Across four continents, Apple's control of payments is under attack

September 27, 2021 11:05 AM

Apple has long wielded its global market power as a blunt instrument, enabling it to dictate the terms of contracts with banks, app developers and anyone else that wants entry into its ecosystem. It may finally be meeting its match.

A federal judge recently ruled Apple must allow developers to use third-party payment options for App Store purchases. Apple and Epic Games were engaged in a dispute over Apple's payment fees.

The App Store is a lucrative business for Apple, with App Store revenue totaling about $64 billion in 2020 with a profit margin above 75%. Apple receives a fee of up to 30% for any digital services sold through its App Store or within apps, but not physical goods ordered from apps.

Developers bristled at the terms, but few fought back. One exception is Epic, maker of the popular game Fortnite, which defied Apple by putting third-party payment options in its game. Apple removed the game immediately, prompting a long court battle that ended with Epic owing Apple $6 million for payments over the past year, according to 9to5Mac.

"App Store revenue is not a small number, and it will take a lot to fill the hole if a chunk of that goes away," said Thad Peterson, strategic advisor for retail banking and payments for Aite-Novarica Group.

The Epic Games dispute is just one of several fights Apple has faced while attempting to expand its mobile wallet, payment app and App Store in multiple markets.

Apple, which has battled with Amazon to be the world's most valuable company, often runs afoul of regulators, politicians and rivals that contend the company's frequent use of walled garden policies for its technology and huge market share unfairly hinders competition. Here are some examples of these battles, and a look at how Apple is able to attract banks and merchants to its payment products despite the controversy.

An Epic legal dispute

Bloomberg

Like most of Apple's payment-related battles, the Epic Games fight is about Apple's role as a gateway for purchases. The technology company often

requires exclusivity

for parties that access Apple to sell products, making it harder for those sellers to transact or market in other venues.

The judge's decision in the Epic case requires Apple to provide more flexibility in how Epic Games collects payments, which potentially hinders Apple's ability to charge the fees elsewhere. Apple has argued the payment fee helps fund the App Store and contribute to security and privacy controls. And despite the seeming win for Epic,

Apple won't welcome Fortnite back to the App Store

anytime soon.

Apple won on some points. Its practices were not judged to be a "monopoly," a ruling

Epic Games

reportedly plans to appeal. The judge also ruled Epic must pay a 30% fee for $12 million in sales over Epic's alternative payment method, which the court found to be in breach of contract.

Apple could have faced greater regulation and a requirement to allow access to other app stores within its ecosystem if the judge ruled the App Store was a monopoly.

In an email, Kate Adams, Apple senior vice president and general counsel, said "underlying the App Store business is a framework, including app review, curation and protection of the security and privacy of our users. The Court has ruled that this framework is lawful."

Political pressure in the U.S.

Bloomberg

Apple's payment fees are also under pressure from legislators. In the U.S., bills have been introduced in several states and Congress to curtail Apple's control over App Store payment processing.

Sens. Richard Blumenthal, D-Conn., and Marsha Blackburn, R-Tenn., have introduced the

Open Markets Act

, which would make it illegal for app stores to require use of internal payment systems as a condition for inclusion.

Similar bills have been introduced in states such as Arizona, Georgia and Minnesota. A failed bill in

North Dakota

would have mandated the inclusion of other apps within large app stores, a fate that could await Apple and Google if either company's app store were found to be a monopoly in the future.

The

Arizona bill

, which has stalled, would create a standard similar to the Durbin Amendment to the Dodd-Frank financial services regulation, which required the option of multiple debit networks at the point of sale. The Arizona bill would require alternative payment methods but would exclude smaller app stores from the requirement.

South Korea weighs in

Bloomberg

Legislation is moving ahead in other countries.

South Korea

recently passed a law that requires Apple and other large app stores like Google Play to allow developers to offer third-party payment options.

Apple and Google

deployed lobbyists

to campaign against the South Korea bill — in the U.S. The technology companies contend the South Korean government is violating U.S. trade policy by governing the actions of U.S. companies.

Apple and Google have already made some concessions amid the pending legislation in the U.S. and the new law in South Korea. Apple has reduced the fee to 15% for developers that earn less than $1 million, while Google cut its fees to 15% for the developer's first $1 million in sales. The concessions for smaller developers alone could reduce Apple's revenue by about $600 million, according to

Forbes

U.K. asks if Apple fees drive up prices

Bloomberg

U.K. antitrust regulators

opened an investigation into the App Store's terms of service this spring, with the U.K.'s Competition and Markets Authority saying it received complaints from developers that said certain App Store policies are restrictive to competition.

For example, the App Store stipulates iOS apps can be distributed only through Apple's marketplace. The 30% transaction fee and internal App Store payment processing requirement are also under pressure in the U.K.

Regulators are trying to determine if Apple's payment policies result in higher prices for consumers on the App Store by reducing competition or eliminating choice for shoppers.

EU asks if fees impair digital content

Bloomberg

The

European Commission

is also investigating the App Store, following complaints by Spotify and an e-book company that contends Apple's rule hinders choice for music streaming services and other content.

Like most of the other jurisdictions, the EU is investigating the impact of Apple's App Store payment requirement, as well as restrictions on developers who wish to inform consumers and other users of alternative sources to purchase the same content at what is usually a lower price, according to the EC.

As part of the EC's announcement, Margrethe Vestager, the EC's vice president in charge of competition policy, said: "Apple sets the rules for the distribution of apps to users of iPhones and iPads. It appears that Apple obtained a 'gatekeeper' role when it comes to the distribution of apps and content to users of Apple's popular devices."

Apple accommodates Netflix in Japan

Bloomberg

In addition to cutting its 30% fee to 15% for smaller developers, Apple recently began allowing media firms such as Netflix to offer access to external websites for payments. Apple made the concession in September as part of a settlement with regulators in

Japan

. The new policy covers mostly news sources and digital media such as magazines, newspaper, books, music and video.

Standard fees will still apply to games, according to

Bloomberg

, which reports gaming is the most lucrative category on the App Store.

Even if Apple is forced to make major cuts to its App Store fees through regulation or market forces, the App Store's easy user experience may still be attractive to developers.

“Game makers and music platforms will have to work hard to incent customers to venture outside their app or the App Store to make their purchases," said Heidi Liebenguth, a managing partner at Crone Consulting. "Apple’s seamless user experience for buying with a simple double click is just too convenient and easy. Add in fraud, privacy and hacking/breach concerns, and staying inside the walled garden continues to be pretty attractive.”

Bank blowback in Australia

Bloomberg

Apple's controversial payment policies aren't limited to the App Store. The underlying technology used for Apple Pay has also come under regulatory scrutiny. The EU has investigated whether Apple's limitation of the

iPhone's Near Field Communication

chip to Apple Pay could make it harder for third parties to offer mobile payments.

NFC chips allow the smartphone to communicate with point of sale terminals to execute contactless payments. Apple also briefly had a dispute with

TWINT

, a mobile payment app operated by Swiss banks, with each side claiming the other was unfairly denying access.

In Australia, a group of banks in 2017 attempted to bargain collectively to reduce

Apple's leverage

in negotiation terms for Apple Pay, access to the App Store, control over NFC technology and the banks' ability to offer their own contactless mobile payment systems.

Australian regulators

sided with Apple, saying collective bargaining would give the banks an unfair competitive advantage in areas beyond mobile technology.