Policymakers continue to struggle with the new business models underlying the digital economy. A good example is the debate surrounding the purchase of apps through online platforms like Apple’s App Store.
First launched in April 2008 with 500 apps, today’s App Store has more than 2 million apps and 30 billion downloads. The App Store pioneered a new way to sell software, replacing earlier business models such as brick-and-mortar sales and direct downloads from the web.
The rise of the App Store and other online sales platforms like Google’s Play Store facilitated the transition from cell phone to smartphone, transforming the consumer’s user experience and the functionality of mobile technology.
The App Store has served consumers well and expanded the reach of many small app developers to a global market. It was created to ensure that Apple’s customers had access to products that added the greatest value to owning an iPhone. Apple reviews all apps, provides a secure payment mechanism, and provides security to minimize the potential dangers from malware and other cybersecurity threats to benefit both consumers and developers. And, of course, there’s convenience.
Consumers buy with confidence at the App Store, so for any aspiring developer, the App Store provides a host of benefits that the developer would otherwise be required to provide in order to compete in today’s market.
In exchange for hosting this online platform, Apple charges developers a fee of 30 percent of sales revenue (which falls to 15 percent in the case of annual follow on sales). This has drawn the ire of some who claim Apple is abusing monopoly power to extract excessive fees from app developers. Spotify, for example, has filed a complaint with the European Commission alleging that App Store policies stifle innovation and unfairly benefit Apple. And in the United States, a recent Supreme Court ruling opens the door for consumers to sue Apple for antitrust violations.
More specifically, the court decided that even though Apple does not set app prices, iPhone users can sue Apple because the company’s commission on app sales is allegedly too high, which can potentially be passed on to consumers through higher prices.
This is a sharp departure from earlier precedent, which made clear that such indirect price effects did not provide grounds for legal action. The court’s reversal of this principle with respect to the App Store is problematic because most apps are created by independent developers who set their own prices, and, more important, decide which platforms they will use to sell their apps. With millions of apps available and competing platforms vying for market share, market competition, more than anything else establishes prices.
Apple is in direct competition with Android smartphones, Amazon devices and other competitors, which creates incentives to innovate while keeping a check on pricing. App developers can work with Apple’s App Store or the Android equivalent, Google Play or any other platform.
Alternatively, app developers can also drive customers to their own websites for purchases, something that Netflix and Spotify have done in order to avoid Apple’s 30 percent cut. Yet, typically, app developers opt to use app stores, suggesting they do provide a benefit in terms of reaching consumers and expanding sales that is greater than the fees paid to platform owners.
If this is the case, the debate over the App Store’s 30 percent commission is of little economic significance. No economic value or surplus is lost — this is simply a dispute over how the existing surplus should be allocated between parties. Heavy hitters like Spotify see regulation as a means to tip the scales in their favor. But absent demonstrated consumer harm, government intervention will do little to improve economic efficiency.
It must be remembered that, at heart, Apple remains a hardware company. It has built a popular ecosystem around the Macs, iPhones and other products it builds and sells. The App Store adds value to Apple’s customers, which is ultimately a factor in determining the price of the hardware they sell. The best smartphone in the world would see little demand if its menu of apps and services were limited and provided little value to consumers.
With more than 2 million apps, the App Store demonstrates a revealed preference by a majority of developers for its efficiencies and convenience. But there are other options in the smartphone market, and robust competition between operating systems, app stores, and hardware providers suggests legal interventions are unwarranted at this point.