Apple and Google set the rules of the game

From the get-go, the CMA lays out its concerns that Apple and Google, through control of the operating systems and app stores in their respective mobile ecosystems, are able to influence the shape of app competition:

“…apps are a critical component of mobile ecosystems and are one of the main channels through which businesses can connect to consumers online. The wide variety of apps available to consumers – millions of apps from hundreds of thousands of app developers – is one of the defining characteristics which sets modern mobile devices apart from earlier forms of mobile phones. It is therefore important for these markets to work well for consumers, and that effective competition in these markets is not undermined by Apple and Google.”

The CMA unpacked Apple and Google’s role in the stages of app competition as follows:

• App development: Apple and Google determine the functionality available to developers when developing apps and can impose software and hardware restrictions. Apple reserves to itself certain hardware functionality on its devices, such as the contactless payments technology, protecting its services that use this technology from competition and potentially restricting innovation.
• App distribution: Apple and Google unilaterally set, interpret, and amend the terms and conditions that govern developers’ access to their app stores, and enforce these through their app review processes.
• App discovery: Apple and Google can influence users’ choice of apps through pre-installation, setting apps as defaults, and design of their app stores through the way they present choices to users within their operating systems and app stores (known as “choice architecture”).
• Apps in use: Apple and Google have access to a range of commercially sensitive information from app developers that they gather through their gatekeeper role which could be used in the development of their own apps (and associated hardware or software).

Self-preferencing and distortion of competition between third parties

The CMA acknowledged that the App Store and Play Store add significant value to Apple’s and Google’s respective mobile ecosystems, and so Apple and Google have a general interest in maintaining choice and quality in their app stores. However, because Apple and Google compete with app developers who use their app stores to reach consumers, the CMA found that in many cases, Apple and Google had both the ability and incentive to self-preference. Similarly, they may also be able to give a competitive advantage to particular third party apps (for example, those that have in-app purchases on which Apple and Google collect a commission), distorting competition between third parties.

The CMA identified the following ways that Apple and Google can self-preference or advantage third party apps:

• Restricting access to software functionality: By restricting access to APIs (which are pieces of software that facilitate communication between apps), Apple and Google can inhibit the quality of restricted apps in favour of their own apps or privileged third party apps. For example, Apple’s CarPlay allows certain device features to be mirrored on an in-car display and the relevant APIs for CarPlay are not automatically available to developers, but they can apply for an entitlement and Apple provides instructions on how to do so. That said, the CMA also acknowledged legitimate justifications for API restrictions. For example, there are APIs within Google Play Services that enable its first-party apps to access a user’s account details and that it would not be appropriate, for privacy and security reasons, to expose these details to third parties.
• Restricting access to hardware: for example, the ultra-wideband (UWB) chip included in the iPhone in 2019. UWB is a short-range wireless communication protocol which allows electronic devices to communicate with each other at short distances and can be used for locate devices (‘where have I left my iPhone?’). While a tagging app using a Bluetooth connection will identify the room the device is in, the enhanced spatial characteristics of UWB locate where in the room the device is. The CMA reports that a third party tagging app developer, Tile, tried unsuccessfully over a number of years to gain access to UWB on iOS. Apple then launched its own app AirTag using UWB and although Apple has now announced it will open UWB to third party apps, that will not be until 2022, giving AirTag a head start;
• Using choice architecture, pre-installation and default-setting of apps to bias consumer choices towards particular apps when using their devices and discovering apps, and thereby self-preference Apple and Google’s own apps or give a competitive advantage to particular third party apps. Clearly, the default settings make our lives easier as users: for example, if an iOS user receives a text in Messages or an email in Mail with a phone number, tapping on it will initiate a call in the Phone app or bring up the Contacts app to store that information. But there are restrictions on the user’s scope to move away from the pre-installed settings: at present, Apple allows a user to change the default setting for the web browser (i.e. from Safari to another browser) and the mail client (i.e. from Mail to another mail client) only. The CMA found that of the 100 most popular third party apps on each of Apple’s App Store and Google’s Play Store in 2020 in the UK has shown that around one fifth of them were competing against an Apple or Google app that had been pre-installed. That said, the CMA also acknowledged that the sheer volume of third party apps shows that competing against pre-installed apps is not ‘insurmountable’;
• Imposing review processes that favour particular apps: App review processes are described as ‘obscure’, ‘arbitrary’, ‘capricious’ and ‘Kafkaesque’, and rules appear to be inconsistently applied, and could be used to favour Apple’s and Google’s own apps. The resulting delays and uncertainty can also add to development costs and hinder innovation by app developers. The CMA also expressed concern that the app review process gave Apple and Google early, unique and detailed insight into innovations by their app competitors. Both Apple and Google denied they used the app review process for industrial espionage and the CMA could only point to some anecdotal evidence;
• Prioritising apps in the app store: the CMA analysis found that 60-70% of downloads on the App Store in the UK were a result of organic search listings using the App Store’s in-built search engine. As with search generally, third party developers expressed concern that Google and Apple could prefer their own apps in search results. The app stores also include editorial pages which showcase apps selected by Apple and Google, which the CMA also said could be skewed to Apple and Google’s own apps. Apple and Google said that an app’s ranking in organic app store search results is determined by their search algorithms, which apply equally to all apps and take similar parameters into account. Again, while the CMA found a capability and an incentive to self-preference, it could only find anecdotal evidence, and has flagged this as an issue for further study.

