Juan Londoño
On Wednesday, July 22, the House Energy and Commerce Committee will hold a hearing on multiple consumer protection bills, including the App Store Freedom Act (ASFA). Supporters of ASFA claim that this bill will promote competition in the app store market by forcing developers of an electronic device’s operating system to allow the installation of third-party app stores, to allow the use of third-party payment processors, and a myriad of other restrictions. Ironically, the bill’s provisions would make the app store market less competitive by reducing covered companies’ ability to engage in competitive practices that make their products more appealing to potential customers. It would also have negative spillover effects in the hardware market by restricting hardware developers from offering closed-system products to customers and prescribing a business model as a whole.
The call to impose these restrictions on app stores stems from the belief that major smartphone operating system developers, namely Apple and Google, are harming competition in the app distribution market by restricting or outright banning the installation of third-party app stores on their devices. They also raise concerns about app stores demanding that apps use first-party payment processing services, preventing apps from steering their users to proprietary payment systems, or requiring apps to offer the same prices for digital products across different app stores.
To resolve these concerns, ASFA mandates that covered companies, defined as companies that own or control an app store with over 100 million users and the operating system on which the app store runs, allow the installation of third-party app stores, allow the use of third-party payment processors, and impose other restrictions on pricing practices. The bill’s definition of app stores goes beyond regulating smartphones to any device with an app store, including not only common tablets and computers but also potentially extending to novel console-computer hybrids like Valve’s Steam Machine. Many of these provisions replicate those enacted in the European Union’s Digital Markets Act (DMA), a piece of legislation that has led to increased cybersecurity risks and even to higher prices of digital goods for consumers.
ASFA’s One-Size-Fits-All Approach
While supporters of the bill tout that it will increase competition and help “little tech.” It would predominantly benefit vertically integrated companies that own app stores and high-grossing, first-party applications, whose revenues can be leveraged to subsidize the low or no revenue from third-party apps. This is a small segment of apps in the app store that could even consider such a system.
Take, for example, the Epic Games Store. Epic offers one of the most generous revenue-sharing mechanisms and the most flexibility for developers because it uses revenue from its first-party titles—which include some of the most popular and highest-grossing games in the video game industry—to make up for lost revenue. Third-party apps are essentially a loss leader for the store, while first-party games are what make the store “marginally profitable,” as they describe it themselves. That is a legitimate business decision and a model the company has adopted, as it deems it the most efficient way to compete in the market.
However, what makes sense for Epic Games might not make sense for other video game app stores, including not only Apple and Google, but also G2G, Valve, and myriad other competitors in the ecosystem. Some of them choose a model that offers their services without passing along service fees to consumers. Others may charge customers a “handling fee” for their software sales.
All of these models may work for different businesses, app developers, and consumers. However, ASFA’s provisions essentially homogenize the market and require all app stores to use a single model. App stores without first-party titles will likely be unable to bring in enough revenue to remain profitable. Thus, they will likely have to look for additional sources of revenue, which will likely mean higher upfront costs, either increasing developer license costs or passing the cost to consumers through handling/processing fees when they acquire apps.
An especially damaging provision of ASFA is its prohibition on covered companies to require that “pricing or other terms of sale be equal to or more favorable on such operating system or app store than on another operating system or app store.” In other words, it prohibits app stores from requiring developers not to charge higher prices in the app store than they would elsewhere or through their own payment and distribution services. Basically, it prevents app stores from setting up a price-match guarantee, which is, by definition, competing. Supporters of the bill argue that, when paired with payment-processing commissions, this price-match guarantee forces developers to “eat” the commissions with no option to pass the cost to consumers.
However, this is a widely accepted dynamic in the “physical” retail world, and it has proven beneficial to producers and consumers. Take the sneaker world, for example. A retailer like Foot Locker demands that sneaker brands charge wholesale prices so it can offer customers the same or a similar price to what the sneaker brand offers in its standalone shops. The brand is free to accept the deal or not and is free not to offer its product to retailers. But, as Nike has recently experienced, that does not necessarily translate to higher revenues and could even be unprofitable.
ASFA’s Cybersecurity Problems
ASFA also creates cybersecurity concerns. The “walled garden,” or closed environment, that some operating systems provide, is appealing to consumers for its simplicity. Openness and personalization can be beneficial, but they can also be overwhelming, confusing, and dangerous for non-savvy users.
Remember the early days of the internet and the popularization of computers, when older members of a household would often inadvertently download bloatware and unnecessary “search toolboxes.” In a world where smartphones have become intermediaries for sensitive transactions and custodians of personal data, many consumers demand a higher standard of security protections that will limit the creation or exploitation of vulnerabilities. Consumers’ consideration of choice/personalization vs. safety is ultimately personal, so they benefit from having different options that allow different tradeoffs. The bill, however, would reverse this trend by essentially forcing all smartphones to be more like computers, leaving consumers more vulnerable to bloatware and malware. The proliferation of malware-ridden app stores in Europe following the passage of the DMA demonstrates this.
Conclusion
The AFSA is a bill that essentially picks winners and losers in the app store market. It would give a regulatory advantage to vertically integrated app stores that both develop high-grossing apps and own app stores, while predominantly harming app stores that rely on third-party apps for revenue. While touted as a bill that promotes competition, it tilts the field by unduly burdening a set of companies by either outlawing their business models or preventing them from using price-matching clauses that allow them to remain competitive. The result would reduce consumer choice and create a less secure digital environment.
