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South Korea sets precedent by forcing Google, Apple to allow alternative in-app payment systems

The new bill might shape how other countries address Google and Apple’s control over app store payments.

South Korea’s National Assembly on August 30 passed a first-of-its-kind bill that forces Google and Apple to open their app stores to alternative payment systems. The bill now awaits to be signed into law by the president, whose party strongly endorsed the legislation.

The legislation comes at a time when both Apple and Google are facing increased regulatory scrutiny and legal battles across the world with respect to their app store practices.

“As bills with similar implications are being proposed in the U.S. and Europe, South Korea’s bill will become a cornerstone for legislating app market platform regulations worldwide.” – Chairman Han Sang-hyuk, Korea Communications Commission.

What does the new law say?

The law, which amends South Korea’s Telecommunications Business Act, stipulates the following:

  • Use of alternate payment systems: The law prevents companies that run app stores from forcing developers to use the store’s in-app payment systems.
    • Current practice: Currently, both Google and Apple require apps that are downloaded from their respective stores to use the in-app payment systems for any sale of digital goods or services through the app and pay a commission on each sale. For example, if a game that was downloaded from Google Play Store sold an in-game avatar to the user, the payment must be processed through Google’s billing system and Google keeps 30 percent of the sale value as commission. Developers are not allowed to notify users about alternative payment systems such as on the developer’s website.
    • What changes for developers? The new law allows developers to use their choice of payment systems, effectively allowing them to avoid the commissions charged by Google and Apple.
    • What changes for users? For users, this could mean lower prices because developers will no longer have to account for the commissions.
    • What changes for Google and Apple? The move will blow a huge dent in the revenues that these two platforms earn from their app stores. Although both companies do no reveal specific figures for their app stores, these stores, especially in-app commissions, make up a significant portion of their revenue. In the last financial year, services including the App Store generated $53.8 billion of Apple’s $274.5 billion revenue, and “Google other” revenue including Google Play store sales accounted for $21.7 billion of Google’s $182.5 billion revenue.
  • No unusual delay in approval or inappropriate deletions of apps: The new law says that companies that run app stores cannot unreasonably delay the approval of apps or inappropriately delete them from the store. This may have been put in place to prevent companies from taking retaliatory measures when developers choose to use alternate in-app payment systems.
  • The government is allowed to conduct probes and mediate disputes: The new law allows the South Korean government to probe app market operators, and mediate disputes regarding payment, cancellations or refunds in the app market, Reuters reported.
  • Penalties for failure to comply: The law says that companies that fail to comply with these new rules could be fined up to 3 percent of their revenue earned in South Korea.

What have Google and Apple said?

Google: In a statement sent to The Verge, Google said that it will reflect on how to comply with the new law but that commissions allow it to keep Android free and give developers the means to access billions of consumers around the world. “Just as it costs developers money to build an app, it costs us money to build and maintain an operating system and app store,” the company said.

Apple: Before the passing of the bill, Apple told The Verge that it was concerned that users will be at greater risk of fraud and privacy violations when using other payment systems. It also said that it will make it inconvenient for users to manage purchases and enable parental controls. “We believe user trust in App Store purchases will decrease as a result of this proposal—leading to fewer opportunities for the over 482,000 registered developers in Korea who have earned more than KRW8.55 trillion to date with Apple,” the company added.

Apple and Google vigorously fought the proposed legislation and even sought intervention from the US government in a last-ditch attempt, New York Times reported. But experts were unsure if the US will defend tech companies facing antitrust scrutiny abroad while it applies that same scrutiny to the companies at home, the report stated.

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MediaNama has reached out to Google and Apple with more questions and is awaiting a response.

Reactions in India

Rakesh Deshmukh, Co-founder & CEO of Indus App Bazaar, one of India’s largest third-party app stores, shared his support for the new law and added that he hopes that Google enhances developer choice by allowing the listing of app distribution platforms like Indus App Bazaar on the Play Store. “It’s about the choice of distribution; we all know that Google Play Store and App Store will continue to exist but we need more competition. We believe that choice is central to competition and hence when developers choose to distribute via our infrastructure, we allow a choice of payment gateway. This choice we believe would allow developers leverage to negotiate a reasonable fee with the two companies and payment gateway providers,” he said.

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Sijo Kuruvilla, Executive Director of the Alliance of Digital India Foundation (ADIF), tweeted: “Any legislation on the matter anywhere in the world will set a precedent for other nations to adopt and build on. To fair markets.”

