“The CMA’s study into mobile ecosystems – ie operating systems, app stores and web browsers – has concluded that Apple and Google’s duopoly means they have a stranglehold over these key gateways. […] Both companies unilaterally determine the ‘rules of the game’, making it difficult for rival businesses such as browsers or alternative app stores to compete. […] Consumers are likely to miss out on new innovations, have less choice, and ultimately face higher prices. Both Apple and Google are making substantial and growing profits – unabated for over a decade. This matters not only for people and businesses, but for the UK’s wider digital economy including tech start-ups struggling to get a foothold,” the UK’s Competition and Markets Authority (CMA) said in its final report on the mobile ecosystems market study, published on June 10.
Why does this matter? The CMA market study has culminated in an extensive and in-depth 356-pages report on competition issues in operating systems, app stores and web browsers, which are three of the most significant digital gateways. Additionally, CMA suggests potential solutions to address these issues. Currently, India’s competition regulator is investigating Apple and Google for many of the same reasons such as high commissions on app stores, non-transparent app review process, excessive restrictions on app developers, etc. CMA’s report could provide additional clarity and detail into these investigations and possible ideas for remedy.
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What was the scope of CMA’s market study?
The year-long market study, which began in June 2021, has looked at mobile ecosystems across the following areas:
- Operating systems: Apple’s iOS and Google’s Android operating systems, which power most of the mobile devices.
- App Stores: Apple App Store and Google Play Store, which are the gateways for app developers to reach users. “Apple’s App Store is the only permitted app store on its devices and over 90% of downloads on Android devices are from Google’s Play Store. Apps can also be downloaded from the open web (ie ‘sideloaded’) [on Android] though this is rarely done,” the report noted.
- Mobile browsers and browser engines: Apple’s Safari and Google’s Chrome, which have a combined share of supply of around 90%. “Browsers run on browser engines, which are fundamental to the speed and capability of browsers. In 2021, 97% of all mobile web browsing in the UK was powered by either Apple’s or Google’s browser engine. Browsers also enable people to access ‘web apps’, which have the potential to be similar to native apps without being tailored to each operating system,” the report noted.
Key issues concerning Apple
App Store restrictions limit third-party options of developers
- Other app stores are prohibited
- No direct download of apps from the web (side-loading)
- Cloud gaming services are effectively blocked from the App Store
- App developers cannot access various hardware and software functionality on iPhone, such as the technology that enables contactless mobile payments (using the Near Field Communication (NFC) chip)
- An opaque app review process
“The majority of developers we contacted had concerns about its opaque app review process and the impact this had on their businesses – describing it as ‘obscure’, ‘arbitrary’, ‘capricious’ and ‘Kafkaesque’, with Apple rejecting apps without sufficient reasoning or being inconsistent in applying its rules.” — CMA report
Safari and WebKit place significant restrictions on what developers can do with web-apps
- No competing browser engines are allowed, meaning all iOS-based browsers, even Chrome, must use Apple’s WebKit browser engine
- Web apps are restricted because WebKit does not have a wide range of key features. “Web apps have the potential to be an alternative way to access content without needing to rely on app stores – potentially weakening Apple and Google’s hold over app distribution. […] The development and take-up of web apps are being hindered because the features and functionality are severely restricted or delayed on iOS; eg push notifications and full-screen functionality, among many others,” CMA noted.
“As a developer, Apple’s treatment of the web on iPhones and iPads costs my business extra manhours, and effectively forces me into Apple’s pay-to-play ecosystem. My apps could largely exist exclusively on the Web if Apple wasn’t putting its thumb on the scale.” — CMA report
Apple’s ecosystem lock-in increases switching costs
- Apple’s own apps and services (such as iMessage) are unavailable on Android devices
- Some of Apple’s connected devices (eg Apple Watch) cannot be used with Android or have more limited functionality
“Our survey of smartphone owners found that the most frequently quoted reason for iOS users not to switch was ‘because I have other devices linked to my phone/operating system’.” — CMA Report
Key issues concerning Google
Preinstallation and promotion of Play Store, Chrome, and other Google apps
- Android device manufacturers are paid sizeably to ensure that Chrome and Play Store come pre-installed and Google is the default search engine
- Important parts of Android can only be updated through the Play Store
- Google shares a percentage of its significant search advertising revenues (and in some cases revenue from the Play Store) with other Android manufacturers in return for placing and promoting Google apps
“Google has fewer explicit restrictions [than Apple] in some respects (for example it allows other app stores and browser engines), but it still holds a significant amount of control within its ecosystem.” — CMA report
Restrictions on alternative app stores and sideloading
- While other app stores are allowed on Android, they cannot be downloaded through Google’s Play Store; instead, they are either pre-installed by manufacturers or must be directly downloaded by the user, i.e. sideloaded – a process involving several steps and security warnings)
- Rival Android app stores also face material barriers – in particular, there are strong network effects, meaning an app store needs a critical mass of users, which Google Play Store enjoys, to attract app developers and vice versa
Key issues concerning both Apple and Google
Supra competitive profits
- Apple made £80 billion in profit globally in 2021, with an estimated return on capital employed of over 100%, which CMA noted as “very high in any sector”
- Google made £57 billion in profit globally in 2021, earning a return on capital employed of 39% (on average between 2011 and 2021), which CMA noted as “well above any reasonable competitive benchmark for many years”
“High profits are not necessarily a concern in themselves, [but] these supra-competitive returns are consistently above what would be expected in a properly competitive market.” — CMA
Requirements to use their in-app payment systems and high commission rates
- Both Apple and Google require app developers to use their in-app payment systems, through which they collect up to 30% commission on subscriptions and in-app digital purchases. “These commissions are high and are set above a competitive level,” CMA said.
