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Spotify’s allegations – genuine anti-competitive concerns or a devious bite of the Apple?

Spotify’s allegations – genuine anti-competitive concerns or a devious bite of the Apple?

After having had enough of Apple’s abusive conduct through their dominant position on the iOS operating system, Spotify has filed a complaint with the European Commission.

In March 2019, digital music streaming service Spotify filed an antitrust complaint against Apple with the European Commission. While the exact facts and data supporting the complaint remain inaccessible to the public, the broad outline of the dispute was communicated initially by Spotify, after which Apple released its own statement. According to Spotify, Apple is abusing its dominant position as the owner and moderator of the iOS App Store, by providing its own streaming service, Apple Music, unwarranted advantages. According to Spotify, ‘Apple requires that certain apps pay a 30% fee for the use of their in-app purchase system’ (which is the only available payment system for applications such as Spotify). It should be noted that the fee is 30% only for the first 12 months, after which it is 15%. Furthermore, according to Apple’s terms and conditions, if Spotify chooses not to use Apple’s in-app purchase system (as it currently does), Spotify is not allowed to display any special deals or promotions within the application. For the sake of clarity, the in-app purchase system is pivotal for Spotify as it allows iOS users to upgrade to Spotify Premium with ease using only the application.

As it stands, Spotify has two options. First, it can adopt Apple’s in-app purchase system, allowing Spotify to offer in-app upgrades to Spotify Premium and display any promotions it wishes. However, Spotify must surrender 30% of each subscription sold on iOS to Apple. Second, Spotify may choose not to adopt Apple’s in-app purchase system, meaning that its customers can only upgrade to Spotify Premium by logging in to Spotify’s website, as a consequence of which Spotify may not display any special promotions within the iOS application. As such, Spotify’s claim has to be based upon Article 102 TFEU, which prohibits dominant undertakings from abusing their market power. However, it must be noted that Article 102 TFEU aims to protect effective competition in the internal market, not any individual competitor per se as was confirmed by the Court of Justice in Post Danmark.

While the European Commission is in principle under no obligation to act upon Spotify’s complaint, it is likely to do so as the matter has attracted heightened publicity. Apple’s behaviour is the subject of a pending US Supreme Court case, investigations in Russia and most recently in the Netherlands. According to data published by Spotify, it has more than 90 million monthly subscribers, a substantial portion of which undoubtedly use iOS. Due to the sheer volume of users, the consequences of a breach of the European Union competition rules may prove to have significant consequences for mobile app stores, should the European Commission find Apple’s behaviour anti-competitive. As avid users of both the iOS operating system and Spotify, the authors seek to provide an alternative line of reasoning to suggest that Apple may be breaching EU competition rules.

Tying two distinct products

Although not in Spotify’s public complaint, the Commission may consider whether Apple can justify tying in-app digital purchases to their own in-app purchasing system. Apple differentiates between apps which offer purely digital goods and services and those which do not, when it comes to the choice of an in-app purchasing system. Purely digital services, such as Spotify, are obliged to use Apple’s system and thus give up 30% of revenue. On the other hand, companies like Uber and Deliveroo benefit from being able to offer a variety of payment systems in their apps, free of charge. This means that potential competitors such as PayPal and WePay, are not able to compete on the market for in-app transactions for purely digital goods and services. If such an infringement were to be found, Spotify and competitors alike would be able to choose their own payment system within their app, leading to more choice and lower prices for developers.

