House Antitrust Committee: Full text of the Apple section

An Apple 3.0 exclusive: 45 Pages from the 450-page majority staff report (sans footnotes).

V. Dominant Online Platforms

D. Apple

1. Overview

Apple was incorporated in 1977, and is headquartered in Cupertino, California. Apple was an early pioneer in designing and marketing mass-produced personal computers. AAPL “designs, manufacturers, and markets smartphones, personal computers, tablets, wearables, and accessories, and sells a variety of related services.” Apple’s hardware products include the iPhone, iPad, Mac, Apple TV, and AirPods; its Services business segment includes the App Store, iCloud, AppleCare, Apple Arcade, Apple Music, Apple TV+, and other services and software applications.

Apple is the leading smartphone vendor in the U.S., accounting for approximately 45% of the domestic market, with more than 100 million iPhone users worldwide. Apple’s iOS is also one of two dominant mobile operating systems—the other operating system, Android, is discussed elsewhere in this Report. iOS runs on more than half of U.S. smartphones and tablets.

Globally, Apple accounts for less than 20% of the smartphone market, and roughly 25% of smartphones and tablets run on iOS worldwide. In 2018, Apple sold its 2 billionth iOS device, and is projected to sell its 2 billionth iPhone by 2021. Apple also owns and operates the App Store for iOS devices.

Launched in 2008, Apple highlights that the App Store allows app developers to reach consumers in 155 countries, and that more than 27 million app developers have published millions of apps in the App Store. Apple credits the App Store with creating 1.5 million jobs in the United States, and more than $120 billion in worldwide revenue for app developers. According to Apple, the App Store ecosystem, including direct sales of apps, sales of goods and services inside of apps, and in-app advertising facilitated more than $138 billion in economic activity in the U.S. last year.

2. iOS and the App Store

a. Market Power. Apple has significant and durable market power in the market for mobile operating systems and mobile app stores, both of which are highly concentrated. Apple’s iOS mobile operating system is one of two dominant mobile operating systems, along with Google’s Android, in the U.S. and globally. Apple installs iOS on all Apple mobile devices and does not license iOS to other mobile device manufacturers. More than half of mobile devices in the U.S. run on iOS or iPadOS, an iOS derivation for tablets introduced in 2019. Apple’s market power is durable due to high switching costs, ecosystem lock-in, and brand loyalty.

It is unlikely that there will be successful market entry to contest the dominance of iOS and Android. As a result, Apple’s control over iOS provides it with gatekeeper power over software distribution on iOS devices. Consequently, it has a dominant position in the mobile app store market and monopoly power over distribution of software applications on iOS devices. The key players in this industry remained the same over the last two technology waves, staying dominant through the shift to mobile and the rise of AI. In the past, dominant businesses found it difficult to navigate innovation or disruption waves. By contrast, Facebook, Google, Amazon, Apple, and even Microsoft were able to ride these waves without significant impact on market share or profit margins. This indirect evidence corroborates the argument that these companies are facing few competitive threats. Apple’s App Store is the only method to distribute software applications on iOS devices. It does not permit alternative app stores to be installed on iOS devices, nor does it permit apps to be sideloaded. As discussed earlier in this Report, consumers have a strong preference for native apps to web apps, and Apple has acknowledged key differences between them. Developers have explained that Apple actively undermines the open web’s progress on iOS “to push developers toward building native apps on iOS rather than using web technologies.” As a result, Apple’s position as the sole app store on iOS devices is unassailable. Apple fully controls how software can be installed on iOS devices and CEO Tim Cook has explained that the company has no plan to permit an alternative app store. The former director of the app review team for the App Store observed that Apple is “not subject to any meaningful competitive constraint from alternative distribution channels.” In response to these concerns, Apple has not produced any evidence that the App Store is not the sole means of distributing apps on iOS devices and that it does not exert monopoly power over app distribution.

Apple says it does not create—nor is it aware of third-party data—that tracks market share in the app distribution market. Apple claims the App Store competes in a larger software distribution market that includes other mobile app stores, as well as the open internet, personal computers, gaming consoles, smart TVs, and online and brick-and-mortar retail stores. While consumers can access software and developers can distribute software through those platforms, none of those platforms permit consumers to access apps on an iOS device, or for developers to distribute apps to iOS devices.

Apple’s monopoly power over software distribution on iOS devices appears to allow it to generate supra-normal profits from the App Store and its Services business. Apple CEO Tim Cook set a goal in 2017 to rapidly double the size of the Services business by the end of 2020. Apple met this goal by July 2020, six months ahead of schedule. The Services business accounted for nearly 18% of revenue.

Services grew faster than Products in recent years, increasing by more than 41% since 2017. The Services category is also Apple’s highest margin business at 63.7% in fiscal year 2019 and 67.2% for Apple’s quarter ending in June 2020. Annual Revenue by Segment Industry observers credit Apple’s rising valuation and future long-term value to its successful focus on growing the Services business. Apple has attributed the growth of Services as a driver of the firm’s profits from sales and an important factor supporting Apple’s overall margins as hardware.

As Apple stock tops $500, bulls cite these key reasons it could still go higher. The company has consistently credited the App Store, licensing sales, and AppleCare for the success of Services.

b. Merger Activity.

In 2019, Apple CEO Tim Cook told CNBC that Apple buys a new company every two to three weeks, with a focus on acquiring “talent and intellectual property.” In July 2020, Mr. Cook explained that Apple’s “approach on acquisitions has been to buy companies where we have challenges, and IP, and then make them a feature of the phone.” An Apple submission to the Subcommittee explains that it: [H]as not embarked on a strategy of acquiring nascent competitors in service of its growth and market position. Instead, Apple’s acquisitions generally are meant to complement its product business by accelerating innovation and building out new features and technologies for Apple’s hardware and software offerings. In 2020, Apple continued acquiring small firms, including artificial intelligence and virtual reality startups, an enterprise software maker, a contactless payment startup, and a weather application. AppleCare is Apple’s extended warranty products for Apple devices.

One of Apple’s largest transactions occurred in 2019, when it paid $1 billion to acquire Intel’s smartphone modem business. Apple has also recently acquired software companies to create a foundation from which it could launch new apps. After purchasing the digital magazine subscription service Texture in 2018, for example, Apple integrated most of Texture’s functionality into its own Apple News+ service, which debuted the following year. Similarly, one of Apple’s largest purchases to date—its $3 billion acquisition of Beats Electronics in 2014—was instrumental to the 2015 launch of Apple Music. Apple sought to grow Apple Music quickly after its introduction. Apple pre-installed the service on iPhones and made it the only music service accessible through Siri, Apple’s virtual assistant. Apple also offered Apple Music with a free month trial period and made it available on Android devices. The strategy saw Apple gain 10 million paying subscribers within six months. Apple supplemented its music services business in 2018 by acquiring the music recognition app Shazam, and most recently in 2020 by acquiring podcast app Scout FM. It is common for Apple to integrate apps it purchases into its own pre-existing apps or into the iOS mobile operating system. Examples include acquisitions of Swell, a podcast app that Apple acquired in 2014, and HopStop, a transit navigation app it acquired in 2013.

Apple has followed a similar strategy for integrating the Dark Sky weather app. Apple shut down Dark Sky’s Android app in August 2020 and plans to integrate the app’s features with the iPhone’s Weather widget on iOS 14. In addition to its app, Dark Sky supplied data to independent weather apps, like Carrot, Weather Line, and Partly Sunny. As a result of Apple’s takeover of Dark Sky, independent weather apps will lose access to the inexpensive, hyper-local weather data that Dark Sky supplied, leading some weather apps to shut down and others to rely on higher-priced suppliers for forecast data.

c. Conduct

i. Commissions and In-App Purchases.

