Analysis of the Promising Prohibition on the Mandatory Use of Gatekeepers’ IAPs
[Rohan is a student at Institute of Law, Nirma University.]
The four corners of the world are witnessing an urge to reduce Gatekeeper power in the app economy. An app store acts as a Gatekeeper since it solely retains the power to permit apps to be offered on its platform; this enables it to impose unfair conditions. One of such conditions is mandating its app developers to use the app store’s proprietary in-app payment services (IAPs).
With a need to counteract anti-competitive conduct resulting from Gatekeeper power, the US and the European Union are on the verge of introducing the Open App Markets Act (OAMA Bill) and the Digital Markets Act (DMA) respectively. These legislations are dedicated to lessening Gatekeeper power for the betterment of competition. While the debate on these bills is ongoing, South Korea has stolen the thunder from these jurisdictions as it has become the first country to adopt an Amendment (Amendment) prohibiting app store owners from mandating app developers to use their IAPs.
Significant to the analysis, the District Court of California in the case of Epic v. Apple (Epic Case), has imposed the same prohibition on Apple App Store. As was also witnessed in the said case, the prohibition raises Intellectual Property Rights (IPR) concerns. Under IPR laws, Apple argued that the prohibition restrains it from monetizing its intellectual property i.e., app store, as the usage of its IAPs by app developers brings income in the form of commission.
In this article, the author analyses the said prohibition in light of the competition law, attempts to address the IPR concerns resulting from the prohibition with categorical reference to the Epic Case, and examines the scope of inspiration for India.
I. Benefits to the Competition Law: Ex-ante Regulation of Abuses and Promotion of Follow-on Innovation
App stores are platforms over which app developers and users interact. In the App Store Market (excluding China), Google Play Store and Apple App Store (“Gatekeepers”) have more than 95% market share. They monetize their platforms by charging commissions on purchases made by users in the apps downloaded from their stores. Further, to ensure that they receive commission per purchase, they mandate the listed apps to use their IAPs. The concerned prohibition intends to do away with this mandatory obligation by proscribing Gatekeepers from tying IAPs to their platforms.
It is argued that the prohibition will act as an ex-ante regulation and thereby, prevent app store owners from committing abuses such as tying and excessive pricing. Resultantly, such regulation will release app developers from the impediments created by these abuses leading to better innovation and competition.
(a) Pre-prohibition Scenario: Abuses Impeding Innovation
In addition to tying, Gatekeepers also practice excessive pricing. They have anti-circumvention provisions which penalize app developers if their apps are found to use other IAPs. This practice provides them the power to charge exorbitant commissions i.e., to an extent of 30% on the usage of their IAPs as app developers cannot switch to alternate payment services.
The major consequence of these abuses is that innovation in the app economy has deteriorated. Many scholars have argued that it does not make economic sense for app developers to spend money, effort, and time that is required for the development of apps and pay commissions as high as 30% commission.
Further, due to this exorbitant commission, would-be app developers especially the ones who wanted to offer products with a slim margin never saw the light of the day. This is even worse for the Indian app economy since most Indian app developers offer thinner margins. Moreover, in South Korea, Google’s conduct of tying and mandatorily charging commission could cost Korean firms an additional $136.4 million in 2021.
(b) Post-prohibition Scenario: Prevention of Abuses Reviving Innovation
As a result of the prohibition, Gatekeepers will not be able to tie their IAPs with their app stores and will have to allow entry of third-party payment service providers. Further, products of these service providers can compete with Gatekeepers’ IAPs. Resultantly, if Gatekeepers continue charging exorbitant prices, app developers can switch to third-party’s IAPs.
Therefore, benefits of the prohibition to the competition are: (i) prevention of aforementioned abuses, (ii) the commission rate being driven by the competition in the presence of other IAPs providers, (iii) new entries on account of elimination of monetary barriers, resulting in follow-on innovation and consumer choice, and (iv) valuable incentives for existing app developers from investing in innovation, in the absence of excessive commissions. Inarguably, these outcomes are beneficial for the competition law.
Nonetheless, these benefits are to be weighed against the IPR concerns that the prohibition causes.
II. The Epic Case: Promotion of Innovation as a Justification for Restricting IPR
In the post-prohibition scenario, Gatekeepers will have to allow the entry of other IAPs providers into the downstream market that they would have created i.e., the market for IAPs, which is an outcome of the upstream market for distribution of apps.
