The relationship between developers and app stores has been marred by disagreement and dispute worldwide. Lawmakers and regulators frequently complain that Apple and Google’s app stores impose unfair and exploitative terms and conditions. Such disputes have arisen in several jurisdictions, including the EU, the US, South Korea, and Australia. In India, this conflict started with MobiKwik, an Indian digital payments app, which was removed by Google from its Play Store for allegedly violating their deceptive or disruptive ads policy. MobiKwik’s app contained a link to Aarogya Setu (a Government of India app for contact tracing and self-assessment during Covid-19) and this link was not labeled as an ad. MobiKwik maintained that the link had been inserted in the app in public interest and in accordance with the directions of the Reserve Bank of India, and that it was not sponsored or commercial in nature and therefore need not be labeled as an ad. Nevertheless, MobiKwik removed the link to the Aarogya Setu app in accordance with Google’s demands and was soon restored on its Play Store. Google’s action was criticized for not only being illogical, but also arbitrary since other apps which contained the same link were not similarly treated.

MobiKwik’s run-in with Play Store however was only the beginning of the story. Things came to a head when Paytm, one of India’s leading digital payments apps and one of the country’s most valuable startups, was removed from the Play Store. Allegedly, Paytm had violated the app store’s rules which prohibit online casinos and other unregulated gambling or sports betting by making available on its app a cricket sticker cashback feature. The timing of the action was notable as it came a day before the commencement of the Indian Premier League (IPL) T20 tournament, one of India’s biggest sporting events. There is often a surge in demand and download of such apps before IPL. Speculations were rife about the real motivations behind this move – while some blamed Google for playing foul against a competitor (Paytm’s digital payment services compete actively against Google Pay), others attributed the removal to complaints made by Paytm’s fantasy sports competitors such as Dream 11 and associated industrial bodies, and to a broader crackdown by Play Store on apps that promote sports betting.

Although Paytm gave in to Play Store’s demands, the incident triggered a verbal spat between the two companies. Paytm has ever since been a vocal critic of Google for acting like the “judge, jury and executioner.”

While Paytm maintained that all its activities were completely lawful, it still removed the controversial cashback feature in order to meet the app store’s policy requirements and was back on the Play Store in a matter of hours. Although Paytm gave in to Play Store’s demands, the incident triggered a verbal spat between the two companies. Paytm has ever since been a vocal critic of Google for acting like the “judge, jury and executioner” and for applying its rules arbitrarily, unfairly, and hypocritically. The incident also nudged people into questioning the power that app stores, especially Google as the primary mobile operating system provider in India, had over apps and developers. Soon after the Paytm episode and during the same business season of IPL, Play Store issued a notice to food-delivery giants Zomato and Swiggy for violating Play Store rules through the use of in-app gamification features. Zomato responded by calling the notice “unfair” and Swiggy removed the feature which was of concern to Google.

The final straw in this conflict was when Google issued a notice that apps on Play Store will be required to use Google Play’s billing system and pay a 30% commission on all transactions made on the app store. Google stated that this rule had always been in place and it was merely clarifying the requirement and giving developers a year to ensure that their apps were in compliance. However, the backlash against this move from the Indian developer community was so severe that Google was forced to defer the enforcement of its billing policy only in India even as the rule went live everywhere else.

By targeting some of India’s biggest developers and apps, the poster children of Digital India, Google has made formidable foes who not only have the incentive to take on Google but also have the resources and the political clout to influence legislation and regulation. In the face of this impetus, Indian developers and startups joined forces to challenge Google’s control over the app ecosystem. Associations of domestic developers were formed, petitions were sent to the government and relevant ministries, meetings of startups were organized, proposals for creating a domestic Indian app store were mooted, and strategies were devised for the impending battle between developers and app stores. Developers expressed concerns that app stores, especially Google’s Play Store, exercise unbridled and arbitrary control over the app ecosystem, operate in opaque ways, and have the ability to stifle innovation and competition and unfairly advantage their own products and services. Prof. Vikas Kathuria, a scholar of competition law and law and economics, explains that “the conflict between developers and app stores is a classic gatekeeper situation which is observed across many digital platforms. In essence, app stores as gatekeepers of the market or ecosystem decide the terms on which other players participate and at what cost.” Additionally, he notes that “digital markets are characterized by network effects and tipping effects which can be irreversible” and these exacerbate the anti-competitive effects of such conduct.

