Same Old, Same Old in the App Economy: Predicting the Effects of Article 6c of the European Commission Proposal for a Digital Markets Act on the iOS App Ecosystem

Adrian Wolkersdorf

Master's thesis

Abstract:

In early 2019, the Swedish music streaming service Spotify launched a media campaign against American tech giant Apple. In line with the campaign’s slogan, “Time To Play Fair,” Spotify is raising a series of accusations against Apple that center around alleged tendencies to monopolize the music streaming market. At the same time, Spotify lodged a complaint with the European Commission (hereafter, the Commission) concerning Apple’s potentially anticompetitive behavior. Spotify argues that Apple uses the terms of conditions of the App Store to impede upon the Swedish music streaming giant’s competitive potential to the advantage of Apple’s own music streaming service, Apple Music, by charging a 30% fee on Spotify subscriptions purchased through the App Store and forbidding Spotify to promote subscriptions to their service through other channels. In August 2020, Epic Games filed a lawsuit against Apple for similar reasons. One of the world’s largest game developers, Epic Games offered a mobile version of their most popular game, Fortnite, for free download through the App Store. The game is financed through in-app purchases of digital items, such as cosmetic character modifications. After Epic Games introduced a payment method in their mobile version of Fortnite, which bypassed payment through the App Store and was instead processed directly through Epic Games, Apple removed the app from the store. As a result, Epic Games sued Apple in the United States, arguing that the amount of time users spend on Fortnite on iOS devices had dropped by more than 60%. In December of that year, Cydia (an alternative app store for software-modified iPhones and iPads) also filed a lawsuit against Apple, alleging that the tech giant abused their dominance over iOS app distribution by using anti-competitive tactics to freeze out alternative app stores from the company’s operating system. Apple’s terms and conditions do not allow third-party app stores to be downloaded from the App Store itself, citing security concerns. Cydia, to date, works only on devices that have been jailbroken — a form of software modification that is counteracted by operating system updates and requires some expertise to install. The amplification of lawsuits targeting Apple’s conduct in the app economy indicates an emerging pattern of resistance against the tech giant’s hold over this section of the industry. While the aforementioned investigations in the US and the EU have yet to be concluded, on December 15, 2020, the EU Commissioner for Competition, Margarethe Vestager, introduced the Digital Markets Act (DMA), which touches upon the exact issue at stake. The DMA’s proposal complements the EU’s digital antitrust regime with a set of ex-ante provisions for very large online platforms, so-called gatekeepers. Among other provisions, the DMA would require Apple to allow third-party apps and app stores to be sideloaded (downloading an app from the web or transferring it from the PC on the mobile phone without using an app store) onto the device (Article 6c DMA). Advocates of the proposal argue that app downloads that do not run through Apple’s servers, along with the availability of alternative app stores, would erode the dominant position of the App Store and thereby set prices and spur innovative competition from which the end user could benefit. Developers could then evade the 30% commission fee that Apple collects for providing a spot on the App Store and for handling inapp purchases. Additionally, consumers would have greater freedom to choose where, when, and how they purchase apps: more competition, choice, innovation, and quality. However, it remains unclear whether Apple users would actually adopt alternative means to download and whether new alternatives to the App Store would actually be utilized. A report by the Directorate General for Connected Networks, Content, and Technology (DG CNECT) and the EU’s Joint Research Centre (JRC) hav

Abstract:

