The News: The European Commission has filed antitrust charges against Apple following a conclusion by European investigators that Apple has “abused its dominant position in the music streaming market” to stifle competition. The investigation followed a 2019 complaint against Apple, filed by Swedish music streaming platform Spotify, which alleged anticompetitive practices by Apple via its app store. The Commission stated in its preliminary view that Apple violated competition laws by using its controlling position to “distort competition in the market for music streaming services by raising the costs of competing music streaming app developers.” Read more at CNBC.
Why the European Commission’s Antitrust Case Against Apple is a Lot More Dangerous to The Tech Sector Than It Seems
Analyst Take: The European Commission’s filing against Apple may signal a new wave of discriminatory and protectionist action targeting US tech companies by the European regulator and has been met with mixed reviews even from advocates of proactive antitrust oversight and enforcement. Part of the reason why this particular case is raising more eyebrows than previous EC antitrust actions is that the complaint that triggered it was made by Spotify, the reigning music-streaming platform, which has itself been under intense scrutiny for years for its own questionable business practices, particularly regarding its handling of royalty payments.
To date, over 18,000+ musical artists on the platform have complained about Spotify’s practices and royalty rates. (Spotify pro-rates royalties, meaning that the top 10% of streaming artists receive over 99% of streaming payouts, while the other 90% of artists are left to fight for the remaining <1%.) In March, musicians organized a global protest in over 30 countries to shine a light on Spotify’s treatment of musical artists, which many consider to be anticompetitive in and of itself.
These issues aren’t new. Filings against Spotify alleging copyright infringement and unpaid royalties go back at least to 2015. In 2018, Spotify settled a $1.6B copyright lawsuit filed by music publisher Wixen. Spotify also settled with other songwriters for $112M, and in 2019, Eminem publisher als sued Spotify for copyright infringement over its 250 song catalog. This pattern of behavior and the daisy chain of litigation it has triggered over the years have prompted critics of the platform to question why the EC is choosing to flex its antitrust muscle against Apple’s App Store rather than on Spotify.
This seeming double standard puts into question the Commission’s impartiality, objectivity, and motivation to pursue a case against a US tech company on behalf of a European (or more accurately a European-adjacent) tech company that has also, and perhaps more credibly, been accused of exhibiting anti-competitive behavior. The EC’s decision not to go after Spotify despite the mountain of complaints leveled against its business practices does raise some uncomfortable questions about selective enforcement of antitrust action, preferential treatment for Eurozone companies despite their equal ability to bring harm to European consumers, and the politicization of a commission whose legitimacy depends on public trust in its impartiality.
Why Antitrust Action is an Inappropriate Approach to What is Essentially a Contractual Dispute
Another reason why this case is raising eyebrows is that although contractual disputes should not be mistaken for antitrust cases, the EC appears to have done exactly that.
The risk is that when regulatory agencies like the EC in Europe or the FTC in the US mistake one for the other, and attempt to solve a problem best left to the courts with the wrong tools and the wrong remedy, the outcome may ironically end up causing irreparable harm to competition.
We saw a similar mistake being made by the FTC in 2018, when it seized upon a complaint by Apple to go after Qualcomm for alleged anti-competitive practices, only to end up losing, and being reminded by the 9th Circuit Court of appeals that antitrust cases and contractual disputes are not interchangeable.
Companies claiming anticompetitive behavior by a rival, a vendor, or an IP holder, in order to resolve a contractual dispute, is not a novel legal strategy, and the FTC and EC should know better than to get dragged into such schemes. Failing to do so sets the wrong precedent, rewards bad behavior, erodes the legitimacy of regulatory agencies, and ends up harming competition and consumers. Sadly, it keeps happening. And just as with the FTC’s doomed antitrust action against Qualcomm, this new dispute between Spotify and Apple looks like a contractual matter rather than an antitrust case, despite the EC’s claim to the contrary.