The Subcommittee sought information regarding Apple’s policy of collecting commissions from apps sold through the App Store and purchases made in iOS apps. Apple charges a 30% commission on paid apps—those that charge a fee for users to download—downloaded from the App Store. It also takes a 30% fee on in-app purchases (IAP) of “digital goods and services.” App subscriptions are charged a 30% commission for the first year and a 15% commission for subsequent years. Apps are not permitted to communicate with iOS users that the app may be available for purchase at a lower price outside the App Store, provide links outside of the app that may lead users to find alternative subscription and payment methods, or offer their own payment processing mechanism in the app to avoid using Apple’s IAP. Apps that violate Apple’s policies can be removed from the App Store, losing access to the only means of distributing apps to consumers with iOS devices.

Apple describes its policies as a standard industry practice and says that other app stores charge the same fees. In 2020, Apple funded a study that concluded that other software distribution platforms run by Google, Amazon, Samsung, Microsoft, and others charge identical or similar commissions on software downloads and transactions, and that commissions are common in other digital markets. Apple also highlighted that its commissions are lower than the cost of software distribution by brick-and-mortar retailers, which dominated the marketplace prior to the introduction of the App Store. The Apple-commissioned study explained Apple funds the App Store through a $99 annual fee it charges to developers and $299 for developers building enterprise apps, as well as the commission and fees collected on apps and in-app purchases. Apple also noted that 84% of all apps distributed through the App Store pay no commissions or fees. Apple does not take a commission on purchases from apps like Uber or Etsy that sell “physical goods or services that will be consumed outside the app.” Apple also makes some exceptions to its rules and may change or update its rules. For example, Apple has an exception for “Reader” apps such as Netflix and Kindle that permit users to access content purchased outside the app, but do not allow for in-app subscriptions or purchases. Apple also makes exceptions for “third party premium video apps” that integrate with Apple TV and other Apple services.Mr. Cook explained, “[t]oday, there are over 130 apps that participate in this program,” and “[t]he reduced 15% commission is available to all developers offering premium video content on the same terms as Amazon Prime Video, with the same qualification criteria.” Amazon Prime Video, Altice One, and Canal+ have been publicly confirmed as participants.

During the investigation, the Subcommittee received evidence from app developers regarding Apple’s commissions and fees for IAP. ProtonMail, a secure email provider, explained that Apple’s justification of its 30% commission overlooks the dynamics of the marketplace for distributing software to consumers with iOS devices—conflating practices that may be unremarkable in competitive markets but abusive in monopoly markets. For example, personal computer (PC) users can install software from app stores run by Microsoft, Google, Amazon and others, or they can download software directly from the software developer’s website and bypass app stores altogether. Similarly, Apple’s Mac App Store is one of many options for Mac users to download software.

While Samsung is a global leader in smartphones, the Samsung Galaxy Store is one of several app stores available on Samsung’s mobile devices. Google’s Play Store dominates app distribution on Android devices and is the most apt comparison to the App Store, but Google permits some competition via sideloading and alternative app stores. In contrast, Apple owns the iOS operating system as well as the only means to distribute software on iOS devices. Using its role as operating system provider, Apple prohibits alternatives to the App Store and charges fees and commissions for some categories of apps to reach customers. It responds to attempts to circumvent its fees and commissions with removal from the App Store. Because of this policy, developers have no other option than to play by Apple’s rules to reach customers who own iOS devices. Owners of iOS devices have no alternative means to install apps on their phones. Apple notes that its 30% commission has remained static for most apps for more than a decade. A group of developers that filed a lawsuit against Apple because of this policy argue that the persistence of Apple’s 30% rate over time, particularly “despite the inevitable accrual of experience and economies of scale,” indicates there is insufficient competition. Additionally, as previously noted, there is little likelihood for new market entry in the mobile operating system or mobile app store markets to compel Apple to lower its rates.

Industry observers have also challenged Apple’s implicit claim that the iPhone was the start of the online software distribution market. For example, Mac and iOS developer Brent Simmons remarked that “when the App Store was created, developers were selling and distributing apps over the web, and it worked wonderfully,” noting that he began distributing software over the internet in the 1990s. Software designer and technology writer John Gruber agreed, explaining that in the mid1990s there was “a thriving market for software sold directly over a thing called ‘The Internet,’” and that Apple’s omission of the fact that “direct downloads and sales over the web” pre-dated the iPhone by more than a decade “is flat-out dishonest.” Many developers have stressed that because Apple dictates that the App Store is the only way to install software on iOS devices and requires apps offering “digital goods and services” implement the IAP mechanism, that Apple has illegally tied IAP to the App Store.Consumers with iOS devices account for a disproportionately high amount of spending on apps—spending twice as much as Android users. Further, iOS users seldom switch to Android. Thus, developers cannot abandon the App Store—it is where the highest value customers are and will remain. As a result, developers say that Apple abuses its control of its valuable user base by prohibiting alternative payment processing options to compete with Apple’s IAP mechanism. Developers further argue that Apple’s 30% commission from IAP is a “payment processing” fee, and not a distribution fee. In a submission to the Subcommittee, Match said “Apple distorts competition in payment processing by making access to its App Store conditional on the use of IAP for in-app purchases, thus excluding alternative payment processors. IAP eventually becomes the vessel through which Apple extracts its extraordinary commissions.” Two app developers that offer services that compete with Apple explained that IAP is a payment processing fee and not a distribution fee. Both pointed out that Apple does not charge apps for distribution, evidenced by the fact Apple admits distributing most apps for free. Instead, Apple generates revenue by adding a 30% processing fee on transactions in the App Store and using IAP. Apple’s Developer Program website explains that Apple does charge for distribution—it requires enrollment in the Apple Developer Program and payment of a $99 fee to distribute apps on the App Store. Apple responded that its “commission is not a payment processing fee” and that it “reflects the value of the App Store as a channel for the distribution of developers’ apps and the cost of many services” it incurs to maintain the App Store.

A study commissioned by Apple in 2020 explained that the annual fees paid by developers, commissions, and charges for in-app purchases fund investments in the App Store ecosystem, such as app review, developer tools, marketing, search functionality, application program interfaces, and software development kits. Apple has also argued that its App Store Developer Guidelines— including its requirement to use Apple’s in-app purchase mechanism—is “designed to keep the store safe for our users.”

Apple’s rationale for its commissions and fees has evolved over time. Its recent explanations of the basis for its 30% commission differs significantly from its explanation of its fee and revenue expectations in the early years of the App Store. Prior to the App Store’s debut in 2008, then-Apple CEO Steve Jobs explained “We don’t intend to make any money off the App Store . . . We’re basically giving all the money to the developers and the 30 percent that pays for running the store, that’ll be great.” In 2011, Apple Chief Financial Officer Peter Oppenheimer explained to Apple’s shareholders that Apple runs the App Store “just a little over break even.”

Apple’s financial reports indicate that the App Store is faring far better than the modest business Apple originally contemplated. According to a 2019 market analysis, Apple’s net revenue from the App Store is projected to be $17.4 billion for fiscal year 2020. CNBC estimated the App Store had total sales of nearly $50 billion in 2019, generating “about $15 billion in revenue for Apple.” An analytics firm concluded that Apple likely made $15.5 billion from the App Store in 2018, and estimated $18.8 billion for 2022. Bloomberg reported that analysts forecasting Apple’s third-quarter 2020 performance predicted growth from Services “up 15% from a year earlier,” and that growth would largely be attributable to the App Store and licensing, not new services. In addition to Apple’s commissions and fees for IAP, App Store revenue also includes an $2.67 billion Apple would make through the $99 annual fee paid by Apple’s 27 million iOS developers. Apple also reportedly made $9 billion in 2018 and $12 billion in 2019 to set Google as the default search engine on the Safari browser. Revenue from setting Google as Safari’s default search engine is attributed to Apple’s Services business, which is the business unit that includes the App Store. In an interview with Subcommittee staff, Phillip Shoemaker, former director of app review for the App Store, estimated that Apple’s costs for running the App Store is less than $100 million. Other analysts estimate that the App Store has significantly higher profits. A gaming developer explained that the fees it pays Apple’s add up to millions of dollars—or even tens or hundreds of millions of dollars for some developers—far in excess of the developer’s estimate of Apple’s costs of reviewing and hosting those apps. Although only estimates, these figures indicate that as the mobile app economy has grown, Apple’s monopoly power over app distribution on iPhones permits the App Store to generate supra-normal profits. These profits are derived by extracting rents from developers, who either pass on price increases to consumers, or reduce investments in innovative new services. Apple’s ban on rival app stores and alternative payment processing locks out competition, boosting Apple’s profits from a captive ecosystem of developers and consumers.

