Friday, November 19, 2021

After Google's announcement of bad-faith compliance with in-app payments law, South Korean lawmakers must go back to the drawing board if they respect themselves and want to be respected

Barring the unforeseeable, I intend not to comment again on app store matters after this post until the Ninth Circuit has ruled on (and most likely will have granted) Apple's motion for a stay of Epic's injunction. But a follow-up to the previous post, which I just linked to, is warranted by Google's official announcement of how the search giant and mobile operating system market leader intends to "comply with the [new South Korean in-app payments] law" (quotation marks are not enough to put this into perspective). I had not addressed this part in my previous post, but it's the same pattern as what Apple intends to do--and Google's announced new terms just took effect yesterday.

The issue is precisely the same one. The South Korean law theoretically requires Apple and Google to do what Epic Games has so far failed to win in court (except in the eyes of a journalist who may never stop reiterating clearly erroneous legal interpretations) and the odds tend to be against Epic's appeal). Yet the bill proves pointless, useless, worthless in practice. But I strongly suspect that this is not how the South Korean legislature wants to be seen, so this is presumably not the end of the story.

The tax and review tyranny of the two leading mobile app stores (Apple's iOS App Store and Google's Android equivalent named Google Play) is under attack on multiple fronts in different ways. There is litigation, which has so far not helped in any meaningful way other than exposing certain issues; there are antitrust investigations, the mere specter of which already played a key role in getting Apple and Google to change some of their terms; and there are legislative initiatives, with South Korea theoretically having been ahead of the rest of the world but now risking to be nothing more than Apple and Google's laughing stock.

Here's the problem with what Google describes as compliance with the South Korean law requiring alternative in-app payment options:

"Service fees for distributing apps via Android and Google Play will continue to be based on digital sales on the platform. We recognize, however, that developers will incur costs to support their billing system, so when a user selects alternative billing, we will reduce the developer’s service fee by 4%."

So, if you're large enough that you normally pay 30%, the Google Play tax goes down to 26%; if you're eligible for small business terms, or if you're large and a particular customer's subscription has been in place for long enough, it's reduced from 15% to 11%; and for Google's Media Experience Program, it changes from 10% to 6%.

4% is just marginally above payment processing fees. If developers don't use Google Play, they have to use some other service or, if large enough, they might opt to work directly with credit card companies. To put this into perspective, let me quote the website:

"Visa and Mastercard tend to charge merchants between 1.5% and 2.5% to accept their credit cards, whereas American Express charges between 2.5% to 3.5%."

So Google's reduction would leave a margin for third-party payment processing of only about 2.5% in the best case and 0.5% in the worst case (Amex's peak rate).

As a result, end users wouldn't save enough money to even bother to enter payment credentials elsewhere.

No app developer could profitably offer users a non-negligible discount if they used an alternative payment system. The saving (on what the developer owes Google) is just not going to make a difference.

The same would happen in the U.S. if the Epic Games v. Apple injunction ever got enforced (which it never might).

As I wrote yesterday, Apple has already declared its intent to levy its app tax on payments made by users who follow external links that take them out of an iOS app to complete a transaction. I'm sure Apple would not offer "sweeter" terms in that hypothetical scenario of Epic enforcing its consolation-prize injunction (again, I think the injunction will be stayed, and I don't think the anti-anti-steering injunction based on California UCL is all that solid).

The difference is just that the Epic Games v. Apple judgment explicitly authorizes Apple to do this. The judge recognized Apple's right to tax app developers. The South Korean law, as far as I can see, neither endorses the app tax nor does it prevent Google from at least trying to get away with bad-faith compliance that is not against the letter of the law.

Whether Apple will play the same game in South Korea or just stop selling devices there remains to be seen. South Korea is pretty much "Samsung Country." It might not be worth it for Apple to serve a limited number of Korean customers if it has to make the kind of concession that no other jurisdiction, for the time being, requires it to make. It could always return to the market later, and various South Korean Apple fans would probably buy their devices abroad.

But Android is huge in South Korea, so Google won't leave the market: it just capitalizes on the in-app payment law's biggest structural weakness.