Here are several reasons why the EC’s antitrust charges against Apple don’t quite pass muster:
- For starters, Spotify entered willingly into an agreement with Apple, in which terms, including how royalties are paid, were clearly stated. Emphasis on willingly. No one forced Spotify to enter into this agreement with Apple. It chose to, and could have just as easily decided not to accept Apple’s terms.
- Second, Apple isn’t the only game in town. Google’s rival Play Store, propped up by the Android mobile platform’s 74.44% market share worldwide, has a significantly larger install footprint than Apple iOS platform. In other words, I don’t see how the EC can successfully argue that Apple is somehow abusing its dominant market position to stifle competition when it does not hold a dominant market position to begin with.
(Caveat: Yes, spend on the App Store is considerably higher in the App Store than in Google Play, but that data point is not particularly relevant to Spotify’s case, as spend on other apps has no bearing on Spotify’s claims. We will circle back to this point in a moment.)
- The EC’s stated view that Apple is using its app store to “distort competition in the market for music streaming services by raising the costs of competing music streaming app developers” is also painfully incorrect.
For one, Apple’s royalty model is comparable to Amazon’s and Google’s, and fairly standard for the industry.
Second, as any reasonable app developer knows, having to pay a small fee to add their apps to various online stores, and pay a small percentage to those stores from every download, are established industry practices. The costs that the EC takes issue with should already be built into app developers’ calculations, just like any company selling goods through an intermediary.
Again, nothing stands out here as being anticompetitive. If the EC is so offended by Apple’s royalty model, it should perhaps begin by looking into Spotify’s own problematic royalty payment practices.
- Spotify is also free to let users, including iPhone users, download its app straight from its own website, and thereby bypass Apple’s toll. So again, nothing about Apple’s behavior stands out as being anticompetitive. This means that not only is Apple not exhibiting any monopolistic or anti-competitive behavior, but Spotify and its users are not being harmed in any way by Apple, since Spotify is free to sell its app anywhere it wants to, and at whatever price it wants.
- Spotify has consistently enjoyed a dominant position in the music streaming market, holding on to roughly 32%-35% of that market for the last five years. Apple’s share of that market, at last count, was down from 21% to 18% this year.
So again, if Spotify’s case against Apple is that its App Store model is anticompetitive, and favors Apple’s competing music streaming service over Spotify’s, why don’t the facts (data) bear that theory out? If Apple truly were engaged in a multi-year anticompetitive effort that harmed competition and gave its own service an unfair advantage, shouldn’t Apple Music be dominating that market?
Can Spotify argue that it has been harmed when it has clearly, instead, benefited from Apple’s App Store, and leveraged that agreement to achieve and maintain the dominant position in the music streaming market? The answer is no.
- Lastly, it is likely that the EC’s antitrust case will seek to show that Apple’s royalties are passed on to consumers, and therefore in some way harm consumers by “overcharging” them in some way, but again, data doesn’t support that argument: Despite Android’s nearly 74.4% mobile footprint against Apple iOS’ comparatively small 24.9% share of global OS installs, Apple’s App Store generated almost twice the revenue as Google’s Android Play Store in Q3 2020.
Given that apps cost relatively the same regardless of the app store, and Apple is managing to monetize its app store better than Google, it is difficult to argue that consumers, who choose en mass to spend more in Apple’s App Store than in non-Apple app stores, are showing signs of being harmed, let alone harmed by hypothetical Apple-specific high prices. If they were, we would see consumer spend trend away from the App Store and towards alternative, cheaper means of downloading the same apps. This is clearly not the case.
We note that a significant portion of Apple’s App Store revenue comes from games rather than from music streaming, but that isn’t relevant to the overall argument.
Unpacking the EC’s Argument
“Our preliminary finding,” the EC stated, “is that Apple is a gatekeeper to users of iPhones and iPads via the App Store. With Apple Music, Apple also competes with music streaming providers. By setting strict rules on the App store that disadvantage competing music streaming services, Apple deprives users of cheaper music streaming choices and distorts competition. This is done by charging high commission fees on each transaction in the App store for rivals and by forbidding them from informing their customers of alternative subscription options.”