To address this concern without compromising the security or quality of the App Store, some developers argue in favor of allowing third- party payment processors like PayPal, Square, and Stripe to compete in the App Store. They explain that the most likely competitors are already trusted and widely used for e-commerce transactions. David Heinemeier Hansson, the Founder and CTO of Basecamp, testified at the Subcommittee’s fifth hearing that Apple’s market power allows it to keep fees “exorbitantly high.” By comparison, he noted that other markets, such as credit card processes, are “only able to sustain a 2 percent fee for merchants. Apple, along with Google, has been able to charge an outrageous 30 percent for years on end.” Several other firms observed that Apple’s control over app distribution allows it to extract high fees on a minority of apps, and that competition for processing payments would drive prices down. For example, developers explain that payment processing typically costs less than 5% of the transaction value. Before the App Store, one developer reportedly explained that “[w]e typically paid about 5%—not 30%—to a payment processor,” and it “worked just as well for small developers as for large.” Other developers have noted that alternative payment processing providers charge significantly lower rates than Apple’s fee for IAP. Match estimates that Apple’s expenses related to payment processing “justify charging no more than 3.65% of revenue.”

Some app developers would prefer to implement in-house payment processing. In August 2020, Epic Games introduced a direct payment option in its Fortnite app, allowing gamers to elect to use Apple’s IAP or pay Epic directly. Epic’s payment processing option that charged consumers 10%, a 20% discount from purchases using IAP. In response, Apple disabled updates for Fortnite for violating the App Store Guidelines.

Developers have also detailed that Apple attempts to lock in its fees by preventing apps from communicating with customers about alternatives. Under the App Store Guidelines, apps may not provide any information “that direct[s] customers to purchasing mechanisms other than in-app purchase.” They also cannot communicate with iOS app customers about purchasing methods other than IAP. In an interview with Subcommittee staff , one developer that offers a “freemium” app—a popular business model where the app
is available for free but users can purchase upgrades—recalled that it sent an email to customerswith iOS devices with information about how to upgrade to a paid subscription, including a link to the service’s website where customers could upgrade their subscription. Apple responded by threatening to remove the app from the App Store and blocked its updates, including security patches. A game developer described Apple’s rules as reaching outside the App Store itself to police the communications that an app can have with its own customers, including communications intended to improve customer experience and offer discounts.

In his questions for the record for the Subcommittee’s second hearing, Representative W. Gregory Steube (R-FL) asked Apple about banning communications to customers by app providers. Apple responded that its restrictions on communications between apps and customers are to ensure Apple can collect commissions and “prevent free-riding.” Apple explained that it restricts developers from using the iOS ecosystem to “direct customers they have acquired through Apple to purchase content elsewhere for the purpose of avoiding Apple’s rightful commission.” The company described its policy as a prohibition “on developers promoting, via the App Store, transactions outside the App Store,” and said Apple’s policies were no different than most other retailers.

In June 2020, the European Commission announced that it had opened a formal antitrust investigation of Apple’s App Store rules and conduct, including “the mandatory use of Apple’s own App Store Developer Guidelines proprietary in-app purchase system and restrictions on the availability of developers to inform iPhone and iPad users of alternative cheaper purchasing possibilities outside of apps.” As Apple has emphasized growing its Services business, app developers and technology writers have observed Apple is increasingly insistent that apps implement IAP—cutting Apple in on revenue from more developers—and threatening apps that do not comply with expulsion from the App Store. In June 2020, an email app developed by Basecamp called HEY was approved by the App Store and then abruptly told it would have to implement Apple in-app purchasing or face removal from the platform. While HEY’s app updates were eventually allowed, Apple did force it to create a free trial option for iOS customers. Basecamp Founder and CTO David Heinemeier Hansson observed that Apple threatened and abused small app developers for years, and that the conflict with HEY amounted to a “shakedown.”

In August 2020, Apple denied WordPress the ability to update its app unless it implemented IAP, even though the WordPress app does not sell anything. Apple ultimately backed off its demands only after the issue received negative attention on social media. ProtonMail told the Subcommittee that its privacy-focused email app competes with an Apple’s email app, and after being in the App Store for two years, Apple demanded the ProtonMail implement IAP or be removed from the App Store. ProtonMail complied to avoid damage to its business. Internal Apple communications reviewed by Subcommittee staff indicate that Apple has leveraged its power over the App Store to require developers to implement IAP or risk being thrown out of the App Store.

Then-Apple CEO Steve Jobs once explained, “there will be some roadkill because of it. I don’t feel guilty” when confronted with developer complaints about Apple’s commission and requirement to use IAP. The Netherlands Authority for Consumers and Markets (ACM) has noted that some app developers attribute Apple’s inconsistent application of its rules to inattention to apps that are infrequently updated, and that Apple likely focuses on requiring IAP for high revenue-generating apps.

In response to the COVID-19 pandemic, some businesses moved physical events online, often booking through an app and holding the event through a video chat application. Educators have also shifted resources online, including through apps. The New York Times reported that Apple demanded a 30% commission from these virtual class offerings. As a result, one company stopped offering virtual classes to users of its iOS app. The Times reported that Apple threatened Airbnb that it would remove its app from the App Store if Airbnb did not comply with Apple’s demand for a share of its revenues. In interviews with Subcommittee staff , multiple app developers confirmed the The New York Times’ reporting. Airbnb spoke with Subcommittee staff and described conversations with the App Store team in which Apple said it had observed an uptick in the number of apps offering virtual classes in lieu of in-person classes due to the COVID-19 pandemic. As a result, Apple began canvassing the App Store to require app developers implement IAP, entitling Apple to take 30% of in-app sales. Airbnb explained that Apple’s commission, plus compliance with Apple’s pricing tiers for in-app purchases would ultimately result in a 50-60% price increase for consumers.

Technology industry observers have reported similar conduct. On June 17, 2020, Ben Thompson, a businesses that have had to change their business models from live, in-person events to virtual events as a result of the COVID-19 pandemic. Mr. Thompson quoted one developer that explained Apple was taking advantage of small businesses in the midst of the ongoing public health crisis.

At the Subcommittee’s hearing on July 29, 2020, Chairman Jerrold Nadler (D-NY) asked Mr. Cook about the allegations that Apple was canvassing the App Store to extract commissions from businesses that have been forced to change their business model in order to survive during the pandemic. Mr. Cook responded that Apple “would never take advantage” of the pandemic, but justified the conduct, explaining that the app developers were now offering what Apple defined as a “digital service” and Apple was entitled to commissions. Responding to The New York Times’ reporting on the mater, Apple defended its conduct, explaining “[t]o ensure every developer can create and grow a successful business, Apple maintains a clear, consistent set of guidelines that apply equally to everyone.” App developers affected by these changes said that after Apple’s conduct became public it created an exception to its policies until the end of 2020.