An app store is a creation of its owners and has numerous patents; for instance, in the US, Apple App Store has 165 patents. It is undeniable that Gatekeepers are within their IPR to monetize the usage of their intellectual property i.e., app stores. However, the questionable aspect is the manner in which Gatekeepers are monetizing their app stores i.e., by requiring app developers to use their IAPs and earning therefrom. This mandatory obligation was judiciously entertained in the Epic Case. In this case, one of the primary arguments made by Apple was the monetization of its IPR through the obligation. The Californian court noted that mandatory usage of Apple’s IAPs has decreased innovation as it has foreclosed entries in the market for other IAPs.
Accordingly, the court concluded that loosening the obligation on app developers will foster competition in the said market which can further promote innovation with the entry of new payment service providers.
Arguably, an alternative remedy was available to the court. While reflecting on the allegation of excessive commission, the court observed that the contribution of the Apple App Store is such that applications on the store get access to Apple’s user base. Thus, Apple was found justified in charging a commission. However, the rate of the commission was found unjustified since it had no co-relation with the intellectual property. Hence, the court could have asked Apple to charge commissions by drawing correlation with the contribution of its intellectual property. The research found that the majority of Apple users searched for “Tinder” by typing it on the search box and Apple contributed only 6% in discovery. There was no discussion as to whether Apple could formulate an algorithm that quantifies the contribution of the Apple App Store in discoveries of apps. The follow-up question would have been on the possibility of charging commissions based on the ascertained contribution. Nonetheless, this remedy would not have created room for new entries and follow-on innovation as Apple’s IAPs would still have been the only payment mechanism that app developers have to mandatorily use. Thus, as the Court intended to promote innovation, it was mindful on its part to do away with the obligation.
This judgment demonstrates interference with IPR on account of ensuring the promotion of innovation. This stance is reminiscent of the landmark case of Microsoft v. Commission wherein the European Court ordered Microsoft to share interoperability data with software developers. The court noted that the possible negative impact on Microsoft’s IPR is outweighed by the positive impact on innovation of the whole industry.
Interestingly, neither court in these judgments halted monetization of intellectual properties. Microsoft asks software developers to pay for the interoperability data that it shares with them. Moreover, Apple can modify its monetization model to generate revenue from its app developers; for instance, Apple can collect revenue from all the app developers in the form of rent for using the Apple App Store. Pertinently, of all the app developers, Apple only charges a certain fraction of them in the form of commission. As opposed to its current model, the modified model will ensure that a level playing field is maintained amongst all the app developers.
Further, the only downfall that these entities faced is that they had to limit the exclusive right of using their intellectual property for which they will also get remunerated. This approach ensures the promotion of innovation with the IPR holder getting remunerated for curbing the use of its intellectual property.
III. Implications for India
Indian app developers have applauded the introduction of the prohibition in South Korea. Currently, India has no law that regulates app stores. Fortunately, whenever India decides to bring in legislation governing app stores, it will have multiple precedents to follow.
The Amendment (South Korea)
The OAMA (US)
The DMA (EU)
The user base of more than 50,000,000
(a) Strong economic position
(b) Strong intermediation position. It means the Gatekeeper must link a large user base to a large number of businesses
Establishment of Dispute Mediation Commission for dealing with disputes related to app payment, cancellation and refunds
Defence under the ground of privacy, security and digital safety
Defence under the grounds of public morality, public health, and public security
Obligations to refrain from
(a) imposing unfavorable conditions on app developers who use third-party’s IAPs, and
(b) restricting communication between users and app developers
Not stipulated but derivable
Only the latter obligation is stipulated
There is no reason why the aforementioned pre-prohibition scenario would not apply to India. In XYZ v. Google, it was apparent to the Competition Commission of India (Commission) that Google is able to charge a 30% commission fee because Google Play is the dominant source of downloading apps in the Android operating system. The Commission observed the effects of such conduct are passing off the commission fee to end consumers, restriction of app developers’ choice with respect to offering IAPs, and concentration of data of users who make in-app purchases. Consequently, the Commission ordered an investigation into this conduct.
In its final order against Google, the Commission can take a cue from the aforementioned precedents and pass an order whereby it, inter alia, refrains Google from tying its In-App Billing services to its app store. Needless to say, the Commission will have to pass parallel orders against other Gatekeepers who indulge in similar conduct. Alternatively, a legislation may be framed in this regard; however, it could take years before it is enforced.
In any case, the Commission or the Parliament will have to address IPR concerns that will result from such an order or legislation. It is to be seen whether Indian authorities will allow limiting IPR on the ground of preserving competition or the other way around.