Apple is, indeed, “a gatekeeper to users of iPhones and iPads via the App Store.” That’s fair. But we note that this language is designed to establish a link between this case and the EU’s Digital Markets Act (DMA), which defines a set of criteria for qualifying a large online platform as a “gatekeeper”. We will explore how this affected the case in a moment.
“With Apple Music, Apple also competes with music streaming providers.” Also fair.
“By setting strict rules on the App store that disadvantage competing music streaming services, Apple deprives users of cheaper music streaming choices and distorts competition.” Let’s unpack that one:
- Apple’s rules aren’t inherently “strict” in a way that differs from any other business agreement. Precise language isn’t “strict.” It is simply clear and specific. The characterization of a contract as being “strict” speaks to the bias of the EC on this point and doesn’t reflect the reality of binding business agreements.
- The EC is asserting that the language of Apple’s agreement with music streaming services puts them at a competitive disadvantage. There is no evidence that any streaming service in the App store is disadvantaged in any way. Case in point: Spotify, which competes against Apple Music on Apple’s own App Store, remains the clear market leader, with nearly 2x the install base as Apple Music.
- In absolutely no way does Apple deprive users of cheaper music streaming choices.
- In absolutely no way does Apple distort competition. In fact, Apple helps create competition by opening its app store to competitors to its own music streaming service.
“This is done by charging high commission fees on each transaction in the App store for rivals and by forbidding them from informing their customers of alternative subscription options.” Again, let’s unpack those statements:
- Commissions charged by Apple are fairly standard for the industry and can hardly be considered “high.” The EC is welcome to suggest more appropriate pricing if it wants to get into the business of fixing prices for industries it aims to regulate, but I don’t think that a unilateral takeover of that type would send the right message for an agency tasked with protecting competition. In other words, whether or not the commission fees charged by Apple, Amazon, and Google are “high,” or “too high,” is best left to the market, competitive forces, and ultimately consumers, rather than to the EC commissioner’s staff or a court.
- Apple also doesn’t forbid music streaming services from informing customers of alternative subscription options. It just limits their ability to do so in its own App Store. On this point, the EC may prevail, and if so, app stores could be required to start allowing app developers to let consumers know that they can download their apps from their own websites. This, in my view, is the only point that the EC has made that makes any legal sense in the EU.
The Commission’s case, while being dangerous to Apple and consequently to other US platform companies like Google, Amazon, and Facebook, is nonetheless deeply flawed in substance, and may encounter significant headwinds when it is tested in court.
Is Spotify Turning the Tables on Apple by Using the iPhone Maker’s Own Dubious “Antitrust” Strategy to Settle a Contract Dispute?
Is it possible that Spotify is manipulating the EC to move against Apple to resolve a contractual dispute in exactly the way that Apple attempted to manipulate the FTC to move against Qualcomm to resolve its contractual dispute? If so, the irony of Apple’s predicament wouldn’t be lost on anyone. And yet, it would appear so.
To what end, you ask? The simple answer is money. Specifically, removing cost from the model. Just as Apple didn’t want to have to pay Qualcomm’s licensing fees for the technologies it was using in iPhones, Spotify doesn’t appear to want to pay Apple’s App Store toll, and for good reason: Despite its dominant position in the music streaming world, Spotify continues to struggle to become profitable. The company clocked an EPS of -0.58 in 2018, -1.14 in 2019, and -3.77 in 2020, and last I checked, its Q1 2021 GAAP EPS was also negative. Is Spotify’s strategy, then, to try to turn its profitability problem around by convincing regulators to change the rules of the streaming game in its favor? Whether or not you agree with the ethics of such a strategy, it wouldn’t be the worst idea Spotify has ever had.
