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Deep Dive: What issues do app developers face and how should app stores be regulated?

In a panel on app store regulations, experts shed light on the issues faced by developers and recommended possible solutions.

Key Takeaways

  • Major concerns of app developers include high commissions, delay in payment, shadow banning, and anti-competitive practices like self-preferencing, sherlocking, gatekeeping, etc
  • Apple and Google do not operate in a free market and think of fines as a cost of doing business
  • There is a market failure because of rent-seeking behaviour, information asymmetry, and skewed incentives
  • Current legislation is slow and not adequate, we need ex-ante regulations
  • Frameworks like ONDC might not work for this market

“These gatekeepers, they’re at the top of the bottleneck and they control everything that happens, and they ignore normal market forces and effects,” Mark Buse, Head of Global Government Relations & Policy, Match Group, said about Google and Apple at a panel discussion on app store regulations in India organised by the Alliance of Digital India Foundation (ADIF) and the Coalition for App Fairness (CAF). “They get to decide who wins and who loses in this marketplace and who even gets a chance to play,” Hannah Ricketts, Deputy Director, CAF, added.

Buse and Ricketts were joined by Dr Vikas Kathuria, Affiliated Research Fellow, Max Planck Institute for Innovation & Competition; Sijo Kuruvilla George, Executive Director, ADIF; and Jai Vipra, Senior Resident Fellow, Vidhi Center for Legal Policy. The panel was moderated by Rohit Kumar, Founding Partner, The Quantum Hub.

Both Apple and Google are currently under investigation by the Competiton Commission of India (CCI) for their app store practices and as the regulator probes these companies, this panel discussion sheds light on what the issues are and what are some possible solutions that policymakers can consider.

What are the major issues faced by developers?

1. App tax and in-app payment system requirement: Ricketts said that the first concern for developers is the mandatory use of the in-app payment system, which, in turn, results in exorbitant commissions ranging from 15 to 30 percent of the sale value. “This is an issue for both large and medium companies, but it’s really an obstacle that many small companies cannot even overcome. And so they never even got the opportunity to get off the ground and enter the marketplace,” she said.

2. Anti-competitive practices: Ricketts and George laid out the following anti-competitive practices that hurt developers:

  • Self-preferencing: The practice of putting the company’s own apps ahead of the apps of developers either by ranking them higher or by stalling improvement and bug fix updates on competing apps.
  • Limiting information access: Limiting app developers’ access to information about their customers such as technical and operating information that might allow these apps to improve.

“More critically, when they actually take direct API access, they have critical information of consumers, pricing everything, which actually is the IP of businesses. And the fact that these companies operate in some of these domains should itself be concerned for regulators and competition watchdogs to step in and understand how these things happen.” – Sijo George

  • Sherlocking: Ricketts referred to a term called “sherlocking” to describe Apple’s practice of making copycat apps based on data obtained from apps made by developers and then going on to self-preference these copycat apps on the App Store.
  • Gatekeeping: Ricketts pointed out that Apple and Google have complete control over their operating systems and app stores and that they do not allow developers to distribute their apps the way they want them to, such as through a browser or third-party app store.

3. Shadowbanning: George said that there have been instances where apps have been banned without any notification or intimation to the developer. “When you search in the store, the apps are not visible. If you click on the direct link, the app loads up in the store. So it’s not even possible for the developer to know that the app has been banned,” George said. “These are not shady fly by night operators which we actually see flourishing on the stores as well. That’s a different problem altogether. These are legitimate businesses who have revenues, who significantly contribute the revenues of some of these stores in the first place,” Geroge added.

4. One-size fits all billing scheme: Buse complained that both the app stores impose arbitrary, one-size-fits-all billing and payment schemes which might not necessarily be the right option for developers. As an example, he said that dating apps are mostly used by 21-23 years old who probably don’t have enough money to buy six-month subscriptions or would rather prefer weekly payment options. “But Apple and Google will not let companies, developers break those payments out. So for Match, we very much want to offer flexibility to the user. So where we can offer payments, we will let people pay weekly or monthly for a six-month subscription. Apple and Google do not allow that. You have to pay per their terms,” Buse said.