- App developers do not get the benefit of choosing their own payment systems for their apps or users, and it breaks the link between developers and their customers
- This also risks distorting competition as Apple and Google’s apps do not pay this commission. For example, “Google’s YouTube Premium is priced higher on iOS than Android – where it pays no commission,” CMA pointed out
They unilaterally determine the terms of access to their app stores for apps
- There is little that app developers can do despite the high commissions and other restrictions as they need to be on both app stores to access the sizeable customer base each has.
- This allows Apple and Google to impose terms that developers have no choice but to accept. “This is far beyond the general ‘cut and thrust’ between businesses, as most developers are simply not in a position to negotiate,” CMA noted.
They operate the two main browsers and browser engines:
- Apple and Google have a strong share of the browser and browser engine market
- They control the way that browsers perform on their devices by supplying the two browser engines on which most mobile browsers are powered, with the exception of Firefox which uses its Gecko engine on Android devices.
No significant threats from other competitors
There have been no successful attempts at challenging Apple and Google because mobile ecosystem markets have certain characteristics (listed below) which make it very challenging for other businesses to enter and expand:
- Network effects: “There are significant indirect network effects, particularly in operating systems and app stores; ie the more apps and content on the operating system or app store, the more users it attracts, and vice versa. This creates a ‘chicken and egg’ problem which can be difficult for new entrants or those wanting to expand, to overcome. This makes it very difficult for a new operating system or alternative app stores to get a foothold,” CMA said.
- Pre-installation, defaults and choice architecture: “Pre-installing apps or browsers and setting certain ones as defaults can have significant impacts on people’s behaviour. There is strong evidence that default behaviour, ie avoiding wasting time by accepting the default option, can shape key decisions and can be difficult to shift. This can have a profound impact on competition,” CMA explained.
- Barriers to switching: “There are potential barriers for people switching and in particular the perception of challenges and difficulties in switching. Most people are buying a replacement device, rather than picking a new system for the first time, and in doing so they rarely switch operating systems, particularly for Apple users. Our survey found only 5% had switched from an iOS to an Android device, and only 8% had switched from an Android to an iOS device,” CMA observed
“I wouldn’t say I am the biggest Apple fan, but it is just really convenient how everything talks to each other.” – iOS to Android considerer told CMA
Apple and Google have both built large interconnected ecosystems
- While Apple’s core business is selling hardware and associated operating systems, between 2016 and 2020 its revenue growth was mainly driven by services i.e. content or apps on its devices. It has also expanded into connected markets like contactless mobile payments and products that connect to its mobile devices like its Apple Watch and the Apple HomePod.
- Google predominately relies on revenue from its search advertising but has expanded this into browsers (Chrome), operating systems (Android) and video and music streaming (through YouTube). Like Apple, it has also expanded into connected devices like Fitbit and Google Home and has grown revenues from services.
- CMA noted that the integrated systems might offer a “seamless and efficient user experience” but can make it much more difficult for competing businesses to enter the market as Apple and Google control the key entry points. Additionally, having large ecosystems can also make it much easier for Apple and Google to extend their power into more emerging markets and such large ecosystems also “give both companies unparalleled access to data on customers’ behaviour, preferences, and purchasing habits, which is a further advantage and can reinforce their market power.”