In a statement Apple said:
“Spotify has become the largest music subscription service in the world, and we’re proud for the role we played in that. Spotify does not pay Apple any commission on over 99% of their subscribers, and only pays a 15% commission on those remaining subscribers that they acquired through the App Store. At the core of this case is Spotify’s demand they should be able to advertise alternative deals on their iOS app, a practice that no store in the world allows. Once again, they want all the benefits of the App Store but don’t think they should have to pay anything for that. The Commission’s argument on Spotify’s behalf is the opposite of fair competition.”
Having followed the Apple v. Qualcomm and Apple/FTC v. Qualcomm lawsuits from start to finish, hearing Apple now complain that a company that owes them royalty payments for a service that Apple provides “wants all the benefits but don’t think they should have to pay anything for that,” is the very definition of irony. On the bright side, Apple arguing that “the Commission’s argument on Spotify’s behalf is the opposite of fair competition” suggests that perhaps Apple’s understanding of fair competition and of the difference between contract law and antitrust law have evolved somewhat since burying the hatchet with Qualcomm in 2019.
Beyond Apple and Spotify – The European Commission’s Crusade Against US Tech Has Jumped the Shark and Threatens to Undermine its Legitimacy
Another point to note is that both Margrethe Vestager, the EC’s Executive vice-president in charge of competition policy, and Spotify, appear to hold a similar grudge against US tech companies. Last September, Spotify’s CEO, Daniel Elk, even took the novel step of pledging $1B to European start-ups, not to merely support the European startup scene, which would be admirable, but to fight against Silicon Valley “selfishness.” Spotify may therefore have found a fellow traveler in Vestager, whose apparent anti-US tech crusade aligns well with Spotify’s anti Silicon Valley posture.
But things are getting dangerous now, thanks to the EU’s proposed new Digital Markets Act: Per the European Commission, the DMA “addresses the negative consequences arising from certain behaviors by platforms acting as digital “gatekeepers” to the single market.”
Note that the EC, in its complaint against Apple, defined Apple as a gatekeeper.
Per the DMA, gatekeepers “are platforms that have a significant impact on the internal market, serve as an important gateway for business users to reach their customers, and which enjoy, or will foreseeably enjoy, an entrenched and durable position.” Platforms that reach more than 10% of the EU’s population (or roughly 45 million users) are considered systemic in nature, and likely qualify as gatekeepers under these new rules. As such, Apple and its App Store would easily qualify as a gatekeeper.
The Commission’s view of gatekeeper platforms is that their market power “can grant them the power to act as private rule-makers and to function as bottlenecks between businesses and consumers.” It goes on to argue that “sometimes, such companies have control over entire platform ecosystems,” and that “when a gatekeeper engages in unfair business practices, it can prevent or slow down valuable and innovative services of its business users and competitors from reaching the consumer.”
Although this does not appear to be the case with the App Store, and specifically with regard to Spotify (as explained in an earlier section), the Commission’s case will almost certainly be predicated on the argument that Apple is preventing or slowing down an innovative service (Spotify). Per the Commission’s own language again: “Examples of these practices include the unfair use of data from businesses operating on these platforms, or situations where users are locked in to a particular service and have limited options for switching to another one.” Spotify’s situation is not reflected in these examples.
How the European Commission’s Proposed Digital Markets Act Will Unravel Fair Competition in the EU
Per the Commission, the Digital Markets Act “builds on the horizontal Platform to Business Regulation, on the findings of the EU Observatory on the Online Platform Economy, and on the Commission’s extensive experience in dealing with online markets through competition law enforcement. In particular, it sets out harmonized rules defining and prohibiting those unfair practices by gatekeepers and providing an enforcement mechanism based on market investigations.”
Unsurprisingly, the DMA is meant to “apply only to major providers of the core platform services most prone to unfair practices, such as search engines, social networks or online intermediation services, which meet the objective legislative criteria to be designated as gatekeepers.” In this statement, the Commission manages to simultaneously articulate an explicit bias against successful platforms, which raises questions about the objectivity of the DMA’s rules, let alone their equitable enforcement and conveniently forgets that Spotify also qualifies as a gatekeeper under its own criteria.
