Apple Inc. has spent decades tending to and building a “walled garden” around its technology, allowing the most valuable company in the US to maintain control over what software can land on its iPhones and Macs and what that software can do.
Recent moves by regulators and legislators in Europe and the US threaten to put the first major cracks in that wall, however, with a focus on mobile payments and the App Store, both part of the fastest-growing segment of Apple’s business. A new European Union law, fresh objections to the underlying technology of Apple Pay’s structure and proposed laws in the US will likely change the way Apple AAPL,
— and Alphabet Inc.’s GOOGL,
Google — operate their mobile businesses.
A new fissure showed Monday, when the European Commission issued a statement of objections to Apple Pay practices, and charged Apple with abusing its payment dominance by restricting access to the technology underpinning contactless payments on its mobile devices. Regulators believe that technology, called Near Field Communication, or NFC, exerts a monopoly that only Apple can offer. Contactless payments are popular across Europe, but Apple Pay remains the only contactless option for mobile payments on iPhone and iPad.
“We have indications that Apple restricted third-party access to key technology necessary to develop rival mobile wallet solutions on Apple’s devices,” European Commission Executive Vice President Margrethe Vestager said in a statement, adding the EC has formally charged the iPhone maker and could levy a hefty fine. “In our Statement of Objections, we preliminarily found that Apple may have restricted competition, to the benefit of its own Apple Pay solution. If confirmed, such a conduct would be illegal under our competition rules.”
The move against Apple is a precursor to sweeping new legislation in Europe called the Digital Markets Act, or DMA, that is months away from going into effect, as well as two bills wending their way through the US Senate that parallel parts of DMA. Mitch Stoltz, senior staff attorney at digital-rights group Electronic Frontier Foundation, has called DMA “the first strong, comprehensive set of regulations that’s specific to market power in internet platforms.”
The charges against Apple Pay and forthcoming legislation could create a crack in Apple’s walled garden approach, Marco Bellin, chief executive of virtual-private network company Datacappy, told MarketWatch.
“Apple wants to protect and control users’ data, not just your privacy,” he said.
For years, Apple has vigorously contended that disruption of its proprietary mobile-payments system and NFC specifically would shatter any resemblance of security for consumers, exposing them to a potential torrent of malware and a data-privacy calamity.
In a statement to MarketWatch on Monday, Apple said it has “designed Apple Pay to provide an easy and secure way for users to digitally present their existing payment cards and for banks and other financial institutions to offer contactless payments for their customers. Apple Pay is only one of many options available to European consumers for making payments, and has ensured equal access to NFC while setting industry-leading standards for privacy and security.”
DMA has been a permanent occupant in the mindset of Apple, in particular, for months. During a keynote speech at a major privacy conference last monthChief Executive Tim Cook laid bare his concerns, invoking a tried-and-true talking point that the law would compromise the security of consumers by allowing them to “sideload” apps from sources besides the App Store and open NFC capabilities to developers.
Cook said Apple is “deeply concerned” sideloading apps on its iOS platform would allow them to “circumvent the App Store” and let “data-hungry companies” skirt Apple’s privacy rules and “once again track our users against their will.”
“It remains to be seen whether Apple’s security concerns will hold water,” Vasant Dhar, a professor at the Stern School of Business at New York University, told MarketWatch. The EU is putting Big Tech on notice, he added, “to operate on a more level playing field going forward, in this case by opening up payments to competitors.”
EFF’s Cory Doctorow was even more blunt: “When Apple uses its dominion over your device to block or downrank apps that compete with its own offerings, Apple wants you to have the best app, but only if you think the best app is the one that makes the most money for Apple.”
DMA’s sweeping new rules, which could go into effect as early as October, are likely to stop Apple’s practice of blocking the installation of apps from outside its own App Store as well as free developers from onerous commission fees charged by Apple, Alphabet, Amazon. com Inc. AMZN,
Facebook parent company Meta Platforms Inc. FB,
and other major app platforms.