In response to regulatory pressure and widespread criticism, Apple and Google have made some changes to their app store policies. For instance, Apple started its App Store Small Business Program in 2020 pursuant to which small developers who earned less than a certain revenue threshold (USD 1 million) would be subject to a reduced commission rate of 15%. According to Apple “the vast majority of developers” who sell digital goods and services on the store will benefit from the program. Google, also followed suit and in fact, went a step further and reduced its commission from 30% to 15% for the first USD 1 million of revenue every developer earns each year. According to Google, this change will result in a 50% reduction in fees for 99% of developers. Further, Apple, in a settlement with some developers, agreed to allow developers to tell customers, via email and other channels, about alternative payment methods. Apple also agreed to create a USD 100 million fund for payouts to small app developers and agreed to not raise the commission rate for small developers for at least three years.

By targeting some of India’s biggest developers and apps, the poster children of Digital India, Google has made formidable foes who not only have the incentive to take on Google but also have the resources and the political clout to influence legislation.

The efficacy of these and other concessions has been questioned by many. Specifically, larger developers (such as Spotify, Epic Games, etc.), who continue to pay higher rates of commission and some coalitions of app developers remain dissatisfied with these concessions. It has been claimed that these changes are a ‘sham’ and do nothing to “address the structural, foundational problems facing all developers, large and small, undermining innovation and competition in the app ecosystem.” For instance, in many countries, app stores still mandate the use of their own billing system and alternative payment methods are still barred. Even though commission rates have been reduced to 15% for some developers, the 30% rate continues to apply to many others and there is no clear rationale for the imposition of either the 15% or the 30% commission. Even the 15% rate has been alleged to be excessive in comparison to the (approximately) 2% commission rate charged by third-party payment services. Further, developers complain that app store review and removal processes continue to remain opaque and arbitrary.

Competition Concerns

As the confrontation between developers and app stores gained momentum, competition regulators around the world as the primary market regulator, were called upon to maintain competition in the market by determining the legality of Apple and Google’s app stores’ policies. Primarily, for both Google and Apple, the following policies of their app stores have attracted controversy.

• The mandatory use of Google/Apple’s own payment systems for all in-app purchases (IAP) to the exclusion of all other payment processing systems.
• Imposition of a 15-30% commission on all IAPs.
• Anti-steering provisions, i.e., preventing developers from informing users within the app of alternative purchasing options elsewhere. For instance, developers might be able to offer services for lower prices on their own websites by avoiding the app store’s commission. However, they are barred from informing users within the app that a certain subscription/other service is available for cheaper on the developer’s own website or anywhere else due to the anti-steering provisions.
• Vague, non-transparent, and one-sided app review and removal process.

Prof. Sidharth Chauhan, a scholar of competition law and tech regulation, notes that “these policies usually have several anti-competitive effects, including foreclosure of competition, increased prices, and decreased innovation.” The one-sided and onerous policies negatively impact both developers and users. For developers, these conditions increase costs, shrink profit margins, and make it difficult for third-party apps to remain competitive especially when faced with competition from Apple and Google’s own verticals. For users, this translates into fewer choices, lesser innovation, and sometimes even exclusion of superior services which are unable to survive the uneven playing field. Highlighting the gravity of these effects, Prof. Kathuria notes, “The policies of app stores affect common people in a more proximate way and hence their implications are worrisome.”

