After being punished for antitrust violations in the e-books field, Apple (AAPL) is facing renewed accusations of anti-competitive behavior related to subscription services sold through its App Store.
Late last month, Apple streaming music rival Spotify accused Apple of anti-competitive behavior for rejecting its updated iOS app on the grounds that it violated the App Store's "business model rules."
Spotify didn't file legal action, but instead publicly issued a call to elected and regulatory officials to act. And two legal experts told IBD that Spotify has a good chance of getting regulators, particularly in Europe, to go after Apple for its App Store policies.
"When you have an application of your own and you also control the distribution through the Apple App Store (of rival apps), that can easily raise anti-competitive concerns," Nicholas Economides, a professor at New York University's Stern School of Business, told IBD.
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Apple App Store issues have been simmering, and Spotify aims to bring the pot to boil. While Apple doesn't break out App Store revenue, and it might be relatively small, changing its policies could be a big revenue-booster for subscription services such as Spotify and streaming video providers Netflix (NFLX) and Hulu, among others.
Apple More Restrictive Than Google
The questions go beyond whether Apple can take up to a 30% cut of revenue from third-party services that use its App Store billing system. A central issue is whether Apple can prohibit those services from publicizing alternative ways of paying, including having customers pay them directly online. Google, the only other major player in the app store duopoly, also takes a revenue cut, but it lets apps publicize the other ways of paying.
Streaming music companies had grudgingly accepted the so-called "Apple Tax" on their services, but they started to complain after Apple launched its own competing service, Apple Music, last year.
Spotify moved the complaints up a big notch last month, sending its complaints in a letter to Apple General Counsel Bruce Sewell, with copies sent to media and legislators in Washington.
"This latest episode raises serious concerns under both U.S. and EU competition law," Spotify General Counsel Horacio Gutierrez wrote in that letter. "We cannot stand by as Apple uses the App Store approval process as a weapon to harm competitors."
Among its complaints, Spotify says Apple's 30% service fee puts it at a competitive disadvantage to Apple Music. Spotify either has to pass along the fee to customers, raising its regular $10-a-month service (the same as Apple Music) to $13 a month through the App Store, or eat the expense in what is already at best a low-margin business. Spotify, in fact, has tried both tacks.
Apple says Spotify violated the App Store rules by encouraging customers to bypass Apple's billing system and get Spotify at a lower price by buying it directly from Spotify.
Last fall, Spotify offered new subscribers three months of service for 99 cents if they signed up on Spotify's website, followed by the regular $10 a month. It revived the campaign in June, angering Apple, which threatened to remove the Spotify app from its App Store unless it stopped telling iPhone users about the promotion.
Spotify stopped advertising the promotion, but it also turned off its App Store billing option, prompting Apple to reject Spotify's latest app.
Is Federal Trade Commission Looking Into Apple App Store?
The U.S. Federal Trade Commission reportedly already is investigating Apple Music and the App Store, for complaints similar to the ones just made publicly by Spotify.
The FTC could use Section 5 of the Federal Trade Commission Act to force Apple to change its App Store business practices, Rutgers University law professor Michael Carrier told IBD.
The FTC could decide that Apple's App Store policies represent an unfair method of competition that benefit its own services, and that they also harm consumers by preventing third-party services from publicizing cheaper payment methods, Carrier said.
In a letter responding to Spotify, Apple's top lawyer Sewell said Spotify is seeking preferential treatment. He said Apple applies its App Store rules to all developers equally and fairly.
Apple recently changed its in-app purchase payment split for customers who renew after the first year. In the first year, the 70-30 revenue split applies, but after a year of paid service with a subscription, the revenue split becomes 85-15. Alphabet (GOOGL)-owned Google soon after adopted the 85-15 revenue split for subscription services, but without the 12-month wait.
Apple says the revenue share helps to pay for its investments in the App Store and to keep it a great e-commerce experience.
Jonathan Prince, global head of communications and public policy at Spotify, continued the war of words with Apple after Sen. Elizabeth Warren, D-Mass., criticized Apple and other tech giants for trying to lock out smaller competitors and new entrants.
"Apple has long used its control of iOS to squash competition in music, driving up the prices of its competitors, inappropriately forbidding us from telling our customers about lower prices, and giving itself unfair advantages across its platform through everything from the lock screen to Siri," Prince said in a June 29 statement.
"You know there's something wrong when Apple makes more off a Spotify subscription than it does off an Apple Music subscription and doesn't share any of that with the music industry," Prince said. "They want to have their cake and eat everyone else's too."
Apple App Complaints Said Not At Antitrust Level
On Capitol Hill, Spotify's complaints have captured the attention of Warren, Sen. Al Franken, D-Minn., and members of the Senate Judiciary Committee, The Hill reported. And Politico reported that Spotify met with European Union parliament members this month.
Spotify leads in the subscription streaming music business with 30 million paying customers worldwide. But Apple has quickly gained 15 million subscribers for its Apple Music service in just a year. Apple Music is rumored to be interested in buying rapper Jay Z's Tidal, a music service that has about 4 million subscribers.
Rutgers' Carrier says Spotify's claims don't appear to rise to the level of antitrust. Such cases usually involve companies with monopoly power, typically over 70% market share. Apple's iOS has about 30% market share in mobile operating systems in use, according to Net Applications. Google leads the mobile operating system market, with almost all of the other 70%.
Another area of antitrust involves collusion, such as in the Apple e-books case, but that has not been alleged here.
In March, the U.S. Supreme Court declined to hear Apple's appeal of a federal court judgment that it engaged in an e-book price-fixing conspiracy with five major book publishers. Apple had to pay $450 million to e-book customers to settle the case.
Stockholm-based Spotify might find a receptive audience in the European Commission's antitrust arm. EU regulators have shown a proclivity for going after U.S.-based tech giants, including Google and Microsoft (MSFT).
"There is a significant possibility that there will be a competition case in Europe (against Apple) before we see one in the U.S.," Carrier said.
Economides, the New York University professor, agrees.
The EU might want to crack down on Apple's App Store practices before Apple starts offering other services, such as a rumored subscription video on demand service, he said. That service likely would compete against Netflix, Hulu and others.
Apple received a price target cut and shares shaved a penny off their price to 98.78 at the close on the stock market today.