In the short term, this may be the right move for Google. It might backfire, however, in the event that South Korean lawmakers recognize that their original bill was not intelligently designed, and come back to require an equal footing for alternative app stores, ruling out that alternative app stores can be taxed. But that would then raise the question of whether South Korea would expropriate Google (and Apple, if the iPhone maker even wanted to stay in that market under those circumstances). There is intellectual property involved, even though--ironically, in no small part as a result of Google's 11-year litigation with Oracle--it would be hard to enforce profitably through infringement litigation. Here, the platform makers can just leverage the market power of their platforms. And at some point the question would then be whether any jurisdiction could and would force them to make their developer tools available to everyone. Theoretically, third-party developer tools could do the job. Practically, constant operating system changes might put alternative tool makers at a fundamental disadvantage, or simply out of business.

There would be challenges even if alternative app stores were allowed. But app store diversity would be structurally stronger and more enforceable, provided that the platform makers would be barred from self-preferencing or from sabotaging third-party app stores. Any restrictions of access to API, or performance degradations by design, could be proven with the help of technical experts, and then those companies could be fined.

So far, Russia and Japan have been most effective, though I think that the European Commission, just by looking at certain issues over many years, was intimidating enough that Apple started to lower its fees, such as the 15% rate for long-running subscriptions (most subscriptions are actually not in place for very long, so what looks like a generous gesture has limited financial impact in practice).

Russia broke the app review monopoly by enabling its government to dictate what Russian apps Apple needs to pre-install. There was some doubt about whether Apple would accept this, but ultimately Apple wanted to keep the rubles rolling and acquiesced. Japan reached an "e-reader" settlement with Apple, which has global impact, but the jury is out on whether Apple will figure out a way of rendering it a lot less effective, such as by restrictions on cross-purchases.

South Korea initially appeared to make the boldest move, but after Google's announcement the question is just whether Apple will adopt the same approach or, more likely, refuse to comply altogether. Either way, the South Korean bill doesn't help developers or consumers in the slightest as things stand.

The South Korean parliament needs to amend its bill or Google will be laughing all the way to the bank.

And there's a geopolitical issue here: South Korea is somewhat dependent on the United States (not just for military reasons). For a variety of reasons it may not be feasible in the foreseeable future, but the best solution for countries like South Korea and even Japan, Russia, India, or possibly Latin American countries, would be to cooperate more closely than ever with the European Union on the regulation of digital markets. I'm not doubting the good intentions of U.S. lawmakers, such as the one and only David Cicilline (just one example), to address these issues. But should it turn out that the U.S. government would ultimately stand behind Apple and Google once countries like South Korea seriously regulated digital marketplaces, smaller countries might have to team up with others lest they be bullied around.

Microsoft is on the right side of history with respect to app distribution. It never did anything even 1% as bad as what Apple and Google have been doing for more than a decade now. But there was a time when Microsoft's conduct raised issues, and in a way, Google's announcement reminds me of Microsoft having been forced by the European Commission (and the EU judiciary) to offer a "Windows N" edition without the Media Player: it did nothing to create additional opportunities for alternative media players as customers saved nothing, Microsoft obviously had no incentive to promote it, and hardly anyone ever spotted, much less purchased, a "Windows N" edition. However, the far more important part of the EU Microsoft case involved network protocols, and that one did have an impact. Interestingly, in that part of the case IP was key (as Microsoft could have tried to enforce patents against third-party implementations of its protocols, and asserted copyright over documentation), and the EU ensured that only a small license fee could be charged. Also, Microsoft has been extremely careful to avoid antitrust issues ever since (there may still be occasional complaints, but they don't appear to have substance), which is more than Apple and Google can say at this stage.

Google's announcement is just the South Korean equivalent of "Windows N": a jurisdiction tells them to offer choice, and the target of the new regulation says "you can have choice, but it's not our problem whether anyone will actually end up choosing the alternative we are forced to provide."

South Korea didn't get this right the first time because Google can just provide a choice that makes no business sense. But no one is ever beaten unless they give up the fight. Better luck next time, South Korea! And may lawmakers and other decision makers (judges, regulators) around the globe learn from South Korea's initial mistake.

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