“The CMA has no concern with businesses being big; nor are we saying that smaller or less efficient rivals should be given a ‘leg up’. A competitive market that is working well means companies can expand to become large successful businesses and get rewarded for their innovation, as both Apple and Google have done. However, the concern in the case of these mobile ecosystems is that there are significant barriers to entry and expansion such that these two companies are not under sufficient pressure from competitors. The existence of a credible threat from rivals helps to keep businesses on their toes, innovating and offering better services to their customers. Without this threat, that incentive is much weaker.” — CMA report
How can the issues raised above be addressed?
Ex-ante regulatory approach
“There are no easy or quick fixes. A new ex ante regulatory approach is required to oversee powerful tech firms like these and support the UK’s innovative tech sector. We welcome the government’s commitment to establish a new regime with tailored powers to tackle these problems.” — CMA report
CMA welcomed the UK government’s proposed new pro-competition regulatory regime, which will oversee key digital firms that are deemed to have ‘strategic market status’ (SMS). “Many of the concerns we have regarding Apple and Google’s hold over their mobile ecosystems could not be addressed through quick or easy fixes. There are connections between the issues and interventions, i.e. some may need to be used in conjunction or in sequence, and in many cases, changes will require ongoing monitoring and oversight. This is why a new digital regime with specifically tailored powers is required. This regime will have the ability to test, iterate over time and oversee these markets on an ongoing basis. It will bring greater flexibility to ensure actions are effective and responsive to developments as key digital markets like these evolve,” CMA noted.
Measures to safeguard app developers
- providing greater transparency and information about Apple’s and Google’s decision-making in the app review process, app store rankings, etc
- restrictions on Apple and Google sharing and using data or insights from their operation of the app store with their app development business
- ensuring others can access their platforms on fair and reasonable terms, including fair commission rates
- allowing side-loading and alternative apps stores on iOS and making these channels easier to access on Android
“At this stage we consider these issues and potential interventions would be better suited to the tailored powers of the new digital regime, which could oversee, monitor and adjust any changes in a more flexible and responsive manner. In the meantime, we will seek to work with other countries that are pressing ahead with some of these changes (eg sideloading).” – CMA
Measures to improve choice and quality in browsers
- Remove Apple’s restrictions on competing browser engines
- Mandate access to certain functionality for browsers including supporting web apps
- Require Apple and Google to provide equal access to APIs for rival browsers
- Make it easier for people to choose and change their default browser
“There are also security and technical implications to some of these types of interventions and there would be costs in making these changes (for Apple but also for rivals) which will need to be taken into account. However, the evidence suggests these are manageable and that greater competition would drive not only significant benefits in terms of innovation, investment and improved quality, but could potentially also drive even better security.” — CMA
Measures to open up competition in operating systems by reducing switching costs
- Enhance interoperability of Apple’s connected devices with Android (eg Apple Watch)
- Ensure access to all the necessary APIs to enable smoother migration of apps and data
- Make Google remove the restriction on making its apps only available to manufacturers that use Google’s version of Android and not on other versions
“But there are challenges in tackling the inherent barriers to competition, and some potential efficiencies in having two large operating systems […] Overall, it could be very difficult to overcome Apple’s and Google’s market power in operating systems, but we are confident that changes in other downstream parts of their ecosystem would have more impact.” — CMA
New investigations by CMA
- CMA is launching a market investigation into mobile browsers and cloud gaming – both of which involve restrictions holding back potentially disruptive innovation
- CMA is opening a new investigation into Google’s app store and its associated terms and conditions, alongside its similar investigation into Apple
What is the impact on consumers?
While the impact on businesses might be evident, the effect of the lack of competition on consumers using these services is less immediately visible, CMA noted while laying out the following concerns arising due to weak competition in the mobile ecosystem:
- “new and valuable innovations could be held back in some areas, particularly where they affect Apple’s and Google’s businesses; eg new types of services like cloud gaming on iOS or technological developments like web apps”
- “choice is more limited; eg in browsers and app stores – hindering the development of new bespoke curated app stores to meet people’s different needs such as stores for different age groups or for gaming enthusiasts”
- “prices are higher than they should be; eg prices for Apple’s devices, Google’s search advertising fees, and both firms’ app store commissions are all above a competitive rate – ultimately leading to higher prices for the end consumer or worse quality.”
Accounting for security, safety and privacy
Both Apple and Google argue that many of their controls are needed to maintain the security, privacy, and quality of the overall service for people and businesses. “Apple, in particular, argues that many of its restrictions make its devices safer and more secure, which is what attracts people to its products and differentiates it from others,” CMA noted.
CMA said that it has considered these factors and ” found there is likely to be significant scope for allowing more competition and removing or revising many of the current restrictions, without compromising safety, security or the privacy of people’s data.”
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