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How regulations fractured Apple's App Store| GuyWhoKnowsThings

Since introducing the App Store in 2008, Apple has managed it in virtually the same way in 175 countries, down to the 30 percent commission it has charged for each app sold.

The company describes the result as an economic miracle. The store has generated more than $1 billion in sales, helped create more than seven million jobs, and brought Apple billions of dollars in annual profits.

But as the App Store approaches its 16th anniversary, a patchwork of local rules is upsetting Apple's authority over it.

On Thursday, European Union regulators will begin enforcing the Digital Markets Lawa 2022 law requiring Apple to open block iPhones to competing app marketplaces and alternative payment systems for in-app sales.

The changes follow similar lawsuits in South Korea and the United States, where Apple has been forced to allow alternative payment processors. Similar concessions are being discussed in Brittany, Japan and Australia.

The rules are fracturing what was once a single store into a mix of digital stores across national borders. The once uniform experience of purchasing software on an iPhone now differs, depending on where people live.

“The App Store is completely fragmenting,” said Eric Seufert, who invests in app makers and runs Mobile Dev Memo, a blog about the app economy. “The approach to compliance is pretty similar: 'Let's lower the rate a little bit.' But it is a pain.”

Apple has worked hard to adapt to the changing regulatory landscape. An Apple spokesperson said the company had spent months talking to the European Commission about the Digital Markets Act and had held meetings with developers as it developed plans to change the App Store while minimizing the risks of malware, fraud and scams in the apps. iPhone.

Apple says its control over the App Store is critical to the security and quality of the apps it distributes. The company has stopped short of abandoning the 30 percent commission. But over time, it has made some concessions to developers and regulators by reducing the commissions paid by smaller app makers and allowing developers to connect to their websites to charge users directly for subscriptions.

The changes are expected to hit Apple's sales and reduce its profits. Last year, the App Store generated an estimated $24.12 billion in revenue, according to Bernstein Research.

When the App Store first appeared, Apple co-founder Steve Jobs said the fee was a “big deal” because it allowed all developers, large or small, to deliver software to every iPhone. But for years, Apple's fees have been a source of frustration for developers. Over time, regulators began to hear those complaints.

In 2019, Spotify filed a complaint against Apple in Europe, accusing it of anti-competitive practices because it prevented music streaming services from advertising where and how users could subscribe to its application. A year later, Epic Games, the creator of Fortnite, filed a lawsuit in a US federal court accused Apple of violating antitrust laws by forcing developers to use its payment system.

The complaints prompted developers around the world to start pushing for changes to the app economy. In 2021, South Korean legislators They were among the first to respond by passing legislation to force app store operators to allow alternative payment systems. Apple relaxed its requirement that developers use its in-app payment service, but said developers who used alternative services would owe Apple a 26 percent commission in sales.

Developers have argued that the new commission rate is the same as the 30 percent rate after credit card processing fees are added. Their criticism has resonated with South Korean regulators, who said Apple's plan undermined the purpose of the law. The country's telecommunications regulator said that Apple could be fined $15.4 million for “unfair practices.”

Apple said it disagreed with the conclusion of South Korean regulators and believed its changes complied with the law.

The company took a similar approach in the United States. During the Epic Games lawsuit, Apple CEO Tim Cook said being forced to offer alternative payment systems “would be a disaster.”

“We would have to come up with another system to bill developers,” he said, adding that Apple would still charge a commission.

The federal judge in the case. governed in 2021 that Apple needed to allow alternative payments in the United States. Apple has largely complied as it did in South Korea, except that it said developers who used alternatives should a 27 percent commission.

“Clearly, it's a front,” said Colin Kass, an antitrust attorney with Proskauer Rose who has no connection to the case. “Does it satisfy the court? Maybe.”

Apple said the judge had upheld its right to collect a fee and that its solution complied with the judge's request to allow out-of-app purchases. Epic said it planned to file a motion challenging the 27 percent fee and asking the court to intervene.

In 2022, the European Union approved the Digital Markets Law to introduce competition in the iPhone App Store, among other changes. Apple had two years to comply.

The company's engineers have spent thousands of hours creating more than 600 new software tools for developers. In January, the company presented these tools and outlined three options for app creators in the European Union, home to approximately 450 million people.

Under Apple's plan, developers could continue with the status quo of the App Store system and pay up to a 30 percent commission on sales. They could reduce their commission to 17 percent and add a new charge of 50 euro cents for every download over a million a year. Or they could avoid Apple's commission by selling through a competing app store while paying the download fee.

Apple said the plan complied with the law and meant that 99 percent of European Union developers would reduce or maintain the fees they owed.

But The app creators said the plan. violated the letter and spirit of the law. Under the new rules, a tech giant like Apple is supposed to allow app makers to sell subscriptions and services outside of their apps “for free,” said Damien Geradin, a European antitrust lawyer who advises app developers. He said Apple's 50-cent fee and 17 percent commission violated that part of the law.

European regulators will not intervene on Apple's proposal until after the effective date on Thursday. If they open a formal investigation, it could trigger a lengthy legal battle that could force Apple to change or risk fines of up to 10 percent of its global annual revenue, which was nearly $400 billion last year.

Geradin said Apple was unlikely to succeed but could continue to collect commissions in the meantime.

“It's part of their tactics,” he said.

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