Dueling federal antitrust holdings dealing with app stores may significantly impact the nature of future competition in mobile internet services. Going forward, antitrust policy in this area should focus on promoting consumer welfare and innovation, rather than the interests of particular competitors.
App Store Basics
Google and Apple compete vigorously for consumer favor in smartphones. While both firms are huge, neither is dominant in this space. Fifteen years of rivalry between the two companies has sparked innovation and great improvements in smartphones.
Google’s Google Play store and Apple’s App Store also are the two major players in the smartphone mobile apps landscape (each firm currently offers over 2 million apps). Mobile apps (or mobile applications) are “software applications developed specifically for use on small, wireless computing devices, such as smartphones and tablets.”
In purchasing new apps, owners of Android-based smartphones turn to Google Play while iPhone owners rely entirely on Apple’s App Store. Both firms charge developers of highly popular apps 15% to 30% for sales made through their respective app stores. But they charge little or nothing to the developers of the vast majority of all apps who rely on the stores (most of those apps are free for consumer smartphone owners).
Apple and Google obviously profit from these fees. But they also use revenue from app sale charges to improve platform quality and security, redounding to the benefit of consumers.
Apple employs a “closed garden” strategy that denies competing app stores access to its platform and prohibits sideloading (“installation of an application on a mobile device without using the device’s official application distribution method”). In contrast, Google allows competing app stores and sideloading.
The Epic Games Antitrust Challenges
Currently, there is a major difference in the U.S. legal treatment of the rival companies’ highly lucrative app businesses.
Epic v. Apple
Apple has largely succeeded in fending off a federal antitrust challenge to its App Store brought by Epic Games in 2020.
Epic, a highly profitable software firm, operates one of the world’s most popular video games, Fortnite. Epic alleged that Apple violated the federal Sherman Antitrust Act “by restricting app distribution on iOS devices to Apple’s App Store, requiring in-app purchases on iOS devices to use Apple’s in-app payment processor, and limiting the ability of app developers to communicate the availability of alternative payment options to iOS device users.”
California federal district trial court judge Yvonne Gonzalez found no Sherman Act violations. In her September 2021 opinion, she recognized “the ever-increasing innovation and growth in the iOS ecosystem”, which redounds to the benefit of both Apple and third-party developers such as Epic. The judge did, however, hold that an Apple “anti-steering” obligation placed on app developers violated California’s Unfair Competition Law. To remedy that violation, she required Apple to allow developers to include notices of alternate payment systems in their apps.
An April 2023 Ninth Circuit Court of Appeals panel agreed with the district court. In discussing the Sherman Act, the appellate decision emphasized that “Epic failed to establish, as a factual matter, . . . the existence of any substantially less restrictive alternative means for Apple to accomplish the procompetitive justifications supporting iOS’s walled- garden ecosystem.”
The Epic v. Apple saga ended in January 2024, when the Supreme Court refused to hear an appeal of the Ninth Circuit’s decision.
Epic v. Google
Epic filed a similar antitrust lawsuit against Google in 2020, but the outcome was very different.
A December 2023 San Francisco federal jury verdict found that Google’s app store practices violated the Sherman Act.
The case then went to federal district judge James Donato to determine appropriate relief. On October 7, 2024, Judge Donato issued a sweeping injunction that essentially totally revamps the working of Google Play.
Under the order, Google must offer alternatives to its Google Play store for downloading apps. It also is barred from paying companies not to compete with Google Play.
What’s more, Google will be subject to a variety of restrictions for three years. These include, among others:
· A ban on payments for exclusive or first app launches on Google Play;
· A ban on preinstallation of Google Play on new devices;
· A ban on requiring competing app stores to use Google Play billing;
· A ban on prohibiting app makers from telling their users about cheaper online goods on their websites;
· Required access to Google Play’s catalogue for competing app stores; and
· Required carriage of third party Android app stores on Google play.
A three person committee including Google and Epic representatives will oversee order compliance.
Google has stated that it intends appeal the verdict. It contends:
“[The changes ordered by Judge Donato] would put consumers’ privacy and security at risk, make it harder for developers to promote their apps, and reduce competition on devices. Ultimately, while these changes presumably satisfy Epic, they will cause a range of unintended consequences that will harm American consumers, developers and device makers.”
Considerations On Appeal
The injunction issued against Google may benefit Epic (and future app stores that want to take business from Google Play), but it is questionable that it benefits consumers.
The U.S. Supreme has made it clear that federal antitrust law is “a consumer welfare prescription.” Antitrust courts have repeatedly stressed that antitrust is concerned with vigorous competition, not the welfare of individual competitors.
The consumer welfare principle undergirds the judge’s holding in Epic v. Apple – which stressed the welfare-beneficial aspects of Apple’s conduct.
Unlike in Epic v. Apple, the decision on liability in Epic v. Google was rendered by a jury, not a judge. Juries do not have to explain their reasoning in rendering a verdict.
This may prove significant on appeal. American antitrust law does not penalize “competition on the merits” that maintains a monopoly market share. Only “exclusionary” conduct exclusively aimed at undermining the competitive process is illegal.
Conduct by a dominant firm that benefits consumer welfare is competition on the merits and is not illegal monopolization. So the key is to ask whether Google’s management of Google Play has provided substantial consumer welfare benefits that will be sacrificed if Judge Donato’s injunction provisions are implemented.
The answer may well be yes.
Google can point to substantial potential consumer welfare benefits from its management of Google Play.
Specifically, Google has been incentivized to continuously offer new and improved paid-for and free apps through the fee structure of Google Play.
Google has not “rested on its laurels” because it has faced vigorous competition due to the steady improvement in Apple iPhones and Apple App Store offerings. This “competition for the market” has greatly benefited consumers.
In addition, some recent economic research suggests that third party apps are not sacrificed by existing app store practices. If so, the argument that current app store practices are welfare-enhancing is further strengthened.
The intrusive judicial restructuring of Google Play will predictably reduce Google investments in its app system and harm consumers. This is a sacrifice of welfare-enhancing competition on the merits.
The benefits of promoting new third party app offerings may sound attractive, but they are highly speculative. Security and privacy protection may be sacrificed.
In any event, Googe (unlike Apple) already allows alternative app stores and sideloading to exist on its platform.
What’s new with the district court’s injunction is that competitors are being subsidized to enter and “free ride” on platform assets generated by Google’s investments. Google may invest less as a response.
Perhaps most fundamentally, Google versus Apple smartphone competition will be artificially skewed, because Apple will not be subjected to App Store micromanagement. The intensity and quality of Apple-Google competition likely will diminish. Assuming that is so, consumers will be the losers.
The Bottom Line
It is possible that the remedies in the court’s injunction would raise consumer welfare (though the Nirvana Fallacy suggests this is highly doubtful). But remedies are only appropriate if the firm under scrutiny was not engaging in competition on the merits. When a monopolist’s actions have instead greatly raised consumer welfare, striking down those actions as anticompetitive is at odds with U.S. antitrust law principles.
The appeals court in Epic v. Google should carefully evaluate Google’s business behavior in light of the efficiency arguments noted above. If those arguments appear insubstantial, the jury verdict and injunction should stand. But if they are substantial and credible, the antitrust condemnation of Google should be set aside.