Requirements to use Apple and Google’s proprietary purchase systems

The main way in which both Apple and Google monetise their app stores directly is through requirements on certain developers to use their proprietary payment systems to process in-app purchases made by users, such as paid for aps, features or content within an app, or subscriptions. Apple additionally has anti-steering’ rules which restrict all app developers offering digital apps from referring, within the app, to other ways a user could pay for digital content, such as through a website.

Under these arrangements, Apple and Google collect a commission of up to 30% on in-app purchases. The significance of these commissions compared to other app revenue streams is illustrated by the following diagram:

Both Apple and Google argue that the obligation to use their payment systems is necessary for them to collect commission for the sales that developers make as a result of distributing apps through Apple and Google’s app stores. This revenue funds the whole structure of app stores available to third party developers.

The CMA acknowledged this position, but considered that the requirement to use Apple and Google payment systems can have the following adverse competitive and consumer implications:

• developers are ‘disintermediated’ from their users in certain respects. Apple and Google effectively act as the seller of the relevant in-app purchase and have the contractual link to the consumer. Payment is taken from the user by Apple or Google and then remitted to the app developer after Apple and Google have taken a commission;
• use of Apple IAP means they are denied various aspects of pricing flexibility that would be available if they contracted with a third party PSP. Apple requires that developers choose among pre-defined price tiers and prevents discounts for certain consumer groups such as students; and
• raising rivals costs in competing against Apple’s and Google’s own apps: Amazon Music charges customers using iOS devices a monthly subscription fee of £10.99,instead of the £9.99 monthly fee it charges customers subscribing using other devices, and compared to Apple Music which is offered at £9.99 per month.

The CMA notes that there may be viable alternative methods for Apple and Google to collect a commission for their app stores, while also allowing developers to handle payments directly which do not give rise to the potential harms to competition.

Apple’s transparency policy

The CMA considers the impact of Apple’s App Tracking Transparency (ATT) policy, which aims to give consumers greater control of their personal data and restricts how app developers may collect and use certain user data.

Before the introduction of ATT, app developers on iOS could access (without requesting user consent) a unique device identifier for each user that could be shared with advertising networks and used to match the same user across multiple apps – the ID for Advertisers (IDFA). The ATT framework requires apps to show a specific prompt (the ATT prompt) to request users’ permission for the app to ‘track’ them. Without consumers opting into this prompt, developers cannot access their IDFA.

Whilst it notes that the ATT policy may create consumer benefits by enhancing privacy and choice, the CMA considers that Apple’s implementation of the policy may advantage Apple’s advertising services, and drive app developers to begin charging for previously free, ad-funded apps. One third-party developer estimated that the ATT policy had reduced its advertising revenue by 26%.

The CMA acknowledged that Apple had introduced a version of ATT for its own apps. However, the ATT choice architecture that Apple apps employ has substantially different choice architecture features than that of third party apps. Based on the CMA’s review of the relevant literature in behavioural sciences and evidence received from third parties, this may result in higher opt-in rates on a like-for-like basis for Apple apps. Third party app developers were reporting opt-in rates of 20-30%, but the CMA suspected the rate for Apple apps was much higher.

The CMA was also concerned that the ATT policy did not allow third party developers to offer incentives for users to opt-in:

“Given that developers benefit from users opting in as it increases the effectiveness of their user acquisition and monetisation, allowing them to offer incentives would enable them to share some of that value with users. This would potentially benefit both users and developers, without restricting user choice.”

Apple’s restrictions on cloud gaming services

Cloud gaming services provide mobile device users access to games which are far beyond the capabilities of even the top end of mobile devices by running games from the cloud, rather than the consumer’s device. Cloud gaming means that the range and type of games that consumers can play are not restricted by their device’s processing and storage capabilities.

The CMA considered how Apple has used its control over app distribution on iOS to block the emergence of cloud gaming apps on its App Store. Apple’s App Store Review Guidelines restrict how cloud gaming apps can function as native apps from the App Store and prevent, in practice, cloud gaming apps from being feasible to develop for the App Store.

The CMA noted that Apple is incentivised to block cloud gaming because it represents an alternative method of game discovery and distribution and therefore threatens Apple’s position in app distribution. As Apple’s iPhones are typically top of the range in terms of hardware capabilities, cloud gaming may remove a unique selling point and make it easier for consumers to switch between devices.

Conclusion

The CMA interim report provides a good ‘go to whoa’ description of how apps make it to your mobile phone. The potential competitive harms from the vertical integration of Apple and Google identified by the CMA echo the risks which regulators advanced in the past about vertical integration in the telco industry. So far, the CMA’s evidence in support of a number of these risks is anecdotal or inferential. The balance of the CMA’s review can be expected to be a ‘battle royal’ over how real these potential competitive harms are and the impact on competitive dynamics and innovation in any pulling part the current market structure.

Read more: Mobile ecosystems