Apple and Google claim that the commission they charge on their app stores is fair compensation for the plethora of functions they provide such as technological toolkits, troubleshooting, customer connection, distribution, etc.

In their defense, Apple and Google claim that their policies are neither unfair nor excessive but are the standard industry practice – they operate in a very competitive market where the imposition of exorbitant commissions or unfair conditions would result in developers switching to other platforms. They deny allegations of self-preferencing and argue that their app store policies are aimed at ensuring the safety and security of devices (for example, by checking for malware/spyware, identity theft, fraud, illegal content, etc.) and maintaining high-quality user experience. Further, Apple and Google claim that the commission they charge on their app stores is fair compensation for the plethora of functions they provide such as technological toolkits, troubleshooting, customer connection, distribution, etc. Additionally, they claim that most developers fall below the revenue threshold beyond which the commission is charged and even then, Google and Apple have been creating carveouts or reducing the commission rates for certain categories of apps to encourage innovation and allow more developers to offer their apps through app stores. According to Google and Apple, mandatory use of their own billing system for IAPs protects consumers from payments-related fraud.

Regulatory Response in Different Jurisdictions

Most countries are grappling with the regulation of app stores’ policies and are attempting to use both existing legal frameworks and devise new ones for this purpose.

• USA: In a controversial and dramatic case (involving spoof videos and verbal spats), Epic Games sued Apple before US courts for removing its game Fortnite from the App Store, claiming that Apple’s terms pertaining to IAP and anti-steering provisions are anti-competitive. There are speculations that the Department of Justice might be preparing a suit against Apple or joining Epic Games in its suit against Apple. Both the District Court and the Court of Appeals passed orders which were largely in Apple’s favor, and an appeal to the US Supreme Court was also rebuffed. Several US states have also sued Google over its Play Store fees. Additionally, a recently passed legislation, the Open App Markets Act enshrines several developers’ rights and app stores’ obligations.
• EU: The European Commission has sent a Statement of Objections to Apple regarding its IAP and anti-steering provisions. The new Digital Markets Act will also redress much of the same conduct and policies of app stores. For example, gatekeepers will be prevented from imposing anti-steering provisions, prohibition of third-party payment processing services, etc.
• UK: The Competition and Markets Authority (CMA) of the UK has also launched an investigation into Apple regarding the terms and conditions of the App Store. Indeed, the CMA has already outlined some of these concerns in its Report on Mobile Ecosystems noting that, “Apple’s and Google’s control over their respective mobile ecosystems allows them to set the ‘rules of the game’ for app developers, who rely on their app stores to reach customers and have little or no ability to negotiate over terms.” Simultaneously, a class action suit demanding compensation of £ 800 million has also been filed against Apple on behalf of UK-based developers.
• India: The Competition Commission of India recently passed an order finding Google’s Play Store practices to be an abuse of its dominant position. Accordingly, it directed Google to allow third-party payment processing services, share data with third-party developers, and prohibited the imposition of anti-steering provisions and other unfair or discriminatory conditions. The Competition Commission is also investigating similar complaints against Apple’s App Store. Further, the Government of India instituted a committee to draft a Digital Competition Act which would prescribe ex-ante regulation for digital markets including app stores. Its findings can be seen here.
• Other jurisdictions: The Australian Competition and Consumer Commission has also noted these concerns and recommended potential measures, including greater transparency regarding policies, discouraging self-preferential behavior, etc. A Commercial Court in France has also fined Apple for imposing abusive conditions on developers through its App Store. Other countries like Italy have also initiated similar investigations. On the other hand, South Korea has already passed a law banning dominant app stores such as those of Apple and Google from forcing developers to use their payment systems.

