finding of dominance in the case of other app categories, as it may introduce a standard of proof that may be difficult to meet in future cases.
Changing the payment rules for a single category of apps – can it really be done?
The remedies imposed by the ACM and left in place after the preliminary relief proceeding indicate that Apple must accept third-party payment solutions for dating apps in the Dutch storefront of the App Store as well as lift the anti-steering prohibition. The question is, however, whether Apple can indeed sustain such an ad hoc adjustment to its payment rules and, if so, for how long and most importantly at what (legal) cost?
Changing the payment rules for dating apps entails more than simply allowing such apps to make use of other types of payment solutions. It means that Apple must now come up with a new price tag for distributing such apps via the App Store when they do not use the IAP system (similar to what Google did in Korea). This may prove, however, more complicated than it seems. Until now, app categories that did not use Apple’s IAP were also not subject to any transaction fees (e.g. ad-based apps or apps the concern services or products provided outside of the apps).
If Apple chooses to treat dating apps in a similar way, it means it may forfeit its commission fees to some extent with regard to such apps. This is an easy solution for this case, but it might be a costly one if more app categories will have to be treated similarly following comparable decisions by the ACM (or other competition authorities). Alternatively, Apple could choose to impose a different transaction fee on paid apps that do not use the IAP. Doing so would allow Apple to keep more of its profits but not without risk.
First, introducing another transaction fee would stick a clear price tag on the IAP service, putting it in direct head-to-head price competition with other payment processing services. Second, such an adaption would inevitably also put a clear price tag on the distribution of paid apps via the App Store (without the use of IAP). This, in turn, opens up the door for a new discussion on a different potential abuse of dominance, namely excessive pricing (or another round of unfair trading conditions). If paid apps that do not make use of the IAP system are subject to significantly higher (distribution and/or transaction) fees than apps that normally do not make use of the IAP system (ad-based apps, apps offering out of app services of products) then a new claim with regard to such pricing would be rather expected. After all, there is little reason for significant price differences in such instances, as all apps would receive the same (distribution) service from Apple. Third, putting a price tag on the IAP may also have implications for any follow-on private litigation that may follow. The difference between the IAP price tag and alternative payment services may then serve as a guideline for the damages caused by Apple’s actions to (dating) apps and/or consumers. In this regard, setting a low price for the IAP would be attractive for Apple (also in order to prevent switching by apps), but might at the same time expose it to different claims of abuse because of the then inevitably (relatively) high distribution fee as previously mentioned.
Implementation of remedies
[Update – 24.01.2022]
Following the decision by the Dutch court in the preliminary proceedings, the ACM’s monitoring of remedy implementation kicked off. During the weekend of 15th January 2022, Apple appeared to make its first steps towards implementing the envisaged remedies of the ACM. A recent notice on Apple developer news, confirms this. Nevertheless, this first step does not appear to satisfy the ACM, which finds that the solution offered by Apple does not fulfill the requirements for adjustment as provided by the remedies. According to the ACM, Apple does not allow dating apps to use third-party payment solutions AND refer consumers to other payment solutions outside the app. Instead, Apple provides such apps with these options as alternatives, contrary to the imposed remedies. Furthermore, the extent to which third-party payment systems will be implemented in such apps remains unclear, as dating apps can currently only communicate their interest to do so to Apple; an actual technical implementation has yet to occur. It is unclear whether Apple chose not to comply with the remedies intentionally, whether it is trying to slow down implementation in practice with the hope that the appeal will go in its favor, or that it simply struggles with the required adjustments both technically and strategically as mentioned above. Time will (perhaps) tell which reason it is. Until then, however, this failure to comply with the ACM’s remedies will cost Apple a penalty fee of 5 million EUR per week.
The Dutch Apple case brings quite a few interesting aspects to the ongoing discussion on the application of competition law in the context of app stores. If the case withstands the judicial review stage in the appeal case, it may become a landmark case, opening up the floodgates for similar parallel national cases and even follow-on damages claims. At the same time, the approach taken in this case may set the standard for future cases for better and worse when it comes to the potential dominant position that Apple may have in the (iOS) app distribution market. Overall, more than enough reasons to keep track of this case!