The European Commission has fined Apple for abusing its App Store. The Commission did not mention Spotify, but the fine appears to answer the music streaming platform’s complaint that Apple’s App Store fees to developers are too high. But now that Spotify has seen Apple’s new approach under Europe’s new Digital Markets Act, Spotify is still unhappy, highlighting the flaws of Spotify’s original complaint and the Commission’s fine, writes Randy Picker.
On March 4, the European Commission fined Apple 1.84 billion euros, finding that Apple had abused its dominant position through its control over the App Store in imposing anti-steering provisions on providers of music streaming apps. The Commission’s statement didn’t namecheck Spotify, but the Commission launched its investigation in June 2020 after Spotify had filed a complaint in March 2019. The fine sounds like a huge win for Spotify that it should be gleefully celebrating. Yet, Spotify remains unhappy. What is going on exactly?
We need to backtrack a little. Apple makes money off of the iPhone by selling us phones and also through the royalty rates that it charges developers in connection with the App Store. Devices and services work together. To simplify, developers with apps that don’t charge users a cash price pay no royalties to Apple and most people start using Spotify on its free, ad-supported tier. When a user downloads that version of the Spotify app from the App Store, Apple collects nothing from Spotify, even though Apple has provided a bunch of different services to Spotify in connection with that download. Those include the costs of running the App Store, the use of the patented inventions embedded in the iPhone and the App Store, and the other costs of distributing apps.
Spotify wants users of its free app to convert to premium, cash-paying customers and it would like to do that from inside the Spotify app. Now we get to the conflict: Apple takes a 30% commission on those sales and Spotify doesn’t want to pay that. Apple could charge Spotify a fee every time the Spotify app is downloaded—more on that possibility later—but it hasn’t done that in the past. Instead it has charged Spotify a royalty only at the point where Spotify started collecting cash from its customers and only when that transaction was completed inside the app. To increase the chance that Apple actually collects that royalty, Apple took another step: it limited the ways in which Spotify could inform users about possible lower prices outside the app. Again, Apple historically hasn’t collected fees on transactions outside of the app, but it clearly wants to drive transactions through the app where it can easily collect royalties. This is the anti-steering rule that the European Commission found to be abusive.
More precisely, the Commission found Apple’s rules to be “unfair trading conditions” and to be practices that, for roughly ten years, “may have led many iOS users to pay significantly higher prices for music streaming subscriptions” based on the assumption that Spotify passed on the charges from Apple to Spotify’s customers. I confess to skepticism that this statement is right on the facts. And it misses the bigger picture.
Start with the facts. Ignore for today the question of who really is dominant here, but do note that Apple’s market share in smartphone operating systems in Europe is roughly 33%, while Apple puts Spotify’s share of the European music streaming market at 56%. Focus on the money instead. Spotify doesn’t want to pay Apple seemingly anything notwithstanding all of the value that Spotify has derived from the iOS platform, so Spotify doesn’t let its customers subscribe to its paying premium service from inside the app. Spotify used to allow that but dropped that practice, first for new customers and then for existing customers. It isn’t clear how much Spotify has actually paid Apple. In its response to the Commission fine, Apple noted that Spotify currently pays Apple nothing, and that seems right.
The size of the fine also suggests that Spotify has actually paid Apple very little. The 1.84 billion euro fine consists of two parts: a 40 million fine calculated based on the European Commission’s 2006 rules for fines and then a 1.8 billion lump sum tack-on. More on that in a second, but the 40 million euro calculated fine suggests that the actual financial costs to Spotify and then to consumers have been quite small.
But there is a bigger issue at stake here and that points to the more fundamental flaw in how the Commission has approached this case. Apple didn’t have to build its royalty structure in the way that it did and we now have a crisp sense of what an alternative structure might look like. Europe’s new Digital Market Act (DMA) focuses on what it calls gatekeepers to the digital economy. The DMA will force Apple, Google and other tech giants to reset how they do business in Europe, as Apple will have to allow alternative app stores and allow developers to complete in-app transactions using tools other than Apple’s.
Apple still plans to get paid for the services that it provides to developers like Spotify. Developers can stay on the old App Store payment arrangement or move to the new one that Apple hopes will comply with the new DMA rules. The new program will include reduced commission rates, but, critically, adds what Apple is calling a “core technology fee” of 0.50 euro for each app installed after the first million installations, whether those apps are downloaded from Apples’ App Store or from an alternative store. Spotify isn’t happy about the new plan—“a complete and total farce” was how it put it—and of course the DMA has just started, so we don’t really know anything yet about how it will be interpreted by the Commission or the courts.
But this gets us back to the anti-steering rules that the European Commission condemned last week. Spotify just doesn’t want to pay Apple for all of the services that Spotify gets from Apple, starting with the, per Apple, 119 billion times the Spotify app has been downloaded to an iOS device. In litigation in the United States last August between Epic and Apple, the Ninth Circuit Court of Appeals recognized that Apple had a legitimate basis in seeking to get paid by developers for the valuable ecosystem it has created.
The anti-steering rules bolstered Apple’s efforts to collect royalties on the value it has created. Pushing Apple away from the anti-steering rules presumably would force it to move to a clumsier system to collect those royalties, perhaps something like the new DMA-driven royalties Apple has put forward (coincidentally, Google has also implemented a revised royalty scheme for its app store designed to preserve its fees). Those might actually raise costs to Spotify and to Spotify’s users, though as Spotify has noted in trying to reassure investors, it could just stay on Apple’s old plan. Pushing Apple to use an inferior system to collect legitimate royalties is almost certainly not in the interest of iOS users.
We should close with a brief discussion of the 1.84 billion euro fine. Again, the 40 million tracks the actual economic flows here, while the 1.8 billion “lump sum” is “to account for the non-monetary harm caused to consumers and to achieve deterrence” as European Commission Executive Vice-President Margrethe Vestager put it in her remarks on the fine.
That seems like the wrong way to see it. Spotify doesn’t seem to think that it should pay Apple anything at all, while Apple understandably wants to collect a chunk of the value it has created for Spotify. Rather than pay up by making it straightforward to sign up for premium inside the Spotify iOS app, Spotify imposed user experience costs on its users to avoid paying Apple. Spotify wants to do the digital equivalent of a dine and dash.
As to the fine itself, assuming it stands up on appeal, the money doesn’t go to Spotify. As the European Commission’s press release on the fine states, fines “are paid into the general EU budget” and that then reduces the amounts that member countries of the European Union have to pay to run the EU. Quite the system. I have this vague recollection from the early days of the United States of concerns about taxation without representation, but perhaps those ideas only applied in the pre-digital era.
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