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5. Delay in paying developers:  Another major issue according to Buse is the delay in developers getting payment. Apple and Google take 90 days to transfer the payment to developers, “which means you as a developer, don’t have the money to pay your employee or to hire a 6th employee if you have five because they’re holding on to that money as the process,” Buse said.

“If you go to a store today and use your credit card, they don’t hold on to it. There are laws and rules around that. So they process it quickly, they get you the money. They allow the marketplace to work in a robust manner. But again, because you have these monopolies with control, they’ll sit on the payment and not revert it to you until it suits their purposes more or less. Again, all arbitrarily decided in a black box. So those sorts of behaviors really dampen innovation.” – Mark Buse

6. Indian consumers are price-sensitive and the commission will be debilitating for companies: George said that in addition to all of the above issues, from an Indian context, developers also face the problem of price-conscious consumers, which is why they are fighting Google’s decision to impose its billing system and commissions. Developers already have very thin margins in India and a 30 percent tax on top of that is going to be super debilitating for companies, George said.

7. Developers don’t have the freedom to choose their business model: Buse explained that apps either monetise through in-app advertisements and pay no commission or through subscriptions and one-time purchases. Match Group’s apps earn through subscription and not advertising because it is transparent and doesn’t need the company to sell data to others as many apps that make money through advertisements do, Buse said. But because of this, Match pays over $500 million a year in the US for app store commissions whereas its competitor Facebook Dating pays only the developer fee of $99 a year because they monetise through ads. George opined that a company should have the freedom to pursue the business model that best respects its users and choices. “But if I’m losing 30% to 40% of my revenue and I’m forced to actually consider ad-based models or freemium models as my way of even exploring markets, these are not happy situations a developer faces,” George said.

“If somebody can explain the logic for why one competitor is paying a half a billion dollars and another competitor is paying $99, I would love to hear the explanation for that, but it just doesn’t make any sense. Again, it shows the arbitrary nature of these gatekeepers and it shows their power in the marketplace. That could never happen in an open marketplace.” – Mark Buse

Recommendations: 

  • Unbundling payment system from the app store and app store from the operating system: Vipra suggested that the payment system should be unbundled from the app store and the app store from the operating system. “I mean, there’s no real economic reason why these should be bundled,” she said.
  • Data sharing in a safe and privacy-friendly manner: Vipra recommended that the industry can borrow from the open banking system in the UK and EU where banks share their data in a safe and privacy-friendly manner and with the consent of the data subject.
  • Regulations for algorithmic transparency: “We should start thinking about legislation, regulations for algorithmic transparency and accountability, including things like even on financial transparency, where algorithms are making some financial decisions in terms of how much money was collected and at what time period it was dispersed. And search algorithms, how the decisions were made in terms of which app shows up first when you search for something,” Vipra said.
  • Interoperability of apps: Vipra suggested that some sort of interoperability mechanism be introduced to allow apps from one app store to be compatible with another. Currently, developers have to create a separate version for iOS and Android, she said.”What is usually ignored is that there is a cost of development for different app stores. So even for two types of app marketplaces to develop two different types of apps is a cost,” Vipra said.

How powerful are Apple and Google?

Apple and Google do not operate in a free market: Looking at it from an academic point of view, there is no free market here because there is no competitor. Both companies talk about being each other’s competitors, but “in what free market do you continue to make a profit and not lose a customer when your price is 100% more than your competitors. It’s just proof that there is no competition,” Buse said.

Two siloed monopolies that see fines as a cost of doing business: Buse referred to Apple and Google as two siloed monopolies who exist in these walled gardens that they have created purposefully. He said that despite countries like South Korea and the Netherlands passing laws and orders to curb the antitrust practices, the companies are just ignoring the law. “They have this belief that they are above the law. I guess they’re just so big and they feel so secure in their positions that they can just simply say, we’ll accept a payment or two and we’ll be fine,” Buse said referring to the fact that the Dutch antitrust watchdog has been levying weekly fines against Apple for not complying with its order since January 12.

They can unilaterally dictate prices: “On the face of it, it seems like benevolence when they actually slash commissions from 30 to 15. But even in that particular scenario, the fact that they can unilaterally dictate prices actually reflects the amount of market dominance that they enjoy,” George pointed out.

