Apple's Supreme Court defeat could signal significant changes in mobile app sales

The mobile appindustry could see profound changes in its financial model if Apple Inc. fails to recover from a stunning Supreme Court ruling that allowed an antitrust suit to proceed alleging tht the company had inflated prices through its control of the App Store — the only way to purchase iPhone apps in the existing market.

Justice Brett Kavanaugh joined the Court’s four liberal members in a narrow 5-4 ruling that will allow the case to return to U.S. District Court and determine on the merits whether Apple — which charges a 30% commission on sales through the App Store — exercises too much control over iOS app sales.

The original 2011 lawsuit alleged that Apple has prevented price competition in the iOS mobile app market by limiting all sales to its App Store. It argued that it was unfair that it had raised prices by  30% and placed other restrictions in terms of how developers could sell their products to consumers.

“Today more and more of consumer’s purchases go through platforms, where sellers and buyers meet virtually via technology, rather than brick-and-mortar stores,” Avery Gardiner, senior fellow for competition, data & power at the Center for Democracy and Technology, said in a statement release after the court ruling. “These technologies are evolving fast and today’s decision shows that antitrust law is — and should be — flexible enough to address allegations that companies misuse their market strength in novel ways.”

She said the court rejected an argument from Apple that the iPhone users who had filed the original suit had no standing to challenge Apple in court. Apple argued that only direct customers should be able to file such a legal challenge, however the court ruled that Apple’s control over the App Store made the sales relationship a direct line between Apple and the iPhone users who needed to buy apps.

Kenneth Vorrasi, co-chair of the antitrust team at Drinker Biddle, warned that Monday’s ruling did not address the merits of the claims made against Apple and should not be taken as a sign of the final outcome. He added, however, that one concern was whether the app market was structured in a way that allows Apple to exercise any real market dominance in a way that was recognized by the courts. 

“The theory in these cases is that Apple has some market power in its own App Store,” he told Mobile Payments Today. “The question is that really a market from an antitrust sense.”

Apple did not respond to repeated queries by Mobile Payments Today but has responded via published reports by denying that the App Store is a monopoly and saying that it will fight the allegations on the merits in court. 

Market share

According to a report by Consumer Intelligence Research Partners, Apple’s iOS accounted for about 36% of U.S. activations during the first quarter, while Google Android accounted for 64% of U.S. activations.

Among smartphone brands, Apple and Samsung controlled most of the market, with Apple iPhone accounting for 36% of the service activations during the quarter, while Samsung, which includes its flagship Galaxy devices among others, took 34% of the activations market, according to CIRP.

The research was based on a survey of 500 smartphone users who activated either a new or used device between January and March of this year.

Concerns about Apple’s dominance of iOS apps are not entirely new. Spotify filed a complaint with the European Commission in March, accusing Apple of using its control over the App Store to limit choice and stifle innovation in the streaming music space.

Spotify founder and CEO Daniel Eck alleged in a March blogpost that Apple requires Spotify and other digital services to pay a 30% tax on purchases made through Apple’s payment system, which includes Spotify customers upgrading from its free to its premium streaming service.

“If we pay this tax it would force us to artificially inflate the price of our premium membership well above the price of Apple Music,” he wrote. “And to keep our price competitive for customers, that isn’t something we can do.”

He said  if Spotify chose not to use Apple’s payment system, then Apple applies technical and experience-related limitations on it — limiting communication between Spotify and its customers, for example — which in some cases includes blocking emails. In addition, he alleged that Spotify and customers of other competitors have been locked out of Home Pod, Siri and Apple Watch.

A spokesperson for Spotify declined to comment on the App Store case or the dispute, however sources familiar with the European regulatory case indicated that a decision may be announced within weeks. A spokesperson for the EC was not immediately available for comment.

Quality control

Despite those concerns, some analysts see enormous value in what Apple brings to the table and argued that in order to maintain such a high-quality product, Apple needs to charge accordingly.

“To sustain a premium product, Apple needs to uphold a premium experience,” Karol Severin, senior analyst at Midia Research in London told Mobile Payments Today via email. “This is only possible if they have a walled garden and authority to enforce the ecosystem’s quality control as appropriate.”

He said the 30% premium — what Spotify calls a tax — is the industry standard and added that Google charges the same. He said that neither has the reputation of draconian or abusive price increases. Severin said without the participation of the major tech companies in app distribution, many developers would never get their apps to the masses.

“The landscape is healthy precisely because you can choose between companies with walled garden experiences as well as the open platform experience,” he said. “If Apple was forced to open up the gates by ruling against it in such lawsuits, they would effectively be making the choice on behalf of the consumer and creating a homogenous and non-diverse market.”

Cover photo: iStock