Apple has drawn a strict line of demarcation in fiercely protecting its proprietary App Store and other parts of its services business, the fastest-growing segment within the company and now its second-largest, behind only the iPhone itself. The services business produced $68.4 billion in revenue in Apple’s most recent fiscal year, up from $53.8 billion the year before, and while Apple does not break down the specific sources of that revenue, executives have repeatedly cited the App Store and Apple Pay as large contributors to its growth.
Apple has largely held firm against attempts to legislate change to the App Store, fighting vigorously against an antitrust lawsuit filed by “Fortnite” maker Epic Games Inc. (Apple won nine out of 10 rulings in federal court last year, but Judge Yvonne Gonzalez Rogers found Apple’s anti-steering provisions violated California’s Unfair Competition Law.) Apple has reduced commission fees to 15% for some smaller developers, and legislation in South Korea forced it to allow rival payment systems, but DMA appears to be the biggest challenge yet.
DMA will apply to companies with a market value of 75 billion euros ($82.4 billion) or that have 7.5 billion euros ($8.26 billion) in annual revenue within the EU, as well as at least 45 million monthly end-users and 10,000 yearly business users of at least one core platform, including web browsers and virtual assistants. It also ramps up potential penalties, after a series of European fines failed to create much change in how large tech companies operate. Under DMA, European regulators would be allowed to fine companies between 4% and no more than 20% of their annual global revenue if they break the law, much larger fines than Big Tech has been seen so far.
Bipartisan legislation in the Senate, meanwhile, could have the same deleterious effect as DMA if it is passed into law. Last week, Commerce Secretary Gina Raimondo threw her support behind the American Innovation and Choice Online Act, a bill co-sponsored by Sens. Amy Klobuchar, D-Minn., Chuck Grassley, R-Iowa, and Lindsey Graham, RS.C., designed to protect the ability to sideload apps and prevent operators of app marketplaces like Apple from “self-preferring” their own products. Another bill, the Open App Markets Actco-sponsored by Sens. Richard Blumenthal, D-Conn., and Marsha Blackburn, R-Tenn., would have a similar impact.
The prospect of DMA-like law in the US has prompted Apple to work harder in Washington. The company spent more than it ever has on lobbying in the first quarter of the year, and has sent a steady stream of letters to federal lawmakers.
“The Open App Markets Act’s alternative-app-store and sideloading mandates would deny consumers the choice to prioritize data privacy and security by selecting Apple products that block sideloaded malware,” Timothy Powderly, Apple’s senior director of government affairs, said in one of three letters sent to the Senate Judiciary Committee this year, which was viewed by MarketWatch.
Apple points out 85% of developers on the App Store do not pay any commission, and 98% of developers that are subject to a commission only pay 15% — a benefit of the App Store Small Business Program launched last year. Developers who make less than $1 million in revenue from selling digital goods and services are eligible for the Small Business Program, Apple said.
Google has taken a different approach. Starting this year, the owner of the Android mobile operating system said 99% of developers would qualify for a 15% commission fee instead of its longtime 30% fee, and it was reducing fees to as low as 10% for specific vertical apps in the Play Media Experience Program. The company is also experimenting with allowing alternative payment options within apps, recently allowing European streaming-music company Spotify Technology SA SPOT,
to test its own payments system for its customers.
Yet the specter of the American Innovation and Choice Online Act was the focus of multiple objections from Kent Walker, president of global affairs at Alphabet, in a blog posts this year. The bill, he contends, would “degrade privacy and security” and help competitors, not consumers.
Antitrust bills in the Senate and House could “hamper [Google’s] ability to integrate automated security features if other companies offer similar features. For example, we might be prevented from automatically including our SafeBrowsing service and spam filters in Chrome and Gmail to block pop-ups, viruses, scams and malware.”
“(L)egislation being debated in the House and Senate could break these and other popular online services, making them less helpful and less secure, and damaging American competitiveness,” Walker said. “We’re deeply concerned about these unintended consequences.”