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Recommendations: 

  • Non-fine related penalties: “As multiple people have mentioned, fines are just a cost of doing business. So I think it’s important that people consider specificity and also non-fine related penalties that are also not criminal penalties, but civil penalties, such as even a restriction of market access,” Vipra said.
  • No loopholes: “The other side of this coin for policymakers that we’ve discussed in depth here is really the app store platforms will stop at very little to protect their monopolies. And so ensuring that there are no loopholes and room for interpretation in these policies is also critically important because we have seen that those will be exploited or created if it is too loose and not fully comprehensive,” Ricketts said.
  • There need to be enough enforcement tools: “The one word I would point to is enforcement. You can have the best laws in the world, but if there aren’t enforcement tools available for regulators and government officials, then history has shown us they’re meaningless because fines don’t matter,” Buse said.

“If you look at the fines that have been levied to date, and I’m not talking the 5 million Euro fines in the Netherlands, but huge fines, billion dollar fines that have come out of Europe, and if you look at the stock of the companies who are fine on the very day they were fine, their stock actually went up. And it’s because they have now built into their business model the fact that these fines are just parts of doing business and that is a clear indication that you need a robust enforcement to actually compel these companies to do the right thing and to follow the law.” – Mark Buse

  • Unified developer community: “We know these companies do react to government pressure and to a unified developer community. So I just encourage everybody to keep the fight going, to escalate the fight, and not allow these monopolies to create more power and more ability to control what we as consumers see,” Mark Buse said.

Is there a market failure?

Jai Vipra and Vikas Kathuria pointed out that there is market failure in the app store market because of the following reasons:

  • Rent-seeking: The practices of Apple and Google are an example of rent-seeking by either a monopoly or duopoly, depending on what you think the relevant market is, Vipra said.
  • Information asymmetry: Because the owner of the marketplace has more than the developer and is also a market participant, there is information asymmetry here, Vipra said.

“There are all manner of distortions in the market that definitely needs to be corrected. I think all markets tend towards monopolization, but the pace is faster for digital markets, I think due to obviously network effects, data enclosures, and also algorithmic control that the platform itself is able to build. – Jai Vipra

  • Skewed incentive structure: Kathuria pointed out that there is a skewed incentive structure because the risk is not proportional to the incentive. In normal markets, the bigger risk you take the bigger the incentive you take home, but this is not being followed in digital markets, he said. “The business model of an operating system is tying its profitability to the success of an app. So if an app becomes successful, it’s just not the app that is making money, it’s the operating system that is making money. And this distorts the risk-should-be-proportional-to-incentive structure. Hence it is unfair,” Kathuria said.

How effective is current legislation?

By the time our existing laws provide relief, it is often too late: Kathuria explained that because of the role of network effects in these digital markets, before the competition machinery moves and developers get relief from regulators, the market may have already tipped in the favour of a competitor app.

“Even if you get some sort of relief from the competition? It would be some sort of a rap on the knuckle. You have already lost your market and mind it, the products that we are talking about, these are the products where competition is characterised by innovation. You compete on new products, not on prices. And these markets are characterised or rather what we witness as gale of creative destruction, they change overnight. So by the time our already existing laws provide you with a lift, it is often too late. And you couple network effects, with economies of scale, economies of scope, these markets become very concentrated, and hence we need new system of law or new system of regulation that could account for technological and economic realities of digital markets.” – Vikas Kathuria

CCI can only play a very limited role: The role that CCI can play here is very limited because the competition machinery is slow, but more importantly, because the kind of market failure we are discussing is not a typical abuse of dominant scenario which is resulting from super mammoth market power, Kathuria said. “In this case, abuse can happen even if the party is not dominant.  We are talking about a special scenario when these gatekeepers are controlling a bottleneck, even when they are not dominant. So you may call what they have significant market power,” he explained.

Recommendations: 

  • We need ex-ante regulation: “Competition law is not a Swiss knife. There is only so much that it can do. We have already discussed the reasons. We have already seen the repercussions. These markets, we are talking about South Korea, the Netherlands and other places, all have competition laws, yet these wanton acts are going on. So we need some sort of ex-ante regulation,” Kathuria said. Ex-ante regulations refer to regulations before the occurrence of an event.

