Apple’s App Store Is the Monopoly You Want

Class-action lawsuits do not always represent the will or best interest of the people. Such is the case with Apple Inc. v. Pepper, a several years old antitrust case against Apple that simply refuses to die. A loss for Apple in this case would mean greater confusion and worse options for consumers on iOS.

Some quick background: In 2011, Robert Pepper and a few other iPhone customers sued Apple, alleging it was monopolizing control of the app market via the iOS App Store. If you have an iPhone, that App Store is the only way to purchase and download new apps without jailbreaking your device. As the lawsuit sees it, Apple used that control to essentially force a 30 percent markup on all paid apps because the company takes a 30 percent commission on each App Store transaction. This commision makes apps on iOS more expensive than they would otherwise be in an open app market, the argument goes.

Initially, that case didn’t go so well. A district court ruled in favor of Apple, which argued that while it offers apps on behalf of developers, those developers are the ones setting the prices and putting them up for sale in the iOS App Store. Though Apple may take a commission on the sale of apps and any in-app purchases, it’s not engineering a price markup.

But a couple of years ago, the Ninth Circuit Court of Appeals got a hold of the case when Pepper and Co. continued to appeal the lower court’s ruling and decided that consumers could sue after all. The court saw a direct seller-buyer relationship between Apple and its app consumers. Last week, the case made its way to the Supreme Court, which must decide if consumers are buying from Apple or the app developers who use its platform. The former would mean that consumers have the right to sue Apple.

The developers — who have made, according to Apple, over $100 billion in total from the App Store — have shown little interest in biting the hand that feeds them.
If this goes Pepper and Co.’s way, Apple could be in a position to get sued by both App Store consumers and app developers. The latter, which literally have no choice but to offer their iOS apps in Apple’s App Store, would have a decent antitrust case. As a counterexample, Android — iOS’s primary competitor — allows consumers to download apps directly from the open web if they so choose.

But the developers — who have made, according to Apple, over $100 billion in total from the App Store — have shown little interest in biting the hand that feeds them. Apple’s strict rules for participating in the App Store are unyielding and well-known, yet 20 million developers happily sacrifice a degree of control for the opportunity to reach a huge audience on iOS.

Pepper and Co. are wrong, and if the Supreme Court decides to rule in Pepper’s favor, the entire iOS ecosystem, known to be more secure than its competitors, could be at risk. Here are three major things consumers need to think about as the case moves forward:

A favorable ruling for Pepper would open the door to a future trial where consumer damages could be assessed in the billions. Apple is rich, but such significant fines could mean big changes that no app consumer will like.
To avoid future lawsuits, Apple might be forced to do the unthinkable and open Apple’s closed app ecosystem to third-party app sellers. Good luck finding the right app across disparate distributors or trusting that you’re getting the official app you wanted.
Security is key. The iOS App Store may not be some pristine marketplace free of sham apps that use social engineering to get your personal info, but it still has nowhere near the recurring volume of malware and counterfeit apps found in Google Play. Third-party iOS app stores will never vet apps as hard and consistently as Apple does.
The basis of Apple Inc. v. Pepper is about protecting consumers. Are those consumers really unhappy about an online marketplace where 88 percent of the apps are free and the average selling price of the paid apps is 99 cents?

I’ve lived through an open applications system. It wasn’t just the ubiquity of Microsoft Windows that, with the advent of the internet, made it such a virus and malware target. Once we switched from installing software via floppies to downloading applications off the internet from a dizzying number of third-parties, the Windows software ecosystem collapsed, and a wild west of shady apps flooded the web.

Over the years, various services emerged to help vet and manage this flood of untrustworthy code, and Microsoft did all it could to mitigate the problem with malware and virus-hardened versions of Windows. Eventually, Microsoft opened its own application store (the Microsoft Store) and even introduced a version of Windows (Windows 10S) that could only download and install apps from that store. These days, email and mobile apps are a more attractive malware attack vector, which leads me back to Android.

Are those consumers really unhappy about an online marketplace where 88 percent of the apps are free and the average selling price of the paid apps is 99 cents?
Google Play tries to split the difference by offering a single official source for Android apps, but its somewhat-more-forgiving vetting system has led to innumerable fake and malware-filled apps that Google routinely scrubs from the service.