e remarked that because of network effects around dominant app stores, the results of the DMA’s provisions could be limited (Cabral et al., 2021). Network effects refer to the added value a user of a platform receives when another user from the same or other side of a market joins. In app stores, consumers benefit from an increasing number of developers in the market because they provide a growing selection of apps and stimulate competition. Similarly, developers benefit from more users who could potentially buy their apps. In theory, these network effects lead to high barriers to entry for alternative app stores and diminish competitors’ ability to scale. Considering the economic literature on the characteristics unique to digital markets, such as network effects, lock-in, and economies of scale, an actual switch of consumers to alternative distribution channels is questionable. Evidence from behavioral economics casts further doubt on the hopes of the advocates of the DMA. For example, the status-quo bias refers to the emotional preference for the status quo. Empirically proven again and again, the theory implies for Apple that as long as it ships its iPhones and iPads with the App Store preinstalled, theirs will remain the standard app store. Building upon previously published literature, this thesis seeks to answer the question of whether Article 6c DMA can create a more competitive and fairer environment for app developers by encouraging European Apple users to employ distribution channels other than the App Store and thereby counter market forces such as network effects. Because users of the Android operating system can already make use of alternative app stores and payment options, Android’s own app store, the Play Store serves as a well-suited case study to predict whether Apple users will actually adopt alternatives to the App Store. Based on the literature review, I argue that even if Apple opens up its operating system, the network effects and status-quo bias will prevent Apple users from switching. With a survey among Android users from the European Economic Area, I test whether network effects in the mobile operating systems are in fact strong enough to prevent mobile phone and tablet users from seeking alternative app distribution systems. The results and empirical knowledge generated are used to evaluate the theoretical assumptions. The theoretical framework provides the reader an overview of the distinct characteristics of digital markets and app stores. After establishing that the two dominant app stores, Google’s Play Store and Apple’s App Store, are two-sided markets with strong indirect network effects, special attention will be paid to the closely interlinked concepts of network effects, status-quo bias and consumer lock-in. The theoretical framework allows us to assume that because of strong network effects, mobile phone users stick to the dominant app store even if alternatives exist. After elaborating on potential barriers to store-switching or resorting to sideloading in the theoretical chapter of the thesis, the empirical chapter analyzes the actual switching behavior. Since Android users can already use alternative app stores, Google’s Play Store is treated as a case study on which to base expectations of how the dynamics in the Apple ecosystem may change after the DMA comes into force. At first sight, alternative app stores on Android OS seem to be underrepresented because most apps are exclusively distributed through the Play Store. However, no study in this field provides clear data the extent to which users of the Android operating system employ alternative means of download. With the help of a survey conducted among Android users, their download behavior will be analyzed; the survey asked 249 Android users whether they had installed apps through sideloading, a practice referring to the installation of apps downloaded from websites other than the Play Store or transferred from the PC onto the device. Respondents were prompted to explain why they had or had not practiced sideloading. A subsequent question probed Android users’ engagement with alternative app stores. While a number of alternatives to the Play Store exist, a gap in the research remains concerning the extent to which Android users actually apply these options. As such, survey respondents were asked to specify why or why not they have made use of alternative app stores. With its survey of the determinants of Android users’ acceptance of alternative app stores and other means of app download, this thesis provides a first assessment of the potential impact of the expected regulatory change of the DMA for Apple users. This assessment offers an important insight as to whether “business users who depend on gatekeepers to offer their services in the single market” will indeed “have a fairer business environment”, as the Commission (2020) states, or whether the proposal will benefit only a small number of app developers that already enjoy an entrenched position in the market.

Abstract:

In early 2019, the Swedish music streaming service Spotify launched a media campaign against American tech giant Apple. In line with the campaign’s slogan, “Time To Play Fair,” Spotify is raising a series of accusations against Apple that center around alleged tendencies to monopolize the music streaming market. At the same time, Spotify lodged a complaint with the European Commission (hereafter, the Commission) concerning Apple’s potentially anticompetitive behavior. Spotify argues that Apple uses the terms of conditions of the App Store to impede upon the Swedish music streaming giant’s competitive potential to the advantage of Apple’s own music streaming service, Apple Music, by charging a 30% fee on Spotify subscriptions purchased through the App Store and forbidding Spotify to promote subscriptions to their service through other channels. In August 2020, Epic Games filed a lawsuit against Apple for similar reasons. One of the world’s largest game developers, Epic Games offered a mobile version of their most popular game, Fortnite, for free download through the App Store. The game is financed through in-app purchases of digital items, such as cosmetic character modifications. After Epic Games introduced a payment method in their mobile version of Fortnite, which bypassed payment through the App Store and was instead processed directly through Epic Games, Apple removed the app from the store. As a result, Epic Games sued Apple in the United States, arguing that the amount of time users spend on Fortnite on iOS devices had dropped by more than 60%. In December of that year, Cydia (an alternative app store for software-modified iPhones and iPads) also filed a lawsuit against Apple, alleging that the tech giant abused their dominance over iOS app distribution by using anti-competitive tactics to freeze out alternative app stores from the company’s operating system. Apple’s terms and conditions do not allow third-party app stores to be downloaded from the App Store itself, citing security concerns. Cydia, to date, works only on devices that have been jailbroken — a form of software modification that is counteracted by operating system updates and requires some expertise to install. The amplification of lawsuits targeting Apple’s conduct in the app economy indicates an emerging pattern of resistance against the tech giant’s hold over this section of the industry. While the aforementioned investigations in the US and the EU have yet to be concluded, on December 15, 2020, the EU Commissioner for Competition, Margarethe Vestager, introduced the Digital Markets Act (DMA), which touches upon the exact issue at stake. The DMA’s proposal complements the EU’s digital antitrust regime with a set of ex-ante provisions for very large online platforms, so-called gatekeepers. Among other provisions, the DMA would require Apple to allow third-party apps and app stores to be sideloaded (downloading an app from the web or transferring it from the PC on the mobile phone without using an app store) onto the device (Article 6c DMA). Advocates of the proposal argue that app downloads that do not run through Apple’s servers, along with the availability of alternative app stores, would erode the dominant position of the App Store and thereby set prices and spur innovative competition from which the end user could benefit. Developers could then evade the 30% commission fee that Apple collects for providing a spot on the App Store and for handling inapp purchases. Additionally, consumers would have greater freedom to choose where, when, and how they purchase apps: more competition, choice, innovation, and quality. However, it remains unclear whether Apple users would actually adopt alternative means to download and whether new alternatives to the App Store would actually be utilized. A report by the Directorate General for Connected Networks, Content, and Technology (DG CNECT) and the EU’s Joint Research Centre (JRC) hav

Abstract:

e remarked that because of network effects around dominant app stores, the results of the DMA’s provisions could be limited (Cabral et al., 2021). Network effects refer to the added value a user of a platform receives when another user from the same or other side of a market joins. In app stores, consumers benefit from an increasing number of developers in the market because they provide a growing selection of apps and stimulate competition. Similarly, developers benefit from more users who could potentially buy their apps. In theory, these network effects lead to high barriers to entry for alternative app stores and diminish competitors’ ability to scale. Considering the economic literature on the characteristics unique to digital markets, such as network effects, lock-in, and economies of scale, an actual switch of consumers to alternative distribution channels is questionable. Evidence from behavioral economics casts further doubt on the hopes of the advocates of the DMA. For example, the status-quo bias refers to the emotional preference for the status quo. Empirically proven again and again, the theory implies for Apple that as long as it ships its iPhones and iPads with the App Store preinstalled, theirs will remain the standard app store. Building upon previously published literature, this thesis seeks to answer the question of whether Article 6c DMA can create a more competitive and fairer environment for app developers by encouraging European Apple users to employ distribution channels other than the App Store and thereby counter market forces such as network effects. Because users of the Android operating system can already make use of alternative app stores and payment options, Android’s own app store, the Play Store serves as a well-suited case study to predict whether Apple users will actually adopt alternatives to the App Store. Based on the literature review, I argue that even if Apple opens up its operating system, the network effects and status-quo bias will prevent Apple users from switching. With a survey among Android users from the European Economic Area, I test whether network effects in the mobile operating systems are in fact strong enough to prevent mobile phone and tablet users from seeking alternative app distribution systems. The results and empirical knowledge generated are used to evaluate the theoretical assumptions. The theoretical framework provides the reader an overview of the distinct characteristics of digital markets and app stores. After establishing that the two dominant app stores, Google’s Play Store and Apple’s App Store, are two-sided markets with strong indirect network effects, special attention will be paid to the closely interlinked concepts of network effects, status-quo bias and consumer lock-in. The theoretical framework allows us to assume that because of strong network effects, mobile phone users stick to the dominant app store even if alternatives exist. After elaborating on potential barriers to store-switching or resorting to sideloading in the theoretical chapter of the thesis, the empirical chapter analyzes the actual switching behavior. Since Android users can already use alternative app stores, Google’s Play Store is treated as a case study on which to base expectations of how the dynamics in the Apple ecosystem may change after the DMA comes into force. At first sight, alternative app stores on Android OS seem to be underrepresented because most apps are exclusively distributed through the Play Store. However, no study in this field provides clear data the extent to which users of the Android operating system employ alternative means of download. With the help of a survey conducted among Android users, their download behavior will be analyzed; the survey asked 249 Android users whether they had installed apps through sideloading, a practice referring to the installation of apps downloaded from websites other than the Play Store or transferred from the PC onto the device. Respondents were prompted to explain why they had or had not practiced sideloading. A subsequent question probed Android users’ engagement with alternative app stores. While a number of alternatives to the Play Store exist, a gap in the research remains concerning the extent to which Android users actually apply these options. As such, survey respondents were asked to specify why or why not they have made use of alternative app stores. With its survey of the determinants of Android users’ acceptance of alternative app stores and other means of app download, this thesis provides a first assessment of the potential impact of the expected regulatory change of the DMA for Apple users. This assessment offers an important insight as to whether “business users who depend on gatekeepers to offer their services in the single market” will indeed “have a fairer business environment”, as the Commission (2020) states, or whether the proposal will benefit only a small number of app developers that already enjoy an entrenched position in the market.

Keywords

Digital Markets Act, Digital Competition, Gatekeepers, Apple, Android

Language used: English

Date on which the thesis was submitted / produced: 20. 8. 2021

Thesis defence

• Date of defence: 20. 8. 2021
• Supervisor: Drs. Linda Keijzer
• Reader: Mgr. Vladan Hodulák, Ph.D.

Masaryk University

Faculty of Social Studies

Master programme / field:
International Territorial Studies / European Governance