Apple’s App Store meets its nemesis in the East

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South Korea has passed a law that will effectively prevent tech giants from forcing developers to use their payment systems

South Korea has passed a law that will effectively prevent tech giants from forcing developers to use their payment systems

Fourteen years ago, Apple co-founder Steve Jobs launched a digital marketplace. Its role was simple: to provide a window through a thumbnail icon to a motley mix of games, tools, and software.

When Jobs made the announcement at the 2008 developer conference in San Francisco, the public was most interested in the Cupertino-based company’s new 3G-capable iPhone with improved battery storage. It only spent five minutes explaining its “Third-Party Apps” feature, which ranked third in its top five list at the event.

The feature explained by Jobs would allow developers to write apps exclusively for iPhones. Apple would provide developers with software development kits (SDKs) to create digital products for the devices it sells. These applications would be distributed on iPhone and iPad via the App Store.

The App Store has become for iPhones what iTunes was for iPods. It was the only storefront that allowed users to buy or download apps on their smartphones.

The feature clicked and became a major line of business for the smartphone maker. In the first month of its launch, there were 1,500 apps – 27% of them were free and the rest paid. Of the paid apps, over 90% were sold for less than $10. Apple said it paid developers $21 million in the month after the App Store launched. This represents two-thirds of all sales made through the digital marketplace. In the announcement, Jobs said the company would collect one-third of the money developers earn in commission.

Goliath versus Goliath

Fast forward ten years and the App Store becomes the largest digital marketplace in the world with half a billion visitors per week. CEO Tim Cook told the audience at the 2018 developer conference that the company has more than 20 million registered third-party developers building apps for the iPhone maker.

“We’re going to take another new step,” Cook said. “The money developers have earned from the App Store will exceed $100 billion.”

That’s about $14 billion in Apple’s coffers, just $4 billion less than the company’s iPad sales in the same year.

Business was good for Apple, but not for all developers. Some were unhappy, and among the unhappy were large, established companies that made billions of dollars in revenue a year selling games. One of them was Epic Games, the creator of the famous Fortnite game.

Epic CEO Tim Sweeney was a vocal critic of Apple and Google‘s digital storefronts. In an interview with CNN, he said his company “felt suffocated” by commission fees from the two tech giants’ app stores.

The Battle of Fortnite

Epic launched Fortnite in 2017 as a paid game for $40. After the game became an instant hit, Sweeney switched to a different business model. He made it a “freemium” game in which users can download and play for free, but must make in-app purchases to purchase digital items like skins and avatars.

The model was working, and Epic was making a few billion a year from in-app digital sales. But the company had to pay Google and Apple a third of the revenue generated through their app stores. This is because the duo had their own payment systems to process purchases.

Epic fired back. In August 2020, he applied a patch to his popular game, which did not require approval from Apple and Google. The patch contained code that allowed users to purchase Fortnite’s in-game currency, V-Bucks, directly from the game’s maker, bypassing Apple and Google’s payment systems. He also indicated that this purchase would cost them 20% less than what they pay through Apple’s or Google’s payment systems.

A few hours after the patch went live, Fortnite was pulled from app stores. In response, Epic filed a lawsuit against Apple alleging the iPhone maker engaged in anti-competitive and antitrust behavior.

Keep the “walled garden” intact

Epic Games wanted Apple to open up its “walled garden” ecosystem and allow other app markets on its iPhones. The Cupertino-based company opposed the call, saying it would weaken the safety offered to consumers.

In September, U.S. District Judge Yvonne Gonzalez Rogers ruled overwhelmingly in Apple’s favor after a week-long trial. In her comprehensive 180-page decision, Gonzalez Rogers expressed concern that developers were being blocked from communicating with iPhone users about alternative pricing.

But she made a key concession to Epic: that Apple, starting Dec. 9, could no longer prohibit app developers from including buttons or links in their apps that direct users to online payment methods. plus Apple’s built-in payment system, which charges developers a commission. .

In October, Apple said in a filing that fulfilling the order could harm it and its consumers. He said he expected to win an appeal challenging the order and wanted the legal process to continue, which could take around a year.

look east

As Epic’s war against Apple continues, the iPhone maker faces a threat from the East. Last week, South Korea’s competition regulator approved rules that will break the dominance of Apple and Google’s app stores in the country.

The settlement will effectively prevent the two tech giants from forcing developers to use their payment systems. The law, an amendment to South Korea’s Telecommunications Business Law, is a first in a major economy against the two companies.

The rules, called an enforcement order, will come into effect on March 15. They state that the law prohibits “the act of imposing a specific payment method on a mobile content provider” by unfairly using the status of an app market operator, regulator Korea Communications Commission (KCC) said in a statement. communicated.

“In order to prevent indirect circumvention of the regulations, the types and standards of prohibited acts have been established as narrowly as possible within the scope delegated by law,” said KCC Chairman Han Sang. -hyuk, according to a report by Reuters.

Prohibited acts include app market operators unfairly delaying the review of mobile content or denying, restricting, removing or blocking the registration, renewal or inspection of mobile content that uses third-party payment methods. Potential fines for violations will be up to 2% of an average annual income from related business practices.

Samsung’s victory?

In a decade and a half, Apple’s App Store has spawned an entire industry that sells games, productivity tools, and other software to its users. The App Store is the only way for iPhone users to download or purchase these apps. South Korean regulations could significantly dent the Cupertino-based company’s dominance in a market it has created.

However, Apple’s loss may be Samsung’s gain. The South Korean electronics major sold 32 million more smartphones than Apple in 2021. And, in the digital storefront ecosystem, Samsung’s store is available as an alternative in its smartphone, along with the Play Store from Google.

While it’s unclear how the new law will be implemented in the Asian nation, the possibility of a Samsung app store in an iPhone in South Korea cannot be ruled out.

THE ESSENTIAL

Apple’s App Store was launched in 2008. It allowed developers to write apps exclusively for iPhones. The digital marketplace has become an important line of business for the smartphone maker, as it collects a third of the money developers earn in the form of commission.

Some developers like Epic Games were not happy with this model and retaliated by introducing different payment systems than Apple or Google in their products.

First, South Korea amended its Telecommunications Business Law by introducing a law prohibiting “the act of imposing a specific payment method on a mobile content provider” by unfairly using operator status. of the app market.

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