Yesterday, the European Commission published its latest executive decision on the Digital Markets Act (DMA). The announcement was made at the European Competition Network Digital Markets Law Conference, which discussed the challenges and opportunities of the new law, with a particular focus on opportunities to make industry and digital markets more competitive.
In its preliminary investigation, the Commission found that Apple’s App Store rules violate the requirements of the DMA because app developers are not free to inform consumers of alternative channels for offers and content. In addition, the Commission has opened a new non-compliance investigation into Apple with respect to the EU’s alternative app store requirements for third-party app developers and app stores. This also includes Apple’s controversial “core technology fee,” which the Commission said was “[s] are insufficient to ensure effective compliance with Apple’s obligations under the DMA.”
These preliminary findings are the latest in the ongoing drama between Apple and competition regulators: In March this year, the European Commission fined Apple a record-breaking €1.8 billion over anti-competitive app store rules for music streaming providers, and in the US, the Department of Justice and 16 state attorneys general have sued Apple for anti-competitive restrictions that keep consumers within the Apple ecosystem.
The Commission’s enforcement action marks Apple as the first DMA gatekeeper to be charged by the DMA. While Apple will have an opportunity to defend its practices, the findings suggest that Apple will likely face significant non-compliance fines. However, because the findings are still preliminary, Apple may be able to avoid formal charges by changing its violating policies.
Preliminary findings of the committee
The Commission’s preliminary findings follow a non-compliance investigation into Apple that began on March 25, 2024. The investigation looked into whether developers can freely communicate and promote their offers, whether users can easily uninstall pre-downloaded apps, whether default settings in Apple’s operating system can be changed, and whether Apple’s choice screens effectively allow users to change the defaults.
Section 5(4) of the DMA states that gatekeepers must allow app developers to steer consumers to offers outside the gatekeeper’s app store for free. These offers could be digital services that offer subscriptions at a lower rate if purchased directly through the developer’s website rather than through Apple’s App Store. Apple has staunchly opposed such steerage. For example, Epic Games Inc., maker of the popular game “Fortnite,” had its developer account revoked in 2020 after it tried to create a payment system separate from Apple’s in-house payment system.
However, under the DMA, Apple must allow developers to direct users outside of the Apple ecosystem. To meet compliance, Apple introduced the EU Alternative Terms Supplement for Apps, allowing developers to distribute web apps directly from their websites, use alternative payment processing through link-outs, offer alternative app marketplaces, and allow users to sideload apps.
For developers, the alternative terms are not particularly attractive. In addition to having to have their apps notarized, Apple will only approve developers if they have been enrolled in the Apple Developer Program for at least two consecutive years and have an app with more than 1 million first-year iOS installs in the EU in the previous calendar year. Developers are also subject to a core technology fee of €0.50 for every 1 million first-year installs in the previous 12 months, and are only charged if the developer has business revenue of more than €10 million worldwide. This fee effectively bars apps from success without paying a significant fee.
“Developers may not provide pricing information within their apps or otherwise communicate with customers to promote offers available through alternative distribution channels,” the Commission said in its preliminary report. This restriction is likely due to Apple only allowing developers to link to deals within their apps, rather than offer them. For example, Apple will now allow music streaming apps to email customers a link that takes them to the music app’s website. However, Apple still plans to charge a 27% commission on app sales, which clearly does not meet Article 5(4) of the DMA.
The Commission wrote that “the link-out process is subject to several restrictions imposed by Apple that prohibit app developers from communicating, promoting offers, and entering into contracts through distribution channels of their own choosing.” As an example of the restrictions mentioned, if a developer decides to use a payment method other than Apple’s in-app purchase system or if the app links to the developer’s web page, the app displays what it calls an Apple-designed “scare screen,” warning users that they are leaving Apple’s ecosystem and that their privacy and security may be compromised. Link-out also incurs a fee of up to 17%, which the Commission says “exceeds the amount strictly necessary for such compensation.” The Commission therefore finds that Apple has not met its obligation to allow developers to freely communicate offers and deals.
New investigation into Apple’s non-compliance with contract terms
The Commission also announced its intention to investigate whether these new contractual requirements for third-party app developers and app stores violate Article 6(4) of the DMA, in particular that provision’s requirements of necessity and proportionality. Article 6(4) requires gatekeepers to allow the installation of third-party app stores. This provision allows gatekeepers to take necessary and proportionate measures to ensure that third-party apps and app stores do not jeopardize the integrity of the hardware or operating system that the gatekeeper provides. However, the Commission’s investigation suggests that Apple has gone far beyond what is “strictly necessary and proportionate.”
The Commission’s investigation will evaluate Apple’s Core Technology Fee and consider “whether Apple has demonstrated that the fee structure it imposed as part of its new terms of business, and in particular the Core Technology Fee, effectively complies with the DMA.” The Commission is likely to conclude, similar to its preliminary findings above, that the fees are too high.
The investigation will also look into overly cumbersome “multi-step user journeys to download and install alternative app stores and apps on iPhones.” Specifically, the committee is likely to take issue with the scare screen mentioned above and the various steps users must take to download third-party app stores, particularly the step that requires authorizing the developer in iPhone settings and accepting several prompts.
The Commission will further investigate “developer eligibility requirements for offering alternative app stores or distributing apps directly from the web on iPhone.” To distribute alternative app marketplaces, Apple requires developers to either obtain a standby letter of credit worth €1 million from an A-rated financial institution or “have been a member in good standing in the Apple Developer Program for at least two consecutive years and have an application with more than one million first-time annual installs of iOS and/or iPadOS in the EU in the previous calendar year.” The Commission will consider whether these conditions are fair in respecting Apple’s right to product security protection, or whether they are excessive and contradict the fundamental principle of contestability.
Next steps
The preliminary findings explain the measures the Commission is considering and that Gatekeeper should take to effectively address the Commission’s concerns. Apple now has an opportunity to respond to the Commission’s preliminary findings. Adam Satariano and Tripp Mickle write in The New York Times that Apple “defends its practices, saying its rules and fees are a fair trade to give it a large platform to reach consumers.” Thus, the question is whether Apple is willing to change its policies and how far such changes would go.
If the Commission’s findings are confirmed, it can issue a non-compliance decision within 12 months of the start of the procedure in March of this year. A gatekeeper found non-compliant can appeal to the EU General Court in Luxembourg and the European Court of Justice. If the gatekeeper wins, the fine and non-compliance decision will be set aside, but if the gatekeeper loses, it is likely to be subject to significant fines.
If Apple is found to be in violation of the DMA, the Commission can impose fines of up to 10% of the gatekeeper’s worldwide turnover, or 20% if the gatekeeper is a repeat violator. In the rare case where a gatekeeper is found to be systematically violating the law, the Commission can impose structural remedies, such as requiring the gatekeeper to sell part or all of its business.
