Friday, July 1, 2022

Apple, Google testing limits of Korean law on in-app payment systems by charging 26% commission that renders use of alternative payment systems unprofitable

Ten months after South Korea's legislature enacted an amended Telecommunication Business Act with new rules governing in-app purchases as well as app reviews, and almost eight months after Google outlined how to adjust its in-app payment rules accordingly, Apple yesterday published rules for "distributing apps using a third-party payment provider in South Korea." What we're seeing there bears a strong resemblance to Apple's behavior in the Netherlands after the Autoriteit Consument & Markt (Authority for Consumers and Markets; ACM) determined that Apple's in-app payment rules were violating European and Dutch antitrust laws with respect to (in that specific case) dating apps:

  • Yes, app developers can now--in principle--use different payment systems without their apps necessarily being rejected on that basis.

  • No, it's not going to make sense for them to do so because Apple--which in Korea also applies to Google--charges a commission even on payments processed by other service providers that has the same effect--that of an "app tax"--as before.

  • Bottom line: Heads, Apple (or Google) wins. Tails, developers lose.

It was to be expected. Within a few days of the Korean legislature's decisive vote, Professor Damien Geradin (whose firm, Geradin Partners, is a leading antitrust boutique in Brussels and London) wrote on the Platform Law Blog:

"The lingering question is whether Apple and Google will do the right thing and voluntarily end the imposition of [Apple's In-App Purchasing] and [Google Play Billing] in the rest of the world or will try to delay the inevitable by fighting antitrust investigations and regulatory initiatives country-by-country. While I hope for the former, I fear the latter."

Those fears have been validated:

Last November, not long after Google announced its plans for how to "comply" with the new law, I described Google's intentions as "bad-faith compliance" and wrote that "South Korean lawmakers must go back to the drawing board if they respect themselves and want to be respected." More than seven months later, I still think that would be the most reliable way forward, but in a more optimistic scenario for app developers, the KCC's Enforcement Decree would be deemed to be within the scope of the 2021 version of the Telecommunication Business Act and to have scope for fining Apple and Google, though the 2% fine the law currently enables may not be enough of a deterrent anyway.

The enforcement guideline lists various types of conduct that constitute "unfair acts" under the 2021 law, the sixth and last item of which translates (unofficially) as follows:

"Conduct that forces [app developers to use] a particular payment system by imposing unreasonable, discriminatory conditions or restrictions in connection with fees [...] on Mobile Content Providers who use an alternative payment system."

The law itself focuses just on the need to open up the market for alternative payment systems. With a view to Android, this means apps shouldn't be required to use Google Play Billing; on iOS, it's called In-App Purchasing.

Is the 26% commission that Google announced in November and Apple published yesterday an unreasonable, discriminatory condition affecting revenues generated through alternative payment systems? And what about other restrictions, such as Apple requiring a separate app for South Korea? Does it all amount to an attempted end-run around a law meant to open up the market and give developers (not just consumers) choice of payment systems and a chance of avoiding the app tax?

A few observations:

  • While Google makes it clear that developers entitled to a reduced rate of normally 15% will be charged only 11% (15%-4%) in South Korea, Apple is being as unreasonable, uncooperative, and arrogant as it could be, and ignores its own Small Business Program by just demanding 26%--meaning that developers using a third-party payment processor in Korea would have a total cost that is about twice as high as if they used Apple's IAP.

    In the Netherlands, Apple started out with the same insult to human intelligence, which I believe does constitute discriminatory pricing, but later (after some contempt fines) said there would always be a 3% reduction (i.e., 12% under the Small Business Program).

  • Why the offset is 3% in the Netherlands and 4% in Korea is unclear. Maybe it's because Google came out first with the 4% figure, and Apple followed suit. It may also have to do with the fees charged by the very few payment service providers Apple currently accepts in Korea, one of which is Inicis, which has a standard fee of marginally more than 3%. It could also be that Apple has to err on the side of caution in Korea--where it's dealing with an actual law--while "only" facing an antitrust authority's decision in the Netherlands. The 3%/4% inconsistency does look odd whatever the reason(s) may be.

  • Just like (initially) in the Netherlands, Apple wants separate apps (also called SKUs, which means "shelf-keeping units" and was already the standard term in the days of "shrinkwrapped" software distribution) for the Korean market if an alternative payment processor is used. That requires app developers to get their users to switch from the app they already have to a new one. In the Netherlands, Apple backed down in that regard, though only temporarily so: Apple reserves the right to change its terms again should it prevail (in whole or in part) on appeal.

  • It would have been more cooperative for Apple to make the same concessions--applying the reduction to the Small Business Program and post-first-year in-app subscriptions, too--from Day One in Korea that the Dutch ACM got Apple to make. But as I said, Apple still takes the position it doesn't really have to do so in the Netherlands, and may just want to have some more bargaining chips for the further process in Korea. The problem is that Apple has so far gotten away with such arrogant and recalcitrant behavior without having been penalized in a way that really hurts. And a 2% fine by the KCC would not really matter to Apple.

  • It's foreseeable that Apple will argue the law itself doesn't require it to make third-party payment options more attractive than its own, and that the law says nothing about commissions (or royalties for intellectual property rights). From a common-sense point of view, the KCC can make a strong point here, but again, the statute could be stronger and clearer.

On the same day that Apple announced its new IAP rules for Korea, Google and class-action lawyers for certain developers filed a motion for preliminary approval of a proposed settlement of antitrust lawsuits over Apple's IAP commission, while new class-action complaints against both Apple and Google were filed in Australia (on behalf of end users, though). So far, no single case or legislation has been a total game-changer. The European Union, however, is soon going to enact its Digital Markets Act--it's on the European Parliament's plenary debate schedule for Monday (Independence Day in the U.S., but a regular workday in Europe). The DMA may be the most powerful measure, but even that one will ultimately have to be enforced, and Apple and Google are not going to interpret it the way many app developers (reasonably) would.

In the end, what may lead to change here is the combination of all those regulatory and legislative measures around the globe, plus litigation (by the way, in a couple of weeks Apple will file its final brief in the Epic Games v. Apple case before the Ninth Circuit holds a hearing). This blog will continue to comment on a variety of cases in numerous jurisdictions.