At the mid-point of its market study of mobile ecosystems, the UK’s Competition and Markets Authority has released an interim report. The market study is a ‘warm up’ for the UK’s proposed digital markets regulatory regime which will allow designation of platforms as having ‘Strategic Market Status’ (SMS).

At over 600 pages, the interim report is too much to summarise in one note, so we will be running a ‘summer series’ over January and February which looks at the four big streams in the report:

• Theme 1: Competition in the supply of mobile devices and operating systems.
• Theme 2: Competition in the distribution of mobile apps.
• Theme 3: Competition in the supply of mobile browsers and browser engines.
• Theme 4: The role of Apple and Google in competition between app developers.

This note provides some background for that summer series.

What is the mobile ecosystem?

Mobile ecosystems can be broadly characterised as comprising the following core set of products:

• Mobile devices: smartphones and tablets which can connect to the internet.
• Mobile operating systems: the pre-installed system software powering mobile devices.
• Mobile applications (or ‘apps’): computer software providing functionalities to mobile devices. Some apps come pre-installed on devices (including, notably, mobile app stores and browsers), while others can be selected and installed by the user.

Users access content through two key channels:

• Native apps: written to run on a specific operating system, these apps interact directly with relevant elements of the operating systems to provide relevant features and functionality. Native apps can be pre-installed on devices or otherwise are typically downloaded through app stores.
• Browsers and web apps: mobile users can access any Internet website through the browser on their devices. Web apps are applications built using common standards based on the open web and have additional functionality compared to standard websites. Web apps should in principle work on all browsers and on any operating system due to the common standards of the open web.

Mobile devices generally come with at least one app store and one browser pre-installed.

The mobile ecosystem is now the main means by which most of us access the internet. In 2020, UK adult internet users spent on average over three and a half hours a day online, with 68% of this time on smartphones, and just 18% and 13% on desktop and tablets respectively. In 2019, over half of online shopping was via a mobile device, and this is expected to double by 2024.

Apple and Google

Currently, mobile users in practice face a binary choice of ecosystems: either Apple’s or Google’s. The CMA depicts the layers of the market, and the presence of Apple and Google at the different layers, as follows:

The CMA says that as suppliers of the two key mobile operating systems in the UK, Apple and Google can make several key decisions that can have significant implications for the products and services that are accessed online. This is because the operating system on a mobile device determines and controls a range of features that are important to users of mobile devices, from the appearance of the user interface, through to the speed, technical performance, and security of the device. They can also determine what kinds of software (applications) can run on top.

The CMA also says that Apple and Google control the key gateways through which users access content. First, there are only a small number of app stores with a material share of native app distribution:

• The App Store is operated by Apple and is available only on its own devices. No other app stores can be accessed on Apple devices. There are around 1-1.5 million apps available on the App Store.
• The Play Store is operated by Google, and is generally pre-installed on Android devices, in some cases alongside other app stores. The Play Store is used for the discovery and download of over 90% of all native apps on Android devices. There are around 2.5-3 million apps available on the Play Store.
• A small number of mobile device manufacturers, including Samsung, Huawei and Amazon provide access to their own proprietary app stores. The CMA says they achieve only a small share of downloads on their respective devices relative to the App Store and the Play Store (around 0-5% between them).

Second, while users can access the universe of the internet from their smartphones, Apple’s browser, Safari, accounts for over 90% of browser usage in its ecosystem and Google’s browser, Chrome, accounts for 75% of browser usage in its ecosystem. The CMA says that this means each can determine the functionality and standards that will apply not only to their own browsers, but to competing browsers and, in turn, to web apps.

Apple vs Google Business cases

The CMA notes that:

“While there are similarities in the range of products and services that they provide, Apple and Google have different business models. This is illustrated most clearly by the contrast in their primary sources of revenue – Apple makes around 80% of its revenue from device sales, while Google makes more than 80% of its revenue from advertising.”

The CMA says the differences in revenue sources drive the two firms to construct and manage their ecosystems in different ways:

“Apple’s mobile ecosystem is tightly integrated and generally referred to as being a closed system, whereas Google’s is more open in some regards, including in relation to app distribution and browser competition on Android devices."

The CMA says that Apple is incentivised to:

• on the one hand, invest in new or enhanced features, services, and connected devices over time to maintain loyal customers, and to encourage periodic replacement of older devices; and on the other hand, add friction to the process of switching away from Apple, as it does not earn any revenue from users of devices from other manufacturers;
• encourage the download of native apps which offer paid content through its App Store as the primary way for users to access content on iOS devices. The CMA says that this could be to the detriment of the development of browsers and web apps on iOS devices and native apps which are free to the user (although in some cases funded through advertising); and
• give an advantage to its own revenue-generating native apps (such as Apple Music) over competing apps (including native apps on its App Store).

By contrast, the CMA considers that Google is predominantly an advertising business and so its incentive is to ensure its operating system and browser are as widely adopted as possible, in order to generate traffic for its search engine and its other services that earn advertising revenues, including YouTube.

While Android is an open standard, most device manufacturers use a ‘Google compatible’ version of Android for which they are also able to licence key apps and services from Google. The CMA says that this is how Google ensures that key Google apps are pre-installed prominently, such as its browser (Chrome) and its app store (the Play Store), and that Google Search is the default search engine at various search access points.

Google also earns substantial revenue from the Play Store and the CMA expresses concerns about the potential for Google to prefer its own apps.

CMA’s direction of thinking

Building on the above CMA perspectives above of the market, we will unpack its detailed analysis of the competition issues in our One Things across January and February. But spoiler alert, the CMA considers that “Apple and Google have developed a vice-like grip over how we use mobile phones and we’re concerned that it’s causing millions of people across the UK to lose out.”

The CMA’s analysis is likely to spark intense debate over the interplay of competition, innovation, end user choice, investment and regulation in the mobile ecosystem.

Read more: Mobile ecosystems