Thursday, October 8, 2020

Desktop OS monopolist Microsoft criticizes app distribution terms of smartphone OS makers Apple, Google: closing ranks with Epic Games, Spotify

Everyone in the industry has known for years that Microsoft hates the notion of Apple and Google retaining 30% of whatever end users pay for and in Microsoft Office and other smartphone apps. Microsoft was exceedingly hesitant but ultimately accepted. The word "hates" has a meaning here that transcends purely financial considerations--in fact, Microsoft has been in business for more than long enough to know and remember that traditional distribution channels used to ask and get up to about twice that margin when Office was installed from a bunch of DVDs, CDs, or floppy disks. There's also a psychological problem here. The need to agree to a revenue split that the likes of Epic Games and Spotify--midgets compared to Microsoft--are fighting against is nothing short of a major humiliation for Redmond. The combination of a revenue split one would rather avoid (or at least minimize) with a constant reminder of having lost in the smartphone operating system (OS) market--and, in fact, no longer being the world's #1 OS company if all device categories are considered--presumably feels toxic.

In an alternative universe in which Microsoft would have extended its desktop operating system monopoly (as a matter of fact, Microsoft didn't even appeal an EU court decision that concluded it was a desktop OS monopolist) to smartphones, which it tried very hard but ultimately unsuccessfully,

It's not like Microsoft hadn't found other great opportunities, such as its Azure cloud. It's a terrific, innovative company and has reinvented itself. Of course, it's still milking its Windows and Office cash cows. But paying what the likes of Epic describe as the "Apple tax" and "Google tax" is comparable to a dethroned king having to pay for the upkeep of his castle after decades of being in the position to tax his subjects (which Microsoft still can and does, but in other ways and other markets).

In the wake of a Congressional report that, among various other topics, also discussed app distribution terms, Microsoft informally joins the Coalition for App Fairness (CAF).

There's also a close personal connection here: Horacio Gutierrez, Spotify's legal and licensing chief, was Microsoft's head of IP and widely considered its #2 lawyer (after Microsoft President Brad Smith). I've said it on another occasion that Spotify couldn't have made a better hiring choice. But that doesn't mean I necessarily agree with his positions.

A few years ago, Microsoft and Google actually made peace in the sense that neither was going to instigate antitrust investigations against the other. Those EU antitrust complaints against Google had been backed by Microsoft. But then Microsoft left certain organizations. Now, while Microsoft hasn't formally joined the Epic-Spotify-led CAF yet, it's in a de facto anti-Google alliance again. Who knows--maybe Google will (again) lend support to anti-Microsoft initiatives at some point.

Microsoft is apparently going to make adjustments to the app distribution terms on Windows to the extent it's necessary to be CAF-aligned. From an app developer perspective, I actually welcome that move, and it may very well shield Microsoft against allegations of hypocrisy as far as Windows app store commissions are concerned. But what about the XBox? Microsoft writes:

"We also operate a store on the Xbox console. It’s reasonable to ask why we are not also applying these principles to that Xbox store today. Game consoles are specialized devices optimized for a particular use. Though well-loved by their fans, they are vastly outnumbered in the marketplace by PCs and phones. And the business model for game consoles is very different to the ecosystem around PCs or phones. Console makers such as Microsoft invest significantly in developing dedicated console hardware but sell them below cost or at very low margins to create a market that game developers and publishers can benefit from. Given these fundamental differences in the significance of the platform and the business model, we have more work to do to establish the right set of principles for game consoles."

That's a non sequitur distinction. It means that the device maker can just let app developers pay for what consumers get. And what should Google say then? Google makes Android available on open-source terms. Whether or not it actually does get paid by device makers, I'm sure it's much less than the price of an Xbox.

At least Microsoft promises to give further thought to "the right set of principles for game consoles." That is very vague. When? What? How? And why not now?

Is Microsoft really giving up much? Certainly not with respect to Windows. The alternative would have been for Microsoft to make technical changes to Windows so as to prevent direct installations. Apart from the enormous logistical effort this would have involved in order to avoid major disruption, it would have raised antitrust issues because Windows is clearly a destop OS monopoly. By contrast, Apple and Google are fiercely competing with each other in a two-horse race. And while Microsoft would have imposed terms now that it's been a monopolist for several decades, Apple and Google asked for the same 30% when they started (and therefore weren't monopolists), and if anything, the terms for app developers have only improved since then. Now, as an app developer I'm always happy about further improvement. But for now I'm talking about it from an antitrust perspective. If Microsoft leveraged its monopoly to impose something it hadn't done in decades, that would be much easier to attack than the fact that Apple and Google haven't made their terms more favorable to app developers.

There have been times, even quite recently, when Microsoft's market capitalization was the highest of any company at least in this industry. Today, Apple is about $400 billion ahead, and Alphabet about $600 billion behind. Doing some damage to those companies would make it easier for Microsoft to reclaim the top spot.

Microsoft is calling for a constructive dialog, which is always good to have. But whatever Microsoft does with respect to its own platforms is motivated by the factors I outlined in this post, and probably others I'm not even aware of. What I see happening here is that some of those who dislike Apple's and Google's app distribution terms create their own app stores or sweeten the terms of existing app stores only to up the pressure on Apple and Google. It's something one can also observe in the patent licensing space where deals are sometimes struck and targets are picked primarily for the purpose of establishing "comparable transactions" and then they impose the same terms on others.

If regulatory agencies are simply looking for "evidence" they can hold against Apple and/or Google, they might make use of those "comparables." It's another question whether any courts that may one day have to review their decisions, or make their own decisions (such as in Epic Games v. Apple and Epic Games v. Google, both in the Northern District of California), will be impressed once they figure out what's going on and why.

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