As the examples discussed above show, there are many potential approaches to the regulation of app stores and various facets of regulation that need to be tweaked to make them better suited for the job. Prof. Chauhan, stresses on the importance of ensuring ‘transparency and clarity’ in app store policies. He also notes the importance of promoting competition amongst app retailers, explaining that, “Promoting a variety of platforms may foster an atmosphere where businesses compete to provide better services and conditions in order to draw developers and consumers.” On the other hand, Prof. Kathuria emphasizes the need for ex-ante regulation and argues that the discussion in India needs to move quickly from the very early stages of justifying ex-ante regulation to actually brainstorming about the design of such regulation. He explains that under the existing laws, “a lot of time is spent on investigations and formulating theories of harms. Regulators are faced with novel issues on digital platforms and they are trying very hard to use existing tools to remedy these but they are finally waking up to the realization that existing tools are not enough.” He stresses the need to provide new powers to competition regulators to deal with the unique competition problems that arise on digital platforms. Using the DMA as an example, he explains that ex-ante legislation which has clearly defined objectives and is narrowly applicable to large firms or ‘gatekeeper’ platforms would meet the needs of regulation without hindering innovation by new or smaller players. Further, according to Prof. Kathuria, regulation needs to be more participative in nature, where market players have the opportunity to interact with the regulator to understand the contours of permissible conduct. He explains that we need to think not just about the substance of regulation but also about issues relating to institutional design, including resources, manpower, funding, etc.

The Underlying Conflict of Interest and the Need for Separation Remedies

Despite heightened regulatory attention on app stores’ policies across the world, most regulatory actions rely on behavioral remedies, that is, they have prescribed dos and don’ts for app stores. However, the impugned app stores’ policies are a manifestation of a more deep-rooted problem, namely, an underlying conflict of interest. In the mobile ecosystem, Google and Apple operate in multiple capacities. They act as: i. the base platform on which everything operates – in the form of mobile operating systems of Android and iOS and by providing developer kits allowing third-party developers to create apps which are compatible to run on these operating systems; ii. Distributors – in the form of app stores and search engines which are primary modes of discovery and installation for most third-party apps; and also as iii. downstream vertical players – in the form of Gmail, YouTube, Google Maps, Google Music, Google Photos, Google Pay, etc., where they directly compete with other third-party apps. As Prof. Sidharth Chauhan notes, operating in these different capacities, results in a conflict of interest between app store operators and independent app developers, which has led to numerous complaints being filed with competition authorities.

Thus, anti-competitive and unfair policies of app stores stem from the underlying conflict of interest which emerges when Google and Apple operate in the dual capacity of distributor/ platform and downstream players.

Due to their involvement in the downstream market, Google and Apple have both the economic incentive and the opportunity to leverage their position as app stores and impose conditions that are not neutral and instead advantage their own downstream services. For example, Google and Apple through their app stores have access to significant volume and types of data, including data about financial transactions and in-app purchases, the popularity of different types of apps or features within the app, growth trends, etc. Third-party apps often complain that this data is not shared with them. It is clear that since Google and Apple also operate downstream players, exclusive access to such data gives them an edge over third-party apps in the downstream market. Indeed, the mandatory imposition of their own billing system further exacerbates Google and Apple’s control over crucial transaction data. Similarly, it is claimed that the anti-steering provisions or the app store commission are not imposed on Google and Apple’s own verticals. For example, Spotify has claimed that Apple uses its App Store to unfairly advantage its own Apple Music service by extracting a heavy commission from competitors like Spotify while Apple’s own services are not subject to the same. Further, Google and Apple pre-install their own apps on their devices, leveraging the status-quo bias to their advantage.

