- Apple was sued last week by app developers who believe there should be more competition in the App Store.
- The company has a long history of controlling access and setting prices in new marketplaces it creates.
- Apple has previously been sued — successfully — for fixing prices in the e-book business.
- Apple’s top executives were “extremely angry” about that decision, and will “never get over the case,” their lawyers said.
- Apple also successfully fought a suit that claimed it prevented competition for songs on iTunes.
It was not a surprise when Apple was sued last week by app developers who believe there should be more competition in the App Store.
That’s because Apple has been accused of price-fixing or monopolistic abuse before, once regarding their control of e-book prices in the iBookStore developed for iPad, and once around the way Apple prevented rivals from selling music that can be played on the iPod and in iTunes.
In the most recent case, the developers of the “Pure Sweat Basketball” workout app and “Lil’ Baby Names,” a newborn-naming app, allege in a lawsuit filed in a California federal court that Apple’s total control of the App Store, and the pricing regime inside it, stifles competition. Apple also faces a consumer class-action lawsuit in the US on the same issue.
It is not possible to have your app compete on price in the App Store by charging 50 cents
Their argument looks like this: Apple does not allow anyone else to operate the App Store’s gateway function. Neither Amazon nor Facebook, for instance, are allowed to distribute their developers’ apps in the App Store. Everything has to go through Apple. Apple thus faces no price competition on the 30% cut it takes from all in-app revenue. Competing app distributors can’t offer developers a more generous 20% cut to Apple’s developer-customers. And Apple also charges a flat $99 fee for developers, which is non-negotiable and — you guessed it — is not exposed to any kind of marketplace competition.
Apple also controls the 99 cent pricing structure for apps and in-app purchases. It is not possible to have your app compete on price by charging 50 cents. (Developers must charge at least 99 cents, and can only charge prices higher than that if the price ends in $.99, the lawsuit claims.)
In its defence, Apple points out the obvious: There is competition. Developers can work with Google if they prefer. Apple built, owns, and maintains the App Store, and thus has a right to charge a fee for developers who want to use it. Neither of these developers would even exist had Apple not built the iOS App Store and launched it, in 2008.
“Developers set the price they want to charge for their app and Apple has no role in that. The vast majority of apps on the App Store are free and Apple gets nothing from them. The only instance where Apple shares in revenue is if the developer chooses to sell digital services through the App Store. Developers have a number of platforms to choose from to deliver their software – from other app stores, to Smart TVs to gaming consoles,” Apple says.
But the lawsuit does raise some basic questions about what a monopoly looks like: Why doesn’t Apple allow non-Apple competition from app distributors inside the App Store? And why aren’t apps allowed to compete on prices?
Apple’s conspiracy to control book prices
This has happened before.
In 2016, a court ruled that Apple should pay $450 million in damages because Apple fixed the prices of e-books sold in its iBookStore.
In that case, a federal judge concluded that Apple organised a conspiracy with book publishers that resulted in the typical price of an e-book on the iPad rising from $9.99 to $14.99, almost overnight. And when I say “conspiracy,” it was literally a conspiracy: Apple media SVP Eddy Cue took a series of secret meetings with New York book publishers in which they all agreed to raise e-book prices rather than let the market sort it out. Some publishers deleted their internal emails in the hopes of keeping the conspiracy from the public. And Steve Jobs all-but admitted to a reporter that he knew that all e-book prices “will be the same” after the iPad launched.
Crucially, Apple leveraged its 30% cut to get the book publishers to agree to go along.
Why did Apple prevent music labels from setting their own prices?
The new App Store lawsuit has a lot of parallels with a long-running class action lawsuit, which Apple won, called “The Apple iPod iTunes Anti-Trust Litigation.”
The suit originated in the prehistoric era before the iPhone was invented. When Apple founder Steve Jobs launched the iPod, he persuaded all the record companies selling music for it to agree to a set range of prices — 79 cents, 99 cents and $1.29, with equivalents in local currencies. The prices were, literally, fixed. He also made sure that music could only be bought and played on the iPod if it had come from Apple’s iTunes store (or from a commercial CD). Generally, users were prevented from playing their own music collections — which at the time often came from pirate copies obtained via Napster — on their iPods.
But Real Networks — a digital media company that was a big deal in the late 1990s and early 2000s — found a way to sell songs from its Real Music shop that could be played on iPod. Apple immediately changed its software to prevent Real songs from being played on an iPod. The litigation went on for years, and Apple finally won when it discovered that the two lead plaintiffs had not actually bought iPods during the time period in question.
Although Real’s litigation strategy was based on a catastrophic error, the heart of the case raised a legitimate question: Why was it that no one else could sell songs that could be played on Apple products? And why had Apple prevented music labels from setting their own prices?
Apple has a clear strategy for markets on its devices
In all three cases, Apple did broadly the same thing:
- Create a new marketplace over which Apple was the sole gatekeeper.
- Prevent outside companies from competing in that marketplace.
- Set the prices of the products inside the marketplace.
Previously, these cases have tended not to succeed. Courts took a common-sense line, which is to say that they ruled Apple had created a product with a simple pricing structure, and the market could take it or leave it. It is hard to demonstrate that consumers who choose to buy an app for 99 cents are being “harmed” in some way.
But now that the European Union has carved into Google’s abuse of its monopoly on search, advertising, and Android, the atmosphere has changed. The US government is looking afresh at whether tech companies are abusing their dominance by reaching into markets they have no business in — music, books, app development — and controlling or stifling competition there.
Apple will ‘never get over the case’
This is not a mere technicality for CEO Tim Cook and his crew. It is the core of their business, and they take it personally. Apple executives were chided by the judge in the e-books case for being “less than forthcoming” in their testimony. Later, documents in the case said that Apple’s top executives remained “extremely angry” about the decision, and will “never get over the case.”
So expect Apple to fight the App Store case tooth and nail.
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