From the start, Apple’s iOS app distribution model was different. Apple basically built a giant store, gave out a million keys (charging developers $99 a year for access to the store and its tools), and then let developers fill the place with iPhone apps — but they all needed to be vetted. Imagine a large group of developers on one side and an even bigger mass of consumers on the other with only a single door and one very stern doorman between them, and you’ll get the idea. The cost of doing business in the store was 30 percent of an app’s sale price. Despite this cost and the restrictions, Apple’s closed-loop model was an instant hit with consumers and developers.

Perhaps part of that success is because Apple has never set the sale price of an app. However, it’s not above trying to influence pricing.

In 2012, the Department of Justice charged Apple and five publishers with ebook price-fixing. Apple entered the ebook game late after Amazon had transformed the publishing industry with one-click buying and a $9.99 asking price for even the newest best sellers. Publishers and authors weren’t happy with Amazon’s pricing structure, and Apple used its App Store model to set a new ebook rev-share model for its iBooks store. Instead of forcing publishers to sell Stephen King’s latest at bargain-bin prices, Apple let publishers set the sale price. Apple founder Steve Jobs never tried to hide the fact that the company had these pricing discussions with publishers.

As it stands, the Supreme Court appears to have no better handle on how the App Store and Apple’s relationship with its millions of developer partners work than the Ninth District Court of Appeals.
Apple fought the case for years but lost before the Supreme Court in 2016, ultimately paying a $450 million fine.

As with apps, Apple wasn’t selling books to consumers, but in this case, at least, it did try to manipulate pricing.

No one in the Apple Inc. v. Pepper case is accusing Apple and its app partners of colluding to fix prices. Apple’s effect on app prices is, as this antitrust case sees it, is a byproduct of its total control of the iOS app ecosystem. If Apple didn’t charge a 30 percent commission, Pepper and Co. contend, developers could charge less for apps.

Until recently, both Google Play and Microsoft had the same rev-share policy, However, late this year, Microsoft offered better terms for app developers, asking for just a 5 percent commission on all non-game consumer apps. (Game developers still have the same 70/30 split.) This was not about showing up Apple or offering more competitive commission options. Instead, it was a strategic move designed to get more Windows developers inside the store under Microsoft’s more strictly vetted and secure Windows application environment. And sure, the revenue split was an extra incentive.

There really is no evidence that developers are chafing at Apple’s restrictions or commission model. And as it stands, the Supreme Court appears to have no better handle on how the App Store and Apple’s relationship with its millions of developer partners work than the Ninth District Court of Appeals.

As Apple lawyer Daniel Wall argued the case before the Supreme Court, Justice Sonia Sotomayor insisted that Apple is charging consumers a de facto 30 percent tax through its commission. I scanned through huge chunks of the oral arguments transcript. This exchange is fairly representative of most of the Supreme Court’s thinking on the matter:

Justice Sotomayor: “The first sale is from Apple to the customer. It’s the customer who pays the 30 percent… But the point is that this closed loop with Apple as its spoke, they are the first purchaser of that 30 percent markup.”
Wall: “No, they are not… The first purchaser is clearly the app developer, who, by contract, agrees that every time it puts a positive price on an app, it will allow Apple to — to take 30 percent of it…”
Sotomayor: “Apple took 30 percent from the customer, not from the developer.”
Wall didn’t dispute that Apple does, in fact, collect the funds. As the digital store, it has to manage the point of purchase and take 30 percent commission off that. But the money is headed to the developer, so that cut is out of the developers’ funds, not the consumers’ pockets. Put simply, the Supreme Court is trying to treat the Apple App Store commission as a tax, which is added to the price at purchase, as opposed to what it is: part of the purchase price.

If the Supreme Court rules in Pepper’s favor, the next step is a trial where the consumers sue Apple for damages based on being overcharged for apps by Apple’s closed-loop App Store system.

Maybe someone there will realize that even if antitrust laws can somehow be interpreted to put Apple in the wrong, the damages should be minimal because, despite what some see as onerous or even unfair restrictions (no adult content, no emulators, and unilateral decisions on controversial or potentially objectionable apps), hundreds of millions of iOS customers benefit from a tightly controlled App Store marketplace.

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