To find a tying infringement of Article 102 TFEU, four requirements have to be met. First, the undertaking must have a dominant position in one of the markets (the tying market). The authors follow the European Commission’s market definition in the Google Android case and suggest that Apple is dominant in the upstream market of iOS app stores and is abusing that dominant position in the downstream market of audio streaming platforms. A differentiating factor from other operating software’s app stores is that Apple’s app store has a monopoly on iOS platforms, further strengthening its dominance. Second, the two tied products must also be distinct, as the Court found in Hilti and Microsoft (Windows Media Player). This can be evidenced in numerous ways, including where there is a specialised market for the tied product without the tying product. The authors suggest that there is indeed a market for e-payments, which should be regarded as completely unrelated to the market for app stores. This is evidence to indicate that Apple is tying two standalone products. Third, it must be shown that the customer was coerced into ‘purchasing’ both the tying and tied products. In this case, the app developer is not purchasing Apple’s in-app payment system, but is nonetheless obliged to integrate it, if it wishes to distribute its application on the App Store. The fact that companies such as Spotify have no choice but to use Apple’s in-app payment system rather than a competitor suggests that the coercion criterion is fulfilled. However, it could be argued that the coercion is not genuine, given that Spotify is able to avoid Apple’s payment system by only selling subscriptions though its own website. This, however, can result in lack of customer choice for those who would prefer to purchase their subscriptions in-app or for those who for any reason are not capable of purchasing via a website.

Finally, for tying to be anti-competitive, it must foreclose access to the market. The obligation to use Apple’s in-app payment system for iOS apps has obvious foreclosing effects, given that competitors have no way of entering the market. By having a monopoly on app distribution, which is tied with Apple’s in-app payment system, there is no competition in the market for in-app payment systems for purely digital goods. The exclusive payment system allows Apple to impose a 30% fee for their services. If competitors were to enter the market for in-app payment systems, effective competition would mean that payment fees would be significantly lower and reflect the true cost of the service provided.

Should the European Commission find the answers to the four preceding questions in the affirmative, the burden would be upon Apple to demonstrate that such a tie is objectively justified or creates efficiencies outweighing the anti-competitive effects. Apple could follow the reasoning of Microsoft and as a justification to the (possible) tie argue that its in-app payment system is integrated for reasons of improved functionality and in this case, safety. This line of argumentation would, however, be unlikely to succeed as other payment service providers, such as PayPal, exist and should be regarded at least as safe and functional. A stronger argument may be the prevention of ‘free riding’. It is not unreasonable from a business perspective that Apple can charge a certain fee for in-app transactions, given the operating costs involved and the platform it provides for businesses to reach customers. Under their current system, Apple monetises its store by taking a fee from paid apps and from in-app transactions on purely digital goods and services. Accordingly, apps such as Uber and Deliveroo utilise the platform free of charge. While tying may be a justification to avoid ‘free riding’, the lack of clear reasons as to why certain businesses operate freely, weakens the defence. On the basis of the high threshold for objective justifications, it is more likely that the European Commission would find the underlying motivation for such a tie to be the protection of commercial interests.

In accordance with the aforementioned, it appears that Apple’s behaviour ought to be regarded as a violation of Article 102 TFEU. To further facilitate the argument of effective competition and considering in-app payment systems as a distinct market, the authors provide evidence by way of companies such as Uber, Deliveroo and Lyft which utilise various in-app payment systems, including PayPal. In its statement Apple indirectly confirms this, taking great pride in the fact that applications such as Uber pays 0% to Apple. However, it must be borne in mind that Apple does not compete within the ridesharing or food delivery markets, while it is a direct horizontal competitor of Spotify in the music streaming market. Furthermore, Apple has recently released Apple TV+, making it a direct horizontal competitor of Netflix and HBO – both companies which are subject to the 30% fee on all subscription fees gained through Apple iOS mobile devices. Should companies which directly compete in the same markets as Apple be restricted from the possibility of choosing among various payment service providers? Arguably, such a practice would prevent the creation of competition and greater overall efficiencies, including more affordable prices and enhanced products through competition based purely on merit.

While to a certain extent the authors understand that purely digital goods and digital goods involving any physical aspect (such as a car and a driver in the case of Uber or delivery service in the case of Deliveroo) may be treated differently commercially by Apple, any one type of service provider should not be given unwarranted advantages, especially for the wrong reasons. Currently, Apple’s policy indirectly exposes its competitors to significantly less favourable trading conditions, for which the most probable rationale is the protection of its own commercial interests. Should the European Commission find an abuse of tying under Article 102 TFEU, app stores would be obliged to seek alternative solutions for monetising their platforms in a less discriminatory and more transparent way.

Image by Hazymu: www.hazymu.com

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