However, on January 1, 2021 those businesses will be required to implement IAP or remove the ability to book virtual classes in their apps. Developers have submitted evidence that Apple’s commissions and fees, combined with the lack of competitive alternatives to the App Store and IAP harm competition and consumers. For instance, Match called Apple’s fee for IAP “unreasonable,” leading to higher prices for consumers and “an inferior user experience and a reduction of innovation.” One developer that offers an app that directly competes with Apple told the Subcommittee that it was forced to raise prices to pay Apple’s commission. As a result, it was less competitive and fewer iOS users purchased its service. The company said that because apps often have small margins, they cannot absorb Apple’s fees, so the price consumers pay for its app is more than 25% higher than it would otherwise be. Small developers described Apple’s 30% cut “onerous.”

Epic Games, which recently filed an antitrust complaint against Apple, has told a federal court that Apple’s fees and commissions force developers “to increase the prices they charge in order to pay Apple’s app tax. There is no method app developers can use to avoid this tax.” Mac and iOS app developer Brent Simmons explained Apple’s fees reduce innovation and lead to fewer apps in the marketplace, observing: [T]he more money Apple takes from developers, the fewer resources developers have. When developers have to cut costs, they stop updating apps, skimp on customer support, put off hiring a graphic designer, etc. They decide not to make apps at all that they might have made were it easier to be profitable. In Apple’s internal documents and communications, the company’s senior executives previously acknowledged that IAP requirement would stifle competition and limit the apps available to Apple’s customers. For example, in an email conversation with other senior leaders at Apple about whether to require IAP for e-Book purchases, then-CEO Steve Jobs concluded, “I think this is all pretty simple—iBooks is going to be the only bookstore on iOS devices. We need to hold our heads high. One can read books bought elsewhere, just not buy/rent/subscribe from iOS without paying us, which we acknowledge is prohibitive for many things.”

International competition authorities have also examined the competitive effects of Apple’s App Store commissions and fees. The Australian Competition and Consumer Commission (ACCC) observed that Apple’s control over app distribution on iOS devices gives it leverage to extract commissions from apps, reducing the revenue that app providers like media businesses can invest in content. The ACM, which completed a comprehensive study of mobile app stores in 2019, noted that developers have increased prices to account for commissions and fees. The ACM also remarked that Apple’s 30% commission on in-app purchases may distort competition because Apple’s requirement to use IAP often applies to apps competing directly against Apple’s apps. As a result, app developers with small margins cannot simply absorb the cost of Apple’s commission, so they increase their price, which gives Apple’s competing service an advantage.

ii. Pre-Installed Apps, Default Settings, Private App Programming Interfaces (APIs), and Device Functionality.

In addition to investigating whether Apple abuses its monopoly power over app distribution to leverage high commissions and fees from app developers, Subcommittee also examined whether Apple abuses its role as iOS and App Store owner to preference its own apps or harm rivals. The Committee requested information regarding Apple’s practice of locking-in Apple’s apps as defaults on the iPhone, and Subcommittee Chairman Cicilline requested information from Apple regarding its practice of preinstalling its own apps on the iPhone. Subcommittee Chairman Cicilline also sought input on whether Apple’s policy of reserving certain application programing interfaces (APIs) and access to certain device functionalities for its apps gives Apple’s services a competitive advantage.

It is widely understood that consumers usually do not change default options. This is the case “even if they can freely change them or choose a competitive alternative.” Subcommittee staff reviewed communications between Apple employees that demonstrate an understanding inside Apple that pre-loading apps could be advantageous when competing against third-party apps. Apple pre-installs about 40 Apple apps into current iPhone models. Several of these apps are set as defaults and are “operating system apps” that are “integrated into the phone’s core operating system and part of the combined experience of iOS and iPhone.” According to Apple, users can delete most of these pre-installed apps. Apple does not pre-install any third-party apps, and until the September 2020 release of iOS 14, it did not allow consumers to select third-party web browser or email apps as defaults.

Apple says that it is making “more than 250,000 APIs available to developers in iOS 14.” A report by the Netherlands Authority for Consumers and Markets (ACM) on mobile app stores recently observed that app providers believe they “have a strong disadvantage” when competing with Apple’s apps due to the fact that those services are often pre-installed on iOS devices. The study also noted that “pre-installation of apps can create a so-called status-quo bias. Consumers are more likely to use prominent business analyst, wrote that app developers told him that Apple was demanding 30% commissions from the apps that are pre-installed on their smartphones.” Consumers will download apps that compete with pre-installed apps only when there is a noted quality difference, and even then, lower-quality pre-installed apps will still enjoy an advantage over third-party apps.

The European Commission’s 2019 report on competition in digital markets explained that privileging access to APIs can provide an advantage to those with greater access over those with more innovative products. Public Knowledge concluded that Apple’s control of iOS and the App store enables it to advantage its own apps and services by pre-installing them on iOS devices, leading consumers to rely on the preinstalled apps rather than looking for alternatives in the App Store. Mobile operating system providers develop APIs to permit apps to access a device’s features, such as the microphone, camera, or GPS, or other software programs and determine what information on the device apps can access. Public APIs for iOS are made available to app developers to ensure apps are integrated with the device and function as intended. These public APIs also control the services that are opened via default when users click a link to open a webpage or an address to open a map application. Private APIs access functionality that is not publicly released. Apple is permitted to use the private APIs on iOS devices, but third-party developers are not. Apple’s public APIs default to Apple’s pre-installed applications. As a result, when an iPhone user clicks on a link, the webpage opens in the Safari Browser, a song request opens in Apple Music, and clicking on an address launches Apple Maps. With some recent exceptions, iPhone users are unable to change this default setting; however they are able to send app-specific links from inside many popular apps.

For example, a person can share a link to a song in a third-party music streaming app such that it would open that song in the same app if it is already downloaded on the recipient’s smartphone. One app developer has argued, however, that Apple uses its control over iOS to give its own apps and services advantages that are not available to competitors. For example, the developer explained that for years it was barred from integrating with Siri, Apple’s intelligent virtual assistant that is built into Apple devices. Although Siri can now integrate with the app, users must explicitly request Siri launch the third-party app, otherwise it will default to launch Apple’s service. Like setting advantageous defaults and pre-installing its own apps, Apple is also able to preference its own services by reserving access to APIs and certain device functionalities for itself. ACM and technology reporters have both noted that “private APIs have the potential to give Apple apps a competitive advantage,” and that “Apple has for a long time favored its own services through APIs.” For example, from the release of iOS 4.3 until iOS 8, “third-party developers had to rely on the UIWebView API to render web pages in iOS apps, while Apple gave its own apps access to a private, faster API,” and as a result, “Google’s mobile version of Chrome for iOS could not compete with Apple’s mobile version of Safari in terms of speed.” Apple’s mobile payments service, Apple Pay, is an example of an in-house app that enjoys an advantage due to its ability to access certain functionalities, such as near-field communication (NFC), on the iPhone that are off limits to third-party apps. According to Apple, “NFC is an industry-standard, contactless technology” that enables communications between the mobile device and payment terminal. Apple Pay uses the iPhone’s NFC chip to allow users to make contactless payments at retail outlets that use the technology. However, Apple blocks access for third-party apps. In June 2020 the European Commission opened a formal antitrust investigation into Apple’s conduct in the mobile payments market, including “Apple’s limitation of access to the Near Field Communication (NFC) functionality (‘tap and go’) on iPhones for payments in stores.”

In response to questions from Subcommittee Chairman Cicilline and Representative Kelly Armstrong (D-ND) about Apple’s treatment of third-party mobile payment apps and access to the iPhone’s NFC chip, Apple said that it limits access to the NFC chip to protect the security of the iPhone and has detailed the differences between Apple’s treatment of Apple Pay and third-party mobile payment apps. The advantage Apple provides Apple Pay may be heightened during the COVID-19 pandemic. Due to the novel coronavirus, consumers have accelerated their adoption of contactless payments, with more than half of global consumers preferring contactless payments over cash or traditional credit cards. In April 2020, MasterCard reported a 40% rise in use of contactless payments, with the trend expected to continue after the pandemic. MasterCard CEO Ajay Banga explained the trend was driven by shoppers “looking for a quick way to get in and out of stores without exchanging cash, touching terminals, or anything else.”