Case in point: via the DMA, the Commission aims to grant itself “powers to designate companies as gatekeepers following market investigation.” In other words, the Commission is allowed to unilaterally pick and choose gatekeepers as it sees fit. This doesn’t create a particularly credible oversight structure or objective criteria to guide this determination, let alone to prevent the Commission from unfairly targeting non-EU platforms for prosecution.
The Commission also aims to grant itself the power to “carry out targeted market investigations to assess whether new gatekeeper practices and services need to be added to these rules, in order to ensure that the new gatekeeper rules keep up with the fast pace of digital markets.” Again, the Commission here uses the DMA to unilaterally grant itself powers that far exceed the bounds of its intended competition enforcement authority.
The problem here, and what constitutes a threat for any and all successful US technology platforms, is that, through the DMA, the European Commission is seeking to grant itself absolute authority over both the designation of and prosecution of gatekeepers, meaning that, should the proposal be adopted, the Commission will be able to unilaterally target US companies like Google, Apple, and others, in order to undermine them in the EU, and, ironically given the Commission’s stated “fair competition enforcement” mission, skew the market in favor of European-based platforms. This is obviously not a healthy direction for the EU to take, as consumers will find themselves caught in the crossfire of the EC’s unnecessary and increasingly illegitimate crusade against some of the most popular technology platforms in the world.
The DMA is still in its proposal stage and will have to be approved by the European Parliament. Should it be approved, it would not go into effect until 2023, but the EC is clearly setting up its complaint against Apple as its first major test case to showcase what it sees as the benefits that the DMA will bring to competition enforcement in the EU. Hypothetically, should Apple be found to be in non-compliance of the DMA, it could face fines of up to 10% of its total worldwide revenue, periodic penalty payments of up to 5% of the average daily turnover, and “if necessary and as a last resort option,” non-financial remedies like a hypothetical breakup of Apple from its Apple Store could be sought. This could set the stage for a wave of regulatory actions by the Commission to “break up Big Tech.”
In other words, the European Commission’s case against Apple is a lot more important than it seems. On the one hand, it could set the stage for an unnecessary groundswell of tension between the EU and the US, not unlike current economic tensions between US and China, at a time when Europe and the United States should be working to harmonize their economies and improve economic cooperation. On the other, it could rattle confidence in U.S. technology innovators among investors who might look to de-risk their stakes in major US platform companies like Apple, Google and Amazon until the storm has passed.
In my view, the European Commission’s crusade against US tech as it exists today ultimately harms competition, stands in opposition to fair market competition, and risks stifling rather than accelerating innovation. Furthermore, it does nothing to increase choice for consumers, let alone help EU-based competitors to US platforms gain a stronger position against their US-based counterparts. Its attempt to engineer an enforcement power grab through the Digital Markets Act will only exacerbate these problems and could end up causing unnecessary economic harm to both the US and the EU tech sectors.
At least for now, the DMA remains a proposal. Despite the likelihood that the Commission will inject DMA-based language and theories into its arguments to the EU General Court, the Commission will have to prove Apple wrongdoing based on European antitrust standards, not on DMA regulations. Objectively, its case is weak, and I don’t believe that it will ultimately prevail, but the case itself is as dangerous to competition and innovation, especially with the prospect of the DMA potentially being approved and implemented in 2023.
Should the Commission’s case against Apple succeed, it would establish a precedent with which the Commission could then go after Google and Amazon, among others. Should it fail however, the DMA would give the Commission a second chance to target Apple once again, along with Google, Amazon, Facebook, and any US tech platform it designates as a “gatekeeper.”
For now, the case against Apple will likely head to the EU General Court, then likely make its way to the European Court of Justice.
Futurum Research provides industry research and analysis. These columns are for educational purposes only and should not be considered in any way investment advice.