Wednesday, July 20, 2022

Google's new European in-app payment rules insufficient to comply with DMA: overt discrimination against game makers, excessive app tax imposed on everyone

It only takes a look at the first sentence of Google's blog post announcing new Google Play billing rules for Europe to discern disingenuity:

"Google has been a leader in platform openness for more than a decade, allowing for multiple app stores and avenues of distribution on Android, and piloting user choice billing."

  • Compared to Apple, Google is a "leader in platform openness" indeed (for example, with respect to mobile browsers or--see my previous post--NFC payments), but that's like Greenland describing its climate as the warmest in a region where the only alternative would be Greenland.

  • Those "multiple app stores" can't effectively compete with the Google Play Store. That's why Google's in-app payment rules are subject to regulatory scrutiny and antitrust litigation at roughly the same level as Apple's. Two years ago, Epic Games sued Apple and Google on the same day; there are near-parallel consumer class actions against Apple and Google's app stores in the UK; and in Australia, such cases were brought simultaneously.

  • And, finally, "user choice billing" came into being because of regulatory and legislative pressure, not because Google wanted to "pilot[]" something. The term User Choice Billing is revealing: users already had the choice betwen different payment methods; what's needed is Developer Choice.

I do, however, agree with the gist of the second sentence--change is coming:

"[T]he recent passage of the Digital Markets Act will require Google Play and other industry players to adjust their current operating model for users in the European Economic Area (EEA)."

It's just that Google will have to do a lot more. If the only objective is to come across as more constructive and cooperative than Apple, yesterday's announcement may do the job, especially since Google is indeed acting "in advance of the DMA's effective date." But at least for now there is no indication of Google truly intending to avoid a clash with the European Commission over the question of whether it complies with the DMA. There are two identifiable issues: discriminatory treatment of app categories, and excessive charges.

Without providing any justification, Google says that games will not be allowed to offer alternative in-app payment methods:

"Google Play’s billing system will continue to be required for apps and games distributed via Play to users outside the EEA, and for games distributed to users within the [European Economic Area]." (emphases added)

There is no basis in the DMA for treating games differently. I've run a full-text search on the 193 pages of the DMA (Council version, which was also adopted by the European Parliament), and terms like "game", "gaming", or even "entertainment" don't occur even once. But "discriminatory" appears seven times (plus one occurrence of "discriminating" and one of "discrimination").

According to BusinