Are App Stores an Abuse of Monopoly Power?
Understanding the antitrust claims against Apple and Google
In 2008, Apple launched the app ecosystem by adding the “App Store” to its iPhone. Today that segment of the software industry is huge and growing. The App Store started with 500 different apps; as of October 2020 it had 1.85 million different apps, and the Google Store has more than 2.56 million different available. The sector is worth approximately $1.7 trillion. Over 218 billion apps were downloaded in 2020 (up 7% YoY) — approximately twenty-seven apps for every human on the planet. Users spent more than $143 billion on apps in 2020 (up 20% YoY). We don’t just spend dollars on apps — users spent an estimated 3.5 trillion hours using phones in 2020, or 11 full-time work weeks per person on the planet. And that’s just on Android devices! There is no major country in the world where apps are becoming less popular. In the U.S., for example, Android phone users spent 3.6 hours on their mobile devices in 2020 as compared to 2.9 hours per day on their mobile devices in 2019. And in certain countries such as India and especially China the growth of apps is astronomical.
With this level of usage, it is probably unnecessary to belabor the functionality of app stores too much — statistically speaking, you’ve probably downloaded multiple apps this month. But bear with me, because the details do matter to the antitrust question we are exploring.
On mobile devices we access apps through “app stores” provided by a variety of companies. For example, the Apple App Store — which, as noted above, created the category — is the sole way to install new third-party software on a consumer Apple device such as an iPhone or iPad. Android devices typically come with the Google Play store but frequently include other app stores provided by the device manufacturer (such as Samsung) or by the mobile carrier (such as Verizon).
The app store model has been copied by gaming consoles that offer downloadable games. Game consoles have always exercised strict control over the third-party software that can operate on the devices, so unsurprisingly app stores such as the Microsoft Store on Xbox or Sony’s PlayStation Store are the exclusive online stores for third party content for those devices.
And perhaps surprisingly, the app store model has even made its way to the general use personal computer. You can still download third party content from the internet to install on a Windows 10 PC, but an increasing number of people use the Microsoft Store to download apps for use on their personal computer. Indeed, Microsoft calls its store “the best way to get apps and games” on a Windows 10 device. Apple’s Mac personal computers also have an App Store that serves a similar function.
The Economics of App Stores
App stores are big moneymakers and popular with developers and users, but what are they, from an antitrust perspective? How can we understand the app store business model in a way that is tractable to antitrust analysis?
App stores are two-sided platforms that match end users with app developers. “A two-sided platform is a business model that creates value by reducing the transaction costs of direct interactions between two or more types of users in ways that mere resellers cannot replicate.” In other words, such platforms create value by matching participants, making it easier for two or more categories of users to initiate and complete transactions. Platforms differ from mere resellers because the platform’s attractiveness to participants on one side of a platform is tightly tied to the number of participants on the other side. For example, an app store is more attractive to an app developer the more users that store has. Likewise, customers find an app store more attractive the more apps it has. This positive feedback loop is essential to the platform’s matching function.
Successful platforms therefore must reach a critical mass at which this positive feedback effect takes off. One way to encourage adoption of the platform on one side is by shifting certain costs of the transaction to the other side. Platforms do this by adjusting both design and pricing choices. For example, app stores require developers to meet certain content criteria, such as banning pornography apps, because the store believes such apps would reduce the number of end users willing to use the store, threatening the feedback loop.
This unique interdependency between the sides of a platform complicates antitrust analysis. When analyzing the price and output effects of a platform’s business practice, if we only focus on one side of the platform we will miss any cost-shifting to the other side, which could lead to erroneous conclusions about anticompetitive effects. We might see a sustained, above marginal cost fee to one side of the platform and conclude that it is anticompetitive without evaluating the economic benefits to the other side of the platform. And we might miss that the fee sustains the feedback loop that ultimately benefits all platform participants.
“vertical restraints on multi-sided platforms can be either procompetitive or anticompetitive depending on a host of complicated interactions among the platforms’ users. Thus, rule of reason scrutiny is normally appropriate in assessing the effects of a vertical restraint in any particular case” involving multi-sided platforms.
Apple and Google both vertically integrate their app stores with the hardware devices they sell — Apple exclusively and Google prominently. The result is that on Apple devices, the only way to install third party software is through the App Store. Android devices often have multiple stores and sophisticated users can also “sideload” apps without using the Google Play store, but most third-party software on U.S. Android devices is installed through the Google Play store.
Both Apple and Google also vertically integrate the app stores with in-app payment systems, meaning that any app on iOS that offers certain types of in-app purchases must use Apple’s payment platform. As a result, Apple, not the app developer, maintains the payment relationship with the user. Apple also charges fees between 15% and 30% for paid apps or for apps with these types of in-app purchases. (Google’s system applies similar fees, but offers more payment options for users. To app developers, however, the result is relatively similar.)
Apple and Google’s vertical integrations are the primary locus of antitrust concerns levied at Apple and Google’s app stores. Indeed, they are at the core of the recent cases brought by Epic Games, creator of the insanely popular battle royale first person shooter game Fortnite, against Apple and Google.
Epic’s lawsuit exhibits the typical complaints levied against app stores. Epic’s business model is “freemium” — the Fortnite app is free to download and play, but Epic sells various cosmetic enhancements within the game. According to the Wall Street Journal, those sales total $1.2 billion globally on iOS. Epic doesn’t want to fork over millions of dollars in fees to Apple (or Google) anymore.
Epic’s complaint therefore claims that Apple monopolizes the market for iOS users (by vertically integrating their app store with their devices), monopolizes the market for iOS in-app payments (by vertically integrating their in-app payment product with their devices and their app store), and imposes technical and contractual restrictions on app developers that illegally maintain its monopolies, impose anticompetitive effects on app developers, and harm consumers.
The Epic complaint (as one might expect at this stage in litigation) simply asserts that Apple lacks any pro-competitive justification for vertically integrating its app store and its in-app payment system with its hardware devices.
There are plausible pro-competitive justifications for vertical integration with multi-sided platforms. Geoffrey Manne and Kristian Stout at the International Center for Law and Economics offer three:
“(1) achieving economies of scale that provide large benefits to consumers overall; (2) helping platforms deal with coordination and expectation problems to the benefit of platform users; and (3) providing benefits to one side of the platform that increase consumer welfare overall.”
Recalling the stats of massive growth mentioned at the outset of this article, the mobile app market certainly looks vibrant for allegedly being under the thumb of a monopolist (monopolists?). Might justifications from the above categories apply to vertical integrations with app stores? Recall that two-sided platforms need to attract sufficient participants on each side of platform to enable the positive feedback loop. Thus, we can divide these potential justifying benefits by whom they benefit.
Benefits for Developers
Given the popularity of the app stores with developers, there must be some advantages to them for developers. Some of those benefits include:
- Low-cost global distribution. App stores provide the benefits of enormous efficiencies of scale to even the smallest developer. Before app stores, software developers had to negotiate with retail distributors to put actual boxes on retail shelves. This involved negotiated terms, stocking fees, guaranteed minimums, shipping and marketing costs, and buybacks for unsold product. App developers today can focus on developing apps, not building legal and logistic capabilities — and yet still put their product in front of billions of potential customers.
- ‘Borrow’ trust from app store brand. The app store confers brand trust onto even small, unknown developers, conveying to consumers that the app meets a minimum quality level. Users trust Apple, so users trust the App Store, so users trust the third-party app.
- Centralized payment processing expands market for in-app payments. As Eli Dourado has written, “… Apple’s in-app subscription rules increases trust in the entire system. A small developer in Belarus or Nigeria can apply to the App Store and receive global subscription revenue that would never be possible if he were soliciting credit card information. If something goes wrong with payments to the Belarussian developer, consumers know who to blame: Apple. This fact makes the market for in-app payments much bigger than it would be in the absence of strict App Store rules. This increase in the market for in-app payments means better outcomes for developers, not just consumers.”
- Trivializes piracy problems. Software piracy used to be an enormous headache for small developers. Stealing software was often as easy as copying a floppy disk or downloading a file. App stores not only simplify the purchase process, making it easier for consumers to pay for software, they also make it much harder (almost impossible, in Apple’s case) to install software not approved by the app store. This greatly reduces the risk of software piracy.
