23 January 2023

Breugel: Has the Digital Markets Act got it wrong on app stores?

Apple’s iPhone and Google’s Android mobile operating system dominate the smartphone market. The two companies also control the app stores consumers use when downloading apps for use on their smartphones.

iPhone users can download apps only from the Apple app store. Android phones, meanwhile, allow ‘sideloading’ of apps from stores other than Google Play. For example, handset manufacturers can install their own app stores on phones. However, these alternatives are rarely used.

As a result, Apple and Google are firmly entrenched as app gatekeepers. They charge app developers store entry fees and a 15%-30% fee on in-app sales of digital services, such as subscription renewals and additional features in games, though there are no fees on in-app sales of physical goods and services, such as e-commerce products or transport services. Some popular app developers, including Spotify music streaming and Fortnite games, have complained about these high fees. They say they harm consumers by increasing prices for in-app services. They want to bypass the incumbent stores with their own app stores and payment services.

The European Union’s Digital Markets Act (DMA), which will apply from 2 May 2023, buys into these arguments. It seeks to erode the market power of app stores and to increase competition in app markets. This will be done, first, by a requirement that consumers should be able to download apps from competing app stores. Second, consumers and app developers should be able to use competing payment service providers for in-app sales. These obligations together are intended to stimulate price competition and enable app developers to circumvent the high fees Apple and Google charge on in-app sales.

The gravity force of network effects

But there are reasons to doubt whether these provisions will work. Google already complies with the first obligation because Android phones allow sideloading from other stores. But, because of network effects, this theoretical choice makes little difference. App developers want to be where consumers are, and vice versa, meaning that developers must be present in both the Apple and Google Play stores, while consumers have no incentive to switch to other stores because it would not give them access to more apps.

A look at the Chinese Android app market gives a sense of the importance of the network effect. Google withdrew the Google Play store and Google Search from China when it came under censorship pressure (Apple has no search engine and accepted app store content restrictions imposed by Chinese authorities). The effect in China was to remove the dominant app store and open up competition between hundreds of smaller Android app stores. Under the DMA, this might be considered a successful achievement of contestable markets, but in fact the Chinese experience has been higher search costs among fragmented stores and less security for consumers, without evidence of more price competition. More fragmentation also means higher development and marketing costs for app developers, who need to be present in many stores. Nobody has gained from eliminating network effects around the Google Play store...

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