“We need to move fast and we need to move even before the harm has happened because these markets are tippy. And that is why competition law plays a very limited role. And we need a new tool, and this new tool would be ex-ante regulation.”  – Vikas Kathuria

  • We need dynamic legislation: “I often hear, we need legislation that is future proof. That might be easy to do in some conventional business streams where you know what’s going to happen. But when you look at the app ecosystem and the companies that are there, the companies that are big today, that weren’t big five years ago or didn’t even exist five years ago, it’s very important to have dynamic legislation again with enforcement tools that can actually compel action,” Buse said.

“Legislating is the art of the practical, not the art of the perfect. So we don’t need to solve all the problems of the world when we do this.” – Mark Buse

  • Restoration in the balance of power: George said that balance of power is very skewed towards the platforms at the moment and the first thing we need is the restoration of that imbalance in power either through legislative action or through a combination of various methods that are available at the state’s disposal. “A business entity operating in the country, these platforms have power way more than even a government to come and put them out of business. That is the extent to which the lopsided power is there,” George said.
  • CCI should give specific directions: If CCI is going to give directions, it is important to be very specific. For example, Russia’s antitrust watchdog has mandated that Google should provide Yandex as the other search engine option and allow the user to make a choice. “The person should be able to choose that level of specificity. I think this is important because as we’ve seen, the companies in question, are very quick to look for loopholes,” Vipra said.
    • But sometimes specificity can be very constraining for innovation: George pointed out that we have to be careful what we wish for in a digital market or innovation ecosystem because specificity can be very constraining for innovation. “We have seen those instances right, when we have very specific guidelines coming from the government, sometimes it might be very restrictive. While the intent might have been to help the smaller companies from abuse by bigger companies, some of these specifically might end up harming the smaller companies a lot more, be it compliance, be it innovation,” George said.
  • Comprehensive policy: We need a comprehensive and meaningful policy, Ricketts said. “They do need to be specific, but they need to be broad and encompassing to make sure that there is meaningful action behind these policies to promote the digital future we know policymakers want to foster,” Ricketts added. But they should directly address concerns like the 30% fees, anti-steering, lack of interoperability, barring third party distribution through other app stores, self-preferencing practices, etc, she added.

Do businesses pass on cost or absorb it?

Some pass on cost:

  • Truly Madly example: Giving the example of a dating app called Truly Madly, George pointed out that some apps pass on the cost of commission to consumers. “Their prices are higher on the iOS store as compared to the Android store. The Android store prices are lower at this point in time given the fact that the 30% rule is not fully implemented. So they’re using payment gateways which charge only 2% commission,” George said.
  • YouTube example: Another global example is YouTube, which has an iOS price that is 30 percent more than the web price, George said. But the cost on the Android store is the same as the web, which is interesting because YouTube is a Google property. “So the 30% either don’t apply to them or it’s a preferential treatment,” George said.
  • Could be very detrimental to businesses: Since consumers in India are very price-conscious, if businesses pass on the cost of commission to consumers, it could be very detrimental to companies, George said. “There could be a lot more churn, especially in the OTT industry, where people decide not to move on with subscription services,” George said.

Will a framework like UPI or the proposed ONDC make sense for this market?

Referring to governments’ efforts to create open digital frameworks like UPI and ONDC, on top of which companies can build their platforms or offer their services, Kumar asked if such an idea will work for the app store market. Kathuria replied that it might not be the right thing for this market:

“Mr. Nilakani and others, they are trying to introduce this in the e-commerce sector,  which is a wonderful idea, which is trying to create platforms of platform. But what might work in ecommerce may not be appropriate in the case of mobile phone operating systems.  They are closely integrated to the company of course. And there are other issues as well. They are also doing something. They have to capture fraud. They also have to make sure that the mobile ecosystem is vibrant and that’s why they should get some money. We are willing to pay them some sort of incentives, maybe one time fee, etc. So I would be a bit skeptical about creating a structure of ONDC for app stores or something similar.”

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