The Epic-Apple app case reveals monopoly power and the need for new regulatory oversight

A customer tries on a new iPhone 7 Plus.

Epic Games’ private antitrust lawsuit that concluded last week revealed the extent of Apple’s power over its own mobile app infrastructure. The company controls the mobile operating system that runs apps on iPhones and iPads and operates the only store where users can obtain apps that work on their Apple devices. The 30% cut Apple takes for apps purchased through its App Store is only one manifestation of its durable control over this mobile app infrastructure.

The trial judge promised that neither party to the case would like her decision, which is not a surprise. Antitrust law as currently understood and practiced provides few resources to rein in the kind of durable monopoly power Apple possesses. Only a supervisory agency tasked with overseeing the mobile app infrastructure, which would include the similar system operated by Google, can protect the public and app developers from abuse by these dominant companies.

The problem is finding an adequate remedy under existing antitrust law. As commentators have observed, Epic Games was consistently vague about the remedy it wanted. But several remedies are possible.

One possibility is a court-mandated price for Apple’s service to app developers, say 15% instead of 30%. But price regulation of a digital service is not self-enforcing. If a monopoly company faces a price cap, it can respond by changing the level, structure, or quality of its service. For Apple, this might mean that an app developer that receives regular treatment will pay the regulated price of 15%, but one that wants a privileged place in the store will have to pay the full 30%.

Regulators in infrastructure industries like railroads, telephones, and energy utilities have known for generations that they must be able to define the structure and quality of the service provided if price regulation is to be effective. The same is true of price caps in the mobile app infrastructure. To be effective, price regulation in the app industry would require an ongoing supervisory regulator that understands the app business well enough to both set prices and define service quality levels.

A second possible remedy is a ban on Apple’s anti-steering rule, which prevents app developers from telling potential customers that they can pay for the app outside the App Store. Apple put that rule in place so that it can get a higher return on its intellectual property investment in the App Store. But the court might find that it is anti-competitive and ban it.

To do so would require distinguishing this case from an earlier Supreme Court decision that upheld Amex’s similar anti-steering rule, which prevented merchants from urging customers to use a cheaper payment method. But this might not be all that hard. The Amex decision was restricted to the transactions market where Amex cardholders received a tangible benefit from the anti-steering rule in the form of rewards for using the card. It is hard to see how the app consumer benefits from Apple’s anti-steering rule.

But a court mandate that Apple abandon its anti-steering rule is also not self-enforcing. Evasion could take the form of Apple communication with potential app purchasers offering discounts or other rewards for using Apple’s own payment system. True, this tactic would cut into Apple’s current level of monopoly profits from the App Store, estimated at $72.3 billion in 2020, but it is not clear that the new circumstances would improve matters all that much for app developers.

If one objective of abolishing the anti-steering rule is to bring a tangible benefit to app developers, then an industry regulator must supervise the market to prevent this kind of evasion, while still allowing Apple and Google the flexibility to improve the service they offer to consumers and app developers through their control of the operating system and the app markets.

Farhad Manjoo concludes his analysis of the Apple “tax” with a call for legislative action if the courts fail to “police” Apple’s monopoly power. But the courts cannot effectively act as an ongoing constraint on Apple’s power. Neither the courts nor the generalist law enforcers at the antitrust agencies are equipped to play this role. They have too few staff, little industry expertise, and no authority to write and enforce rules to protect the public.

Congress will have to do the job. It should consider legislation to set up a new digital regulatory agency or authorize an existing one to oversee mobile app infrastructure. The goal of such an entity would be to serve the public good and protect consumers, app developers, and competitors.

This agency should also be given authority to regulate the conflict of interest between Apple’s role as platform manager and its role as competitor in the app marketplace itself. This issue is part of the European Union’s charges against Apple in connection with its treatment of
Spotify, which competes with Apple Music. The new mobile infrastructure agency should have authority to write rules to manage this conflict, enforce them on an ongoing basis, and update them as market and technological conditions evolve.

The new law must respond to the possibility that a regulatory structure like this would inhibit innovation. It could do this by explicitly requiring the agency to promote technological and business process innovation, perhaps, by forbearing from regulation while industry players try out new features and quality improvements.

The new law must also respond to the possibility that such an agency would serve the interests of the regulated industry rather than the public. Several legislative measures are possible to prevent this regulatory capture. Attracting and retaining qualified people with the expertise to regulate the industry means that agency salaries and incentives must be competitive with industry standards. Revolving-door restrictions must be put in place to keep the judgment of the agency focused on the public interest. Perhaps, the agency should be led by a career government official who would have a long-term interest in effective management of the agency rather than be directed by temporary political appointees looking for their next position.

The Epic-Apple case reveals the monopolization of the mobile app infrastructure. But the remedies to this problem are beyond the resources of antitrust law. Congress needs to step in with a regulatory solution.

Apple is a general, unrestricted donor to the Brookings Institution. The findings, interpretations and conclusions in this piece are solely those of the authors and not influenced by any donation.