- Simplifies security issues. Centralized app stores reduce the risk that consumers will be made vulnerable in the process of trying to install a developer’s app. For as long as users have been installing third party software, malware has tried to disguise itself as popular applications or content to gain access to users’ computers. In fact, Epic faced this exact problem when it initially offered Fortnite on the Android platform through sideloading rather than through the Google Play store. “Within the first day after the developer released Fortnite for Android devices, [UK independent security researcher] Helme said fake Fortnite games made up nearly a third of the malware samples discovered that week.” By vetting software, app stores greatly reduce the risk to consumers of installing software.
Each of these benefits is more important for smaller developers who do not have their own brand or the scale to provide some of the logistics that app stores offer as a package deal. It is not surprising, then, that highly successful brands like Epic and Spotify value the App Store package less — they get less out of it. They already have consumers’ trust; they feel less of a need to rely on the consumer trust built by the app store policies.
Benefits for Consumers
App store policies also have benefits for consumers. Some benefits include:
- Increased device reliability. Apple and Google both use their stores to enforce many rules about how apps operate. For example, Apple prohibits apps that leave Bluetooth on in the background. Such battery drain would give consumers a bad experience, but users are unlikely to properly fault the app; instead, they are likely to blame Apple, dislike the phone, and use it less or not at all. That would be bad for users and for developers, so Apple heads off the problem in its rules.
- One-stop shopping. The convenience of a single searchable outlet for apps reduces transaction costs. Consumers only must provide payment information to one company, Apple. And while I know that App Store customer service is not always stellar — when I was at the Federal Trade Commission we investigated and settled cases with Apple, Google, and Amazon over child-driven in-app purchases — it certainly is secure.
- Trusted source. The flip side of the benefit to unknown developers is that users can trust that someone who wants them to have a good experience has vetted the apps in the store. This is very different from the 1990s. I remember that shoving a floppy drive from the library into my IBM PC back then was like playing Russian roulette with my hard drive. Maybe it would install the latest 16-bit karate game or maybe it would be an ugly virus. When was the last time any of you had a virus on your phone? Not counting Candy Crush.
So, Are App Stores Anticompetitive?
As suggested above, the app marketplace appears to be generating increasing output at consumer prices that are extremely low. One can understand the motivation of certain larger app companies to seek more favorable deals on revenue sharing with the platforms. But at what point does harm to those larger developers translate into harm to the competitive process and ultimately to consumers?
In answering this question, courts will have to apply a rule of reason analysis to the vertical integration of the devices with the respective app stores and payment platforms. The Supreme Court in American Express v Ohio described the rule of reason analysis as “three-step, burden-shifting framework.”
Plaintiffs will first need to show anticompetitive effects. They likely will not be able to do so. They will claim that price increases come via the 15–30% fee that the stores charge and which app developers pass on to users. Challenges of demonstrating this include the fact that Apple, at least, has never raised those prices; the fees are comparable with other platform fees across the economy; and the fees are significantly lower than distribution costs in a world without the App Store.
Plaintiffs may also claim that app development output is lower than it would be otherwise, but as my opening paragraphs indicate, app development output is growing in absolute terms, so plaintiffs will have to design a convincing “but for” model.
Plaintiffs may attempt to show anticompetitive effects through evidence of market power. The success of this approach will depend on how the market is defined. In its lawsuit against Apple, Epic claims the relevant market is limited to the market for iOS users, which is a bit like suing Porsche and claiming that the market is “people who like Porsches” rather than “luxury cars” or perhaps “cars.” In the alternative, Epic claims the market is the market for mobile apps across the two major operating systems. The latter definition better matches reality, but this definition complicates Epic’s legal arguments given that Epic has sued both Apple and Google, claiming that they both have market power over mobile apps.
In any case, the claimed anticompetitive effects will need to be demonstrated taking all sides of platform into account under Ohio v. American Express. To the extent that a court finds that restraints on app developers benefit consumers more than they harm developers, it may decline to find anticompetitive effects.
If a court does find anticompetitive effects, defendants will offer procompetitive justifications for the vertical integrations. As discussed above, there is both theoretical and empirical evidence that these integrations have the possibility to benefit the entire platform ecosystem by strengthening the feedback loop that sustains the platform. Combined with evidence of the vibrant status of the app ecosystem, a court is likely to accept these pro-competitive justifications.