Apple itself has capitalized on the perception that contactless is the safest way to make transactions, marketing Apple Pay as “a safer way to pay that helps you avoid touching buttons or exchanging cash.” Like Apple Pay, Safari is another pre-installed app that enjoys advantages over rivals. Safari is Apple’s default browser on iOS and Mac devices. When someone using an Apple device clicks on a website link, the webpage opens in the Safari browser. Until the September 2020 release of iOS 14, Apple did not allow consumers to select third- party web browser as a default. This was unique to iOS. Other mobile device operating systems allow the user to set a default browser across all applications. Apple’s policies require alternative browsers apps for iOS (iPhone) to use Apple’s WebKit browser engine. As a result, all competing web browser companies must rebuild their product to make it available for iOS users. Additionally, browser engines are used in other applications that link to web content, such as email applications. Market participants explained to Subcommittee staff that these guidelines cost significant internal resources and create a hurdle for market entry on iOS. These requirements also make alternative browsers on iOS less technically distinct from Safari limiting product differentiation. Further, market participants expressed concern that because Apple mandates the use of WebKit, as opposed to allowing developers an option, that WebKit has become slower to innovate and adopt standards. At the Subcommittee’s second hearing, Chairman Cicilline asked Apple about its policies related to web browser engines. Apple responded: “By requiring use of WebKit, Apple can provide security updates to all our users quickly and accurately, no matter which browser they decide to download from the App Store.” While market participants agree that Apple’s WebKit mandates would allow for easier updates to browser apps, there is disagreement about whether WebKit is measurably less secure than other browser engines. The ACM has noted app providers have limited access to some APIs “that are essential for the functioning of apps. In certain cases, these functionalities are, however, used by Apple for their own apps,” which may limit competitive alternatives to Apple’s products and services.

In January 2020, Kirsten Daru, Chief Privacy Office and General Counsel of Tile offered testimony to Subcommittee about this dynamic. Tile is a company that makes hardware and software that helps people find lost items. Tile testified that for years it successfully collaborated with Apple. However, in 2019 reports surfaced that Apple planned a launch a hardware product to compete with Tile. In her testimony, Ms. Daru said that Apple’s 2019 release of iOS 13 harmed Tile’s service and user experience while simultaneously introducing a new pre- installed Apple finder app called Find My. Changes to iOS 13 made it more difficult for Tile’s customers to set up the service, requiring several confusing steps to grant Tile permission to track the phone’s location.

Meanwhile, Apple’s Find My app was pre-installed on iOS devices and activated by default during iOS installation. Users are unable to opt out of Find My’s location tracking “unless they go deep into Apple’s labyrinthine menu of settings.” Tile’s response to the Subcommittee’s Questions for the Record included detailed location permission flow comparisons between Tile and Find My. Tile explained that as a result of Apple’s changes to iOS 13 it saw significant decreases in users and a steep drop off in users enabling the proper settings on iOS devices. A group of app developers wrote to Apple CEO Tim Cook in 2019 arguing that Apple’s new location notification permission polices will hurt their businesses and accused Apple of acting anticompetitively because it was treating its own services differently: The developers conclude their email by asserting that Apple’s own apps don’t have to jump through similar hoops to get access to user location. An Apple app called Find My for tracking the location of other iPhone users, for example, bypasses the locating tracking requests that apps from outside developers must go through, the email reads.

Instead, Find My gains location access through a process that occurs as users install the new operating system. The app developers —including Tile, Arity, Life360, Happn, Zenly, Zendrive, and Twenty—explained that this gives Apple products that compete against their apps an advantage. “Apple says Find My and other apps are built into iOS and that it doesn’t see a need to make location-tracking requests from users for the apps after they install the operating system.” Apple also differentiates Find My by pointing out that “‘Find My’ stores user location data locally on the user’s iPhone, and Apple only transmits the location up on the user’s request.” In response to the Subcommittee’s questions at its second hearing in July 2019, Apple responded and explained that the iOS 13 changes give users more control over background location tracking by apps. Apple also explained that turning on location tracking to Apple’s Find My service was “essential” for users, and that the disparate treatment between Find My and Tile was due to the fact that data from Find My remains on the device, while Tile stores data externally. Additionally, during Apple’s June 2020 World Wide Developers Conference, Apple announced that the Find My app would work with third-party finder hardware like Tile’s. However, Apple’s service would require companies like Tile to abandon their apps and the ability to differentiate their service from Apple’s and other competitors. Apple’s solution would continue to put Tile and other apps and hardware developers offering finder services at a competitive disadvantage.

iii. App Search Rankings.

In response to extensive reporting on the subject, Subcommittee staff has also examined the competitive effects of Apple’s search rankings in its App Store. In 2019, the Wall Street Journal and The New York Times both conducted extensive investigations and reported that Apple appeared to be favoring its apps in the App Store search results. The Wall Street Journal explained that “Apple’s mobile apps routinely appear first in search results ahead of competitors in its App Store, a powerful advantage that skirts some of the company’s rules on search rankings.” The New York Times reported that six years of analysis of App Store search rankings found Apple-owned apps ranked first for at least 700 common search terms. “Some searches produced as many as 14 Apple apps before showing results from rivals,” although app developers could pay Apple to place ads at the top of the search results. Searches for the app titles of competing apps even resulted in Apple’s apps ranked first. Apple’s apps “ranked first in more than 60% of basic searches, such as for ‘maps’” and “Apple apps that generate revenue through subscriptions or sales, like Music or Books, showed up first in 95% of searches related to those apps.” The Wall Street Journal noted that growing revenue from its apps is core to Apple’s strategy of offsetting sluggish hardware sales by increasing revenue from its Services business. Rival app developers slipped down the search rankings as Apple introduced new services in their product categories. For example, Spotify had long been the top search result for the query “music,” but Apple Music quickly became the top search result shortly after it joined the App Store in June 2016. By the end of 2018, eight of Apple’s apps appeared in the first eight search results for “music,” and Spotify had fallen to the 23rd result. Similarly, Audiobooks.com was the top ranked result for “audiobooks” for nearly two
years but was overtaken by Apple Books shortly after Apple began marketing for Books. Audiobooks explained to the Wall Street Journal that losing the top search ranking to Apple “triggered a 25% decline in Audiobooks.com’s daily app downloads.”