Thus, anti-competitive and unfair policies of app stores stem from the underlying conflict of interest which emerges when Google and Apple operate in the dual capacity of distributor/ platform and downstream players. The regulatory responses discussed above, which simply state the dos and don’ts for app stores are merely symptomatic redressal of the real problem. Behavioral remedies are not only piecemeal but often turn out to be ineffective when companies find new creative ways to promote the same objective of disadvantaging downstream competitors. Prof. Chauhan also cautions about ex-ante regulation that, “there is a possibility of various loopholes and those need to be carefully examined by regulatory authorities.” For instance, even before the implementation of the DMA in the EU, Google has already found loopholes in the law. In preparation for the DMA, Google introduced third-party billing in its Play Store in the EU, although it would still charge a hefty service fee from them effectively making third-party payment options less attractive than Google’s in-house billing service. Similarly, the European Commission in its competition investigations against Alphabet has passed clear and detailed prescriptions of the expected and prohibited conduct. And yet these behavioral prescriptions have been found to be ineffective. Google has found new creative and technical ways to bypass the effects of the prescriptions by adopting alternatives which have an equivalent effect of distortion of competition. Thus, it seems that behavioral remedies or prescriptions, irrespective of whether they are passed by a regulator or encapsulated in legislation, are vulnerable to creative interpretation by companies or the adoption of alternatives that would defeat the object of such remedies. Further, Prof. Chauhan also highlights the difficulty in reaching a consensus around ex-ante rules, as an example he points out that “the case for alternative fees could spark an economic debate as to what is considered as a reasonable fee for app-store services.”

Structural separations prohibit a dominant intermediary from operating in markets that place the intermediary in competition with the firms dependent on its infrastructure.

Instead, remedies should aim at redressing the underlying problem, namely, the conflict of interest. This could be achieved through structural remedies in the form of structural separations. Structural separations prohibit a dominant intermediary from operating in markets that place the intermediary in competition with the firms dependent on its infrastructure. In the context of app stores, it would entail the structural or functional separation of the Play Store and the App Store from the rest of Google’s/Apple’s suite of apps and their mobile operating system. Separation would remove the economic incentives which galvanize attempts to distort competition. It would also reduce opportunities for Google and Apple to leverage their position as an app store to unfairly disadvantage third-party apps. Indeed, separation measures have been used in the past in sectors such as railroads, telecommunications, and finance where prohibitions have been placed on companies from operating in a capacity which would result in a conflict of interest.

The use of separation remedies in digital markets has been discussed in the past. The US Senate Report noted the importance of structural separations in reducing conflicts of interest and other benefits including easy administration. Recent antitrust investigations in the US have demanded separation remedies, for example, the Federal Trade Commission’s antitrust lawsuit against Facebook is demanding divestiture of assets and control from WhatsApp and Instagram to remedy Facebook’s ‘buy-or-bury’ strategy. The US Justice Department has also demanded a divestiture of Google’s digital advertising technology product from the Alphabet group on the grounds that Google has illegally monopolized digital advertising technology through a series of acquisitions and anticompetitive conduct. The UK’s Competition and Markets Authority has also recommended that the Digital Markets Unit (responsible for maintaining competition on digital platforms in the UK) should have the power to grant operational and functional separation remedies. The CMA acknowledged the use of separation remedies in eliminating “the ability or incentive for the business or function to trade in a way that favors its own related services.” Even the Competition Commission of India has the power to direct division of an enterprise enjoying a dominant position to ensure that such enterprise does not abuse its dominant position.

Conclusion

Regulation of app stores is complex yet necessary. There is an inherent conflict of interest when digital platforms that operate app stores also own apps that compete with third-party downstream players. While several models of regulation are being tested around the world, most of them are prescriptive in nature, that is, they state which practices are prohibited and what conduct is expected from app stores. However, this does not redress the underlying conflict of interest. Such symptomatic treatment becomes ineffective since app stores find loopholes in these prescriptions and devise alternative ways to further the same objective of distorting competition in their favor. Thus, regulators need to consider separation remedies to resolve this conflict of interest and foster competition amongst app stores and also ensure a level playing field in the downstream market.

The author would like to thank Prof. Sidharth Chauhan and Prof. Vikas Kathuria for their insights.

This essay has been published as part of IT for Change’s Big Tech & Society Media Fellowship 2022.