Plaintiffs could seek to show that the alleged competitive restraints are not necessary to achieve the desired objectives and that those objectives are achievable with substantially less restrictive alternatives. Here, plaintiff would need to show that the benefits to users and developers could be achieved without vertically integrating. For example, they could argue that security concerns on mobile devices could be dealt with in a manner more like PCs. If a case proceeds to this stage, the effort to demonstrate substantially less restrictive alternatives will need to account for the potential disruption of the positive feedback loop that drives platform success.
App stores have generated significant benefits for consumers and for developers in the approximately thirteen years of their existence. Some of the companies who have themselves profited significantly from the benefits of these two-sided platforms now seek to get a better deal for themselves and their users. But they face a difficult task. The restraints that they struggle against very likely drive the success of the platform. Even if those big app developers and their users would be better off without those restraints, removing them could undermine the positive feedback loops that have made the app store platforms so successful.
This article is based on materials I prepared for my participation on a panel titled “App Stores: An Abuse of Monopoly Power?” at the 2021 ABA Antitrust Law Virtual Spring Meeting.
 Mansoor Iqbal, App Download and Usage Statistics (2020), Business of Apps, https://www.businessofapps.com/data/app-statistics/.
 ACT: The App Association, The Relationship Between App Developers and Platforms: Why It Matters, https://actonline.org/wp-content/uploads/The-Relationship-Between-App-Developers-and-Platforms-2020.pdf.
 App Annie, The State of Mobile 2021, https://www.appannie.com/en/go/state-of-mobile-2021/.
 This is only true for consumer environments. Corporate environments sometimes have their own app stores that are essentially a custom extension of the Apple App store.
 Microsoft, Get apps from Microsoft Store on your Windows 10 PC, https://support.microsoft.com/en-us/account-billing/get-apps-from-microsoft-store-on-your-windows-10-pc-f69412b3-3e5c-9122-1e87-820bd718058a.
 Geoffrey A. Manne and Kristian Stout, The Evolution of Antitrust Doctrine After Ohio v. Amex and the Apple v. Pepper Decision That Should Have Been, 98 Neb. L. Rev. 425 (2019), available at https://digitalcommons.unl.edu/nlr/vol98/iss2/10. See generally, David S. Evans & Richard Schmalensee, The Antitrust Analysis of MultiSided Platform Businesses, in OXFORD HANDBOOK ON INTERNATIONAL ANTITRUST ECONOMICS 405 (Roger Blair & Daniel Sokol eds., 2013).
 Manne and Stout at 441.
 Manne and Stout at 441, citing Leegin Creative Leather Prods. v. PSKS, Inc., 551 U.S. 877, 887–89 (2007).
 Another, less prominently asserted complaint is that Apple guides the development of its own apps using inside information gathered from the App Store about what apps are popular.
 Sarah E. Needleman, ‘Fortnite’ Kicked Off Apple and Google App Stores After Epic Games Moves to Bypass Fees (Aug. 14, 2020), Wall Street Journal, https://www.wsj.com/articles/fortnite-creator-aims-to-bypass-apple-google-fees-11597333613.
 Complaint of Epic Games, Inc., United States District Court for the Northern District of California, filed Aug. 13, 2020, available at https://cdn2.unrealengine.com/apple-complaint-734589783.pdf.
 Manne and Stout, 441–42.
 The Relationship Between App Developers and Platforms supra n.2.
 Eli Dourado, Blame and vertical integration (Sept. 28, 2020) The Benchmark, https://medium.com/cgo-benchmark/blame-and-vertical-integration-1fc5ef1af18.
 Alfred Ng, Fortnite’s battle royale with Android security problems is just getting started (Aug. 28, 2018), https://www.cnet.com/news/fortnites-battle-royale-with-android-security-problems-is-just-getting-started/.
 See, e.g., Federal Trade Commission, Press Release, Apple Inc. Will Provide Full Consumer Refunds of At Least $32.5 Million to Settle FTC Complaint It Charged for Kids’ In-App Purchases Without Parental Consent (Jan. 15, 2014), https://www.ftc.gov/news-events/press-releases/2014/01/apple-inc-will-provide-full-consumer-refunds-least-325-million.
 Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U. S. 877, 886 (2007).
 Ohio v. American Express, 585 U.S. ___ slip op at 9 (2018).