The reporting on App Store search also revealed that Apple may also advantage its apps by holding them to a different standard when they appear in the App Store search rankings. Apple told The Wall Street Journal “it uses 42 factors to determine where apps rank,” and that the four most important factors are “downloads, ratings, relevance, and ‘user behavior,’” with user behavior the most important factor because it measures how often users select and download an app.Approximately forty of Apple’s apps come preinstalled on iPhones. These apps do not have reviews and consumers cannot rate them. Mr. Cook explained at the Subcommittee’s hearing that Apple’s “apps that are integrated into the iPhone are not reviewable by users on the App Store.” Apple has also said that its search algorithm works the same for all apps, including its own. Despite the fact that Apple’s pre-installed apps do not have ratings or reviews—factors that Apple says are most influential in determining app ranking—many of Apple’s pre-installed apps “still tend to be ranked first, even when users search for exact titles of other apps.” For example, Apple Books has no reviews or rankings and appears first in a search for “books,” while competing apps have tens-of-thousands of customer reviews and ratings of 4.8 or 4.9 stars on Apple’s five-star rating system. A search by Subcommittee staff of terms “music,” “news,” “TV,” and “podcast” returned Apple Music, News, TV, and Podcasts as top ranked search results although those apps do not have any reviews or ranking. Despite the lack of reviews or rankings, Apple told the Wall Street Journal that “the No. 1 position for Books in a ‘books’ search is reasonable, since it is an exact name match.” Philip Schiller, Apple’s Senior Vice President, Worldwide Marketing who oversees the App Store and Eddy Cue, Apple’s Senior Vice President Internet and Software Services said “there was nothing underhanded about the algorithm the company had built to display search results in the store,” that Apple’s apps tend to rank highly because they are popular and their generic names like Books and Music closely match common search terms. It appears that Apple does not apply the same rule to third-party apps. Documents reviewed by Subcommittee staff show that Apple previously punished non-Apple apps that attempted to “cheat” the app store rankings. Apple determined that at least one third-party app had achieved its high search ranking because its name was a generic name that was also a common search term. Apple’s employees determined it was cheating to give an app the name of common search term. In February 2018, Apple’s App Store search team noted that an app named “Photo Editor— Stylo” was the top ranked result when users searched the App Store for “photo editor.” In an email thread with Philip Schiller, Apple’s Senior Vice President, Worldwide Marketing, an Apple employee wrote that “[s]ince the app name matched a broad query term like ‘photo editor’ the developer was able to game the query with a direct name match.” The Apple employee explained that “[t]he app has been added to the Search Penalty Box for rank demotion,” and the action was labeled as complete. Additional action was slated to disable the initial boost that new apps are given in the app store if the app name is an “exact match to broad queries.” Here, Apple punished an app for the same conduct it said justified Apple’s position atop the App Store rankings. Apple’s position as the provider of iOS enabled it to designate the App Store as the sole means for app developers to distribute software to iPhone users. Apple’s public statements, including testimony by Mr. Cook that Apple’s apps “go through the same rules” as more than 1.7 million third party apps appear to be inconsistent with Apple’s actual practices. In this case, Apple leveraged its control of iOS and the App Store to give its own apps preferential treatment, and applied a different set of rules than third-party apps, punishing them for the very conduct Apple engaged in. Subcommittee staff did not have access to additional evidence from Apple to determine how widespread this practice is within the company.

iv. Competitively Sensitive Information. In addition to investigating allegations Apple engages in self-preferencing in the App Store, the Committee sought information regarding whether Apple exploits third-party developers that rely on distribution in the App Store. Developers have alleged that Apple abuses its position as the provider of iOS and operator of the App Store to collect competitively sensitive information about popular apps and then build competing apps, or integrate the popular app’s functionality into iOS. The practice is known as “Sherlocking.” The antitrust laws do not protect app developers from competition, and platforms should continue to innovate and improve their products and services. However, Sherlocking can be anticompetitive in some instances. Some app developers have complained that Apple leverages its control of iOS and the App Store to glean business intelligence that enables it to better compete against third-party apps. For example, after a stress relief app called Breathe was Sherlocked in 2016, the app’s developers said that Apple used third-party developers “as an R&D arm.” The Washington Post reported on the phenomenon, explaining: Developers have come to accept that, without warning, Apple can make their work obsolete by announcing a new app or feature that uses or incorporates their ideas. Some apps have simply buckled under the pressure, in some cases shutting down. They generally don’t sue Apple because of the difficulty and expense in fighting the tech giant—and the consequences they might face from being dependent on the platform. At the Subcommittee’s fifth hearing, Representative Joe Neguse (D-CO) asked Ms. Daru of Tile about how Apple used competitively sensitive information it collects as owner of the iOS ecosystem to compete against third-party apps. She explained that as operating system provider and App Store operator, Apple knows who Tile’s customers are, the types of apps those customers preferred, and the demographics of iOS users that look at Tile’s app or search for similar apps— information that would give Apple a competitive advantage against Tile.
Apple had harmed Tile’s service and user experience, while simultaneously introducing a rival app and preparing to launch a rival hardware product. Blix, developer of email management app BlueMail, has sued Apple in federal court claimed Apple has engaged in Sherlocking and infringed the patents underlying BlueMail: Apple frequently takes other companies’ innovative features, adds those ideas to Apple’s own software products without permission, and then either ejects the original third-party application from the App Store (as it did with Blix’s software) or causes the third-party software developer to close its doors entirely. In response to the requests for information, Match Group, Inc. told the Subcommittee that Apple has a history of “closely monitoring the success of apps in the App Store, only to copy the most successful of them and incorporate them in new iPhones” as a pre-installed app. Phillip Shoemaker, former director of app review for the App Store, similarly told Subcommittee staff that during his time at Apple an app developer proposed an innovative way to wirelessly sync the iPhone and Mac. The app did not violate any of Apple’s Guidelines, but it was rejected from the App Store nonetheless. Apple then appropriated the rejected app’s feature for its own offerings. During the Subcommittee’s sixth hearing, Rep. Neguse asked Mr. Cook about Tile’s testimony. In particular, he asked if Apple has access to the confidential information of app developers, and whether Apple’s Developer Agreement explicitly authorizes Apple to use developers’ information to build apps to compete against them. Mr. Cook’s answer was non-responsive regarding allegations of Sherlocking. Instead, he said that Apple does not violate other companies’ intellectual property rights.

We respect innovation. It’s what our company was built on. We would never steal somebody’s IP. In contrast, Apple co-founder and former CEO Steve Jobs once noted that “[w]e have always been shameless about stealing great ideas.” The Apple Developer Agreement, which Apple requires every app developer to agree to, appears to warns developers that in exchange for access to the App Store, Apple is free to build apps that “perform the same or similar functions as, or otherwise compete with” apps in the App Store. Additionally, “Apple will be free to use any information, suggestions or recommendations you provide to Apple pursuant to this Agreement for any purpose, subject to any applicable patents or copyrights.” Mr. Cook’s statement that Apple’s apps play by the same rules as other apps appears contrary to Apple’s stated policies. While the Apple Developer Agreement provides Apple the right to replicate third-party apps, Apple’s Guidelines direct developers not to “copy another developer’s work” and threaten removal of apps and expulsion from the Developer Program for those that do. Further, the Guidelines instruct developers to “[c]ome up with your own ideas,” and admonishes them “[d]on’t simply copy the latest popular app on the App Store, or make some minor changes to another app’s name or UI and pass it off as your own.” Lastly, Apple differentiates between—rather than conflates or confuses—copycat apps and intellectual property infringement, which are both prohibited in the App Store. Apple noted that MDM could allow the app developer to access sensitive content on the device. According to The New York Times, the parental control apps using MDM had been offered in the App Store for years, and hundreds of updates to those apps had been approved by Apple. As a result, many apps were forced to shut down, although some were given a reprieve. Two parental control apps filed a complaint with the European Commission, alleging Apple’s App Store policies were anticompetitive. The complaint alleged that as Apple purged competitors it introduced Screen Time, pre-installed Screen Time on iOS 12 and activated it by default, and gave Screen Time access to iOS functionalities it denied to competing third-party apps. Subcommittee staff reviewed emails from parents who contacted Apple to complain about the removal of one of the purged parental control apps. They said that Screen Time was a comparably worse option for consumers—and described it as “more complicated” and “less restrictive” than competitors. In emails to the company reviewed by Subcommittee staff, parents complained about Apple’s monopoly power over app distribution on iOS and self-interest in promoting Screen Time motivated Apple’s actions.2324 In response, Apple Senior Vice President Worldwide Marketing, Phil Schiller explained that Screen Time was “designed to help parents manage their children’s access to technology.” He added that Apple would “work with developers to offer many great apps on the App Store for these uses, using technologies that are safe and private for us and our children.”

