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Judge orders Apple to ease restrictions on app developers

A federal judge on Friday dealt a serious blow to Apple’s control over its app store, offering companies a way to avoid handing Apple cut in app sales and potentially disrupting an online market. of $ 100 billion.

Apple is relying on revenue from its app store to fuel its expansive profits, and the move could eat into that money. It was a damaging loss for the company, which faces increasingly pointed questions from regulators and politicians around the world about its business.

Over the past month, regulators in Japan and South Korea have forced Apple to change the way it handles the App Store. In the United States, the Department of Justice has launched an antitrust investigation into the company. The Senate introduced antitrust legislation to promote competition among app stores after a House committee said last year that “Apple exercises monopoly power in the mobile app store market. “. And the European Union, Britain and India are also investigating Apple’s dominance of app stores.

Together, legal setbacks and tighter regulatory controls indicate that Apple’s long run of calling the shots on the App Store – one of the pillars of the internet economy – may come to an end. This could represent one of the most substantial changes in the tech industry in years, as small businesses keep more of their profits and Apple’s ability to be an inevitable toll collector recedes.

Apple “had a huge advantage because of the popularity of its platform, and that advantage has now been reduced,” said Jonathan Rubin, partner at antitrust law firm MoginRubin.

The order was part of the ruling in a high-profile legal case between Apple and Epic Games, which makes the game popular Fortnite and sued Apple last year over its app store policies.

Judge Yvonne Gonzalez Rogers of the U.S. District Court for the Northern District of California said Apple violated California’s unfair competition laws by prohibiting app developers from directing customers to other means of paying their services. She ordered Apple to start allowing developers to include links in their apps to other payment methods within 90 days.

This means that when customers sign up for a subscription or purchase a service or digital item in an iPhone app, businesses can now direct those customers to external websites to complete the transaction. This would allow these companies to avoid Apple’s commission on the sale, which can be as high as 30%.

But Gonzalez Rogers didn’t say Apple had a monopoly on the mobile gaming market, which would have been the worst-case scenario for the company. She also said that Epic broke its contract with Apple by allowing Fortnite users to pay it directly, instead of through Apple, in its iPhone app last year.

Apple is generally expected to ask a judge to prevent the order from coming into effect. Either company could also appeal to the 9th US Court of Appeals. In that court, a panel of three judges could review the decision, a process that could take a year or more. After a decision there, Apple or Epic could appeal to the Supreme Court.

The decision allows both sides to claim a partial victory. Apple now has a court ruling that says it does not have a monopoly in a significant digital market, undermining efforts by its opponents to claim it violates antitrust laws. But Epic’s lawsuit could also force Apple to open up its airtight iPhone software to create a way for developers to avoid its commission.

Apple shares fell nearly 3% on the Nasdaq stock exchange after the decision was announced.

“Today, the court confirmed what we have known from the start: the App Store does not violate antitrust law,” Apple said in a statement. “As the court recognized, ‘success is not illegal.’ Apple faces stiff competition in every segment in which we operate, and we believe customers and developers choose us because our products and services are the best in the world. “

The decision upheld many principles of Apple’s app store business, including the fact that it can ban third-party iPhone app marketplaces and may continue to charge a 30% commission on many transactions. Epic had challenged these practices.

“It puts an economic question mark around the App Store, but at the same time, it affirms the principles,” of the company, said Adam Kovacevich, a former Google lobbyist who now heads a tech policy group in part sponsored by Apple. .

Tim Sweeney, CEO of Epic, said on Twitter that he was not happy with the move because it did not go far enough in allowing businesses to transact in the app with their own payment systems. , rather than having to direct customers to external websites. He said Fortnite will not return to the App Store until such rules are in place.

“Today’s decision is not a victory for developers or for consumers,” he said. “We will continue to fight.”

Rubin said Apple would feel relieved to avoid being labeled a monopoly, but the judge’s verdict likely wouldn’t help strengthen its position in other investigations, as antitrust lawsuits can vary. He said Apple might also consider lowering its commission now that it will be easier for developers to send customers elsewhere to make purchases.

Epic has sued Google for the same issues with app commissions on its Android operating system, and that case is expected to go to trial this year. Last month, 36 states and the District of Columbia also sued Google for forcing companies to use its payment system in exchange for access to its app store. Google’s public response said, in effect, that states should focus on Apple instead.

Other challenges await the Apple App Store as well. Gonzalez Rogers is set to hear another lawsuit from consumers seeking class action status and claiming the App Store commission is illegal.

The App Store generates about $ 20 billion a year for Apple, according to Sensor Tower, an app data company. Apple effectively forced companies to use its payment systems in exchange for access to the store, which is the only way to get an app on iPhone. This arrangement allowed Apple to charge a commission on many transactions.

Last month, South Korea passed a law that requires app stores to allow customers to pay through multiple payment systems. Apple has also settled another lawsuit regarding its commission with a group of smaller developers. In that settlement, Apple paid $ 100 million and agreed to allow developers to tell customers by email other ways to pay for their services, outside of Apple’s payment systems.

And last week, following an investigation by the Japan Fair Trade Commission, Apple said it would allow a subset of apps called playback apps, like Netflix and Spotify, to include a link in their applications directing users to external payment methods.

But Friday’s order goes much further, as those reading apps represent very little of Apple’s App Store revenue, analysts said. The order applies to all apps, and Gonzalez Rodgers said gaming apps made up 70% of iPhone app sales.

Apple instituted its 30% commission on many app sales shortly after the introduction of its app store in 2008. In recent years, as smartphones have become essential to modern life and commerce, app makers have started to balk at Apple’s cut. An executive from Match Group, the maker of dating apps like Tinder, told Congress this year that app store fees were Match’s biggest expense and would soon exceed $ 500 million a year, or a fifth of total sales.

In response to the complaints, Apple halved its commission on developers who brought in $ 1 million or less from their apps the previous year, charging them 15%. This move affected about 98% of developers who pay the commission, but it hardly affected Apple’s results; these developers represent less than 5% of App Store revenue, according to Sensor Tower estimates.

A year ago, Epic started offering discounts to Fortnite players if they used Epic’s payment system instead of Apple and Google’s. The tech giants quickly pulled Fortnite from their app stores. Epic responded by pursuing the two. Apple’s efforts to dismiss the lawsuit have failed. At the federal trial in Oakland, Calif., In May, Tim Cook spoke for the first time as CEO of Apple.

One of the main goals of the lawyers during the trial was to define the market in which they were arguing. Epic’s lawyers said the market was for iPhone apps, over which Apple has a monopoly. Apple retorted that people play games and use digital services on a wide variety of devices, from smartphones to game consoles to laptops, and that Apple controls a small portion of that large market.

Gonzalez Rogers said she is not siding with either company and that the market in question is digital mobile game transactions. In this market, she said, Apple does not have a monopoly.

“Although the court finds that Apple enjoys a sizable market share of over 55% and extraordinarily high profit margins, these factors alone do not show antitrust behavior,” she said. “Success is not illegal.”

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