Concessions made by Google and Apple

Reduced 15 percent commission: After coming under fire from multiple companies, Apple last November said that it will reduce commissions to 15 percent for developers that make less than $1 million per year. Google followed Apple with a similar, albeit slightly different, announcement saying that it will charge developers 15 percent for the first $1 million they earn in revenue in a year.

Developers allowed to email users of alternate payment methods: Apple on August 27 proposed a number of changes to its App Store policy and agreed to pay $100 million in a bid to settle a 2019 class-action lawsuit filed by US app developers. The biggest concession is that developers can now let users know about payment methods available outside the in-app billing system through external communications like e-mail. But critics have argued that this doesn’t go far enough because in-app notifications and redirections to alternate payment systems are still banned.

Other battles that Google and Apple face

Epic Games lawsuit: Epic Games, maker of the popular Fortnite game, publically challenged Google and Apple last year by adding their own payment system within their app that allowed them to avoid the 30 percent commission. Owing to this violation, both Google and Apple removed Fortnite from their app stores, leading to a legal challenge from Epic Games. The hearings in the much-publicised lawsuit concluded last month and a verdict is awaited. Tim Sweeney, CEO of Epic Games, called the new South Korean law a major milestone in personal computing.

New antitrust bill in the US: On August 11, US lawmakers introduced a new bill titled Open App Markets Act that goes even further than the South Korean legislation in regulating the app store market. The bill proposes:

  • Operating systems must allow third-party app stores
  • Developers must be allowed to choose their choice of in-app payment system
  • Pricing for various app stores or in-app payment systems can be determined by developers
  • Developers can freely communicate pricing offers with users
  • Google and Apple cannot use non-public data to build competing apps
  • No self-preferencing in app stores
  • Third-party developers must be provided the same access to developer tools

“It’s time the U.S. follow suit to reduce Big Tech’s app store influence. I urge Congress to swiftly pass my bill with Senators Blumenthal and Klobuchar that will help ensure fair competition for innovative startups,”- Senator Marsha Blackburn in a statement.

Lawsuit in the US: In July this year, three dozen states in the US and the District of Columbia filed an antitrust lawsuit against Google alleging that its Play store is an illegal monopoly.

Retaliation to Google policy update in India: Back in September 2020, Google clarified that it will enforce its billing system on all apps downloaded from the Play Store for in-app purchases of digital goods and services and gave developers until September 30, 2021, to integrate into its billing system. Multiple Indian startup founders pushed back against Google forcing developers to use its billing system. Bowing to pressure, Google deferred the enforcement of its billing system policy only for India to March 2022. Interestingly, it is this very same policy update that pushed South Korean lawmakers into introducing this new law.

Investigation in India: In November 2020, the Competition Commission of India (CCI) ordered a detailed investigation into Google’s payment policies and alleged manipulation within Play Store. The apex body for anti-trust matters said that there was prima facie evidence that Google may be abusing its dominant position in India, with regards to Play Store’s exclusivity and Google Pay (GPay) services. The CCI ordered an investigation into these aspects of Google’s practices:

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  • High commissions 
  • Exclusivity regarding the choice of payment systems for app purchases
  • Preference to Google Pay for payments
  • The advantage gained from data collection

Investigation in EU/Spotify complaint: The European Commission in June 2020 opened formal antitrust investigations to assess whether Apple’s rules for app developers violate EU competition rules in response to a complaint by Spotify. It particularly focuses on the mandatory use of Apple’s in-app purchase system and restrictions on the ability of developers to inform users of alternative cheaper purchasing possibilities. In April this year, the commission informed Apple of its preliminary view that it distorted competition in the music streaming market as it abused its dominant position for the distribution of music streaming apps through its App Store.

Investigation in the UK: In June, the UK government launched an investigation into Google’s and Apple’s effective duopoly over the supply of operating systems (iOS and Android), app stores (App Store and Play Store), and web browsers (Safari and Chrome). The investigation will examine the amount of power Google and Apple have in the distribution of mobile apps and the extent to which there are suitable alternatives to the default app stores. It will also examine if Google and Apple are using their position to launch competing apps and services and if these are favoured over third-party apps when showcased to consumers. The final report of this investigation will be published by 14 June 2022, based on which the government will establish a new pro-competition regulatory regime for digital markets.

Russia warning: Russia’s Federal Antimonopoly Service (FAS) on August 30 gave Apple a warning over abusing its dominant position in the distribution market for iOS apps and asked the company to eliminate signs of violations before the end of September. FAS reported that several iOS users and app developers reported concerns that users are not allowed to be informed about the possibility of cheaper purchase options outside of the app.

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