Internally, Apple’s Vice President of Marketing Communications, Tor Myhren concurred, responding “[t]his is quite incriminating. Is it true?” to an email with a link to The New York Times’ reporting. Apple’s communications team asked CEO Tim Cook to approve a “narrative” in that Apple’s clear-out of Screen Time’s rivals was “not about competition, this is about protecting kids privacy.” Developers of the purged apps also contacted Apple, outraged that they had been removed from the App Store while other apps that used MDM remained. One developer explained it had invested more than $200,000 building its parental control app, then another $30,000 to fix the problem Apple identified, only to be told that Apple would no longer support parental control apps in the App Store. Although Apple claimed its conduct was motivated to protect privacy and not intended to clear out competitors to Screen Time, Apple reinstated many of the apps the same day that it was reported the Department of Justice was investigating Apple for potential antitrust violations. Apple’s solution to address privacy concerns was to ask the apps to promise not to sell or disclose user data to third parties, which could have been achieved through less restrictive means and without removing those apps from the App Store.

Developers of parental control apps asked Apple to “release a public API granting developers access to the same functionalities that Apple’s native ‘Screen Time’ uses.” Eventually, Apple did grant some apps access to APIs, but only after rival app developers were accused of being a risk to children’s privacy, removed from the App Store, forced to incur significant costs, only for Apple to change its mind. As one developer noted, Apple’s new MDM privacy policies resulted in “really nothing much changing from the developer side as far as the technology goes.”

Here, Apple’s monopoly power over app distribution enabled it to exclude rivals to the benefit of Screen Time. Apple could have achieved its claimed objective—protecting user privacy—through less restrictive means, which it ultimately did only after significant outcry from the public and a prolonged period of harm to rivals. Apple’s conduct here is a clear example of Apple’s use of privacy as a sword to exclude rivals and a shield to insulate itself from charges of anticompetitive conduct. Subcommittee staff learned that Apple has engaged in conduct to exclude rivals to benefit Apple’s services in other instances. For example, Mr. Shoemaker explained that Apple’s senior executives would find pretextual reasons to remove apps from the App Store, particularly when those apps competed with Apple services.

vi. Opaque Guidelines and Arbitrary Enforcement At the Subcommittee’s sixth hearing, Representative Henry C. “Hank” Johnson, Jr. (D-GA) asked Mr. Cook about how the App Store Developer Guidelines are interpreted and applied to developers in the App Store. Subcommittee Chairman Cicilline requested similar information about the Guidelines as well, including how they have evolved and whether there are “unwritten rules” developers must comply with.

The Guidelines are rules for the more than 20 million iOS app developers and more than 1.8 million apps in the App Store must comply with to reach “hundreds of millions of people around the world.” Apple notes that the App Store is “highly curated” and that “every app is reviewed by experts.” The introductory section of the Guidelines warns that Apple can create new rules at any time, and explains “[w]e will reject apps for any content or behavior that we believe is over the line. What line, you ask? Well as a Supreme Court Justice once said, ‘I’ll know it when I see it.’ And we think that you will also know it when you cross it.” App developers the Subcommittee spoke with expressed frustration with Apple’s curation of the App Store. David Heinemeier Hansson testified before the Subcommittee and explained: It’s complete tyranny, and the rules are often interpreted differently by different reviewers because they’re intentionally left vague. So we live in constant fear we may have violated these vague rules, and that the next update to our applications will be blocked by Apple. There are countless examples where developers large and small have been denied access to publish their applications without explanation for days or even weeks at a time. One social media platform expressed concern that Apple has absolute discretion about whether to approve apps or accept updates.

Developers are frustrated that Apple’s interpretation and enforcement of the Guidelines have changed over time, despite prior precedents and the fact developers rely on understanding the Guidelines to operate their businesses. One developer described Apple’s Guidelines as “arbitrarily interpreted,” and another party that called it “opaque and arbitrary.” Internally, after an app was rejected from the App Store an Apple employee wrote to the leadership of the App Store that Apple’s decision “still isn’t obvious to people inside the company that work directly on the App Store.” In 2017, Gizmodo reported that iOS app maker Deucks saw its Finder for AirPods app removed from the App Store. The app used the iPhone’s Bluetooth signal to locate lost AirPods, helping its users find a missing earbud and save money by not having to purchase replacements. After the app was reviewed and approved, it disappeared from the App Store. Deucks told Gizmodo that Apple’s app review team “didn’t find anything wrong with the app itself, but rather they didn’t like the ‘concept’ of people finding their AirPods and hence [the app] was deemed ‘not appropriate for the App Store.’” At the time, Deucks had several other finder apps, such as Finder for Fitbit and Finder for Jawbone, that remained available in the App Store. Developers also say that Apple uses its power over the App Store to change the Guidelines when convenient in ways that benefit Apple. The Guidelines—along with their interpretation and enforcement—all change over time in ways that always appear to benefit Apple. Spotify noted, “[t]he reality is Apple continues to move the goal posts and change the rules to its advantage and the detriment of developers,” and that the company’s “selective and capricious enforcement [of its App Store policies] is designed to put companies like [Spotify] at an untenable competitive disadvantage.” ProtonMail explained it offered a free version of its app in the App Store for years, but then Apple abruptly changed the way it applied its IAP requirement and demanded the app add the ability for consumers to purchase upgraded functionality through the app—giving Apple a 30% cut from those subscriptions. ProtonMail noted that its app competes with an Apple service and that requiring it to implement IAP would increase its customer acquisition costs and make it less competitive, benefitting Apple. Another party Subcommittee staff spoke with said when Apple introduces a new app, developers with rival apps know they may be targeted for a violation of a rule Apple has suddenly decided to interpret or enforce differently. Another app developer that competes with an Apple services noted the Guidelines are constantly shifting, that Apple arbitrarily decides when an app no longer complies with the rules, and those decisions always favor Apple’s interests. Others have noted that Apple unilaterally determines if, how, and when to apply its Guidelines, and that it also freely makes up “unwritten rules” when convenient.

Apple said that it has a “set of standard terms for Amazon, and every other video-streaming service that met the criteria, to launch their service on Apple TV and iOS.” One of Apple’s business partners told Subcommittee staff that it suspects Amazon receives preferential treatment by being exempt from sharing revenue for some categories of transactions. Subcommittee staff reviewed communications between Apple CEO Tim Cook and an executive from Baidu regarding whether Apple would provide Baidu with preferential treatment. At the Subcommittee’s sixth hearing, Rep. Johnson questioned Mr. Cook whether Apple differentiates in how it treats app developers. Rep. Johnson also asked if it was true that Apple assigned Baidu two employees to help it navigate the App Store bureaucracy, and whether other app developers receive the same access to Apple personnel. Mr. Cook responded, “we treat every developer the same,” and explained the App Store Guidelines “apply evenly to everyone.” He also said “I don’t know about that, sir,” in response to Mr. Johnson’s inquiry about Baidu, adding, “We do a lot of things with developers including looking at their beta test apps regardless of whether they’re large or small.” Communications reviewed by Subcommittee staff show that in 2014 Baidu requested, among other things, that Apple “set up a fast track for the review process for Baidu APPs,” along with setting Baidu as the default search and mapping services on “all Apple devices in China.” Mr. Cook solicited feedback from Apple’s senior executives regarding these and other requests from Baidu, and also noting, “I think we should have someone focus on them as we have done with Facebook. Thoughts?” Responding to the email thread with Mr. Cook’s request that Apple focus on Baidu as it had with Facebook, one executive explained, for integration,” and responded to Baidu’s app review fast track request, “I believe we put a lot of work into having a fast review process for all apps.” Within two weeks, Mr. Cook responded to the Baidu executive’s requests. “I’d like Apple to have a deeper relationship with Baidu,” Cook wrote, noting that “some of” the Baidu executive’s requests were “great starts.” In response to the Baidu executive’s request for “APP Review Fast Track,” Mr. Cook wrote “We can set up a process where Baidu could send us a beta app for review and this can often speed up the process.” Mr. Cook then noted he had assigned Baidu two employees from App Store chief Phil Schiller’s team to “help manage through Apple.” When asked about these issues in questions submitted for the record following the hearing, Mr. Cook explained his view that “There is no ‘fast track’ for App Review special to Baidu,” that “any developer can request expedited review from App Review by submitting a formal expedite request,” and “[t]he beta app review process I referenced in my email has been available to developers since 2009.” Mr. Cook also noted “The key contacts referenced in my email were focused on other strategic opportunities outlined by Baidu. Neither individual had responsibility for App Store review.” In a subsequent interview with Mr. Shoemaker, the former Director of App Review for the App Store, Subcommittee staff asked about Apple’s treatment of app developers. Mr. Shoemaker responded that Apple “was not being honest” when it claims it treats every developer the same. Mr. Shoemaker has also written that the App Store rules were often “arbitrary” and “arguable,” and that “Apple has struggled with using the App Store as a weapon against competitors.” He has noted that “Apple has complete and unprecedented power over their customers’ devices. The decisions they make with regards to third-party apps needs to be above reproach, and currently are not.” Mr. Shoemaker also admitted that Apple advantages its own apps over third-party apps.

He has previously noted that apps that compete against Apple’s services have a track record of problems getting through the App Store’s review process. For example, Apple’s gaming service, Apple Arcade, is a type of app that was “consistently disallowed from the store,” when offered by third-party developers, but Apple allowed its own app in the store “even though it violates existing [App Store] guidelines.” Mr. Shoemaker explained to Subcommittee staff that Apple’s new Guideline 3.1.2a related to streaming game services was likely written to “specifically exclude Google Stadia,” describing the decision as “completely arbitrary.” Similar conduct has been commented on by the courts, as well as international antitrust authorities. Apple disputes that its rules are opaque and arbitrarily applied. In response to questions from Rep. Johnson, Mr. Cook insisted the Guidelines are “open and transparent,” and that Apple “treat[s] every developer the same.” In response to questions submitted for the record from Subcommittee Chairman Cicilline (D-RI), Mr. Cook reiterated that “[t]he Guidelines provide transparency and act as a practical guide to help developers better understand the app approval process. . . . Apple attempts to apply the Guidelines uniformly to all developers and all types of apps.” Apple appears to have recently revised some of its App Store policies under the scrutiny of the Subcommittee, the Department of Justice, and global competition authorities. In June 2020, Apple announced new policies for its App Store review that will allow app developers to appeal decisions by app reviewers and even challenge the Guidelines governing the App Store. Apple also announced that app updates with bug fixes will no longer be held up due to a violation of an App Store guideline. Additionally, on September 11, 2020 Apple changed its App Developer Guidelines to address some of the questions raised about the Guidelines arising from many recent controversies described earlier in this Report.

3. Siri Intelligent Voice Assistant

a. Market Power

Apple describes Siri as “an intelligent assistant that offers a faster, easier way to get things done on Apple devices,” helping users to “make calls, send text messages or email, schedule meetings and reminders, make notes, search the Internet, find local businesses, get directions, get answers, find facts, and more just by asking.” Apple integrated Siri into iPhone 4S at its release in October 2011. As of January 2018, Apple said Siri was active on over 500 million devices, making Siri one of the most widely used voice assistants in the world. In a submission to the Subcommittee, Apple states that it neither creates market share data for Siri nor tracks third-party market share data for integrated voice assistants. Market research firm FutureSource Consulting found that as of December 2019 Siri was the leading intelligent virtual assistant with a 35% market share globally. A third-party supplied the Subcommittee with additional market research that reported in the first half of 2018 Apple’s Siri was built into 42% of virtual assistant-enabled devices sold worldwide. Apple, along with Google, Amazon, and Microsoft are the leading providers of intelligent virtual assistants. Siri’s success reflects its integration into the iPhone and other Apple hardware, such as the iPad, Mac, Apple Watch, Apple TV, and HomePod. Siri is the hub of Apple’s ecosystem of smart-home devices. Users can control Apple HomeKit-compatible devices using Siri on an Apple device.

b. Merger Activity

The startup Siri, Inc launched the Siri app for iOS in February 2010 based on a prototype developed by Adam Cheyer while working at SRI International Research Lab. Apple acquired the company two months later. Apple has followed up on its acquisition of Siri with a series of additional acquisitions to strengthen Siri’s underlying technology and natural language processing. For example, in 2019, Apple acquired Laserlike, technology to help Siri improve at delivering personalized results for users. In 2020, Apple acquired Inductiv, an AI technology for correcting data flaws, Xnor.ai which specializes in low-power, edge-based artificial-intelligence tools needed for smart home devices, and Voysis to increase Siri’s speech recognition accuracy.

c. Conduct

As with many of Apple’s other products and services, Apple has taken a walled garden approach to the intelligent voice assistant market by, among other things, limiting interoperability by restricting how digital voice assistants work on Apple devices and how Siri works with non-Apple devices, and by using Siri to guide users to its own products and services.

Apple does not allow competing digital voice assistants to replace Siri as the default on Apple devices. On iOS devices the user must download the app for a competing digital voice assistant and then either use Siri to access that voice assistant, or use that app directly. Additionally, Apple does not have a program where third-party device manufactures can install a speaker that receives Siri commands; only Apple devices can respond to the “hey Siri” prompt. While third-party hardware manufactures can make their products Siri- compatible through the Works with Apple HomeKit, the voice commands needed to control the smart devices must still be directed to Siri on an Apple device, such as an iPhone or iPad.

In addition to keeping Siri closely tied to Apple hardware, Apple has used its voice-enabled devices to strengthen consumer engagement with its own services and apps. For example, as of the writing of this Report, by default requests to Siri to play music open the Apple Music app; requests for directions open the Apple Maps app; and requests for web searches open the Safari app. To use a competing service through Siri a user must adjust the device’s settings and identify the service in the command to Siri (e.g., “Hey Siri, play the National Anthem on Spotify”). For streaming music services, this integration only became possible with the introduction of iOS 13 in 2019. Previously, even when a user said the name of a third-party streaming service in the voice command, Apple opened an Apple-branded alternative. In June 2020 Apple announced that it would update its HomePod smart speaker system to support third-party music services. It remains unclear how seamless the integration will be and if Apple Music will remain the pre-installed default service. One third party that spoke with Subcommittee staff described Siri as a “closed” intelligent virtual assistant that limits the types of voice interactions voice app developers have access to. The app developer explained that SiriKit, which allows iOS apps to work with Siri, relies on a pre-deigned list of basic interactions that third parties can use, such as messaging, calling, payments, etc. The very limited set of interactions permitted by Apple can make it impossible to launch an app for the third party’s services, including applications that compete with an Apple service. These practices have recently come under scrutiny by antitrust authorities. In March 2019, Spotify filed a complaint against Apple before the European Commission, reportedly alleging, among other things, that Apple is restricting Spotify’s access to Siri. July 2020, the European Commission’s antitrust authority announced that it had opened an inquiry into the use of digital assistants and smart home products by Apple, Google, and Amazon, among other companies. In her statement accompanying the announcement, Margrethe Vestager, the Commission’s Executive Vice President, identified interoperability and self-preferencing as areas of concern.

My take: John Gruber and Ben Thompson are both quoted, but the staff might have been better served reading the Apple 3.0 comment stream.

7 Comments

  1. David Emery said:
    I found the report’s extensive coverage of merger activity hard to understand. The context was “buying the competition” but they didn’t make a very strong case to support that assertion, at least not for Apple.

    2
    October 7, 2020
  2. Fred Stein said:
    Quote, “It is unlikely that there will be successful market entry to contest the dominance of iOS and Android.”

    In the past, people said that about IBM and later Microsoft.

    0
    October 7, 2020
  3. Richard Weathered said:
    From Amazon in its defense: “Large companies are not dominant by definition, and the presumption that success can only be the result of anti-competitive behavior is simply wrong. And yet, despite overwhelming evidence to the contrary, those fallacies are at the core of regulatory spit-balling on antitrust,” Amazon writes.

    I loved the use of the term “spit-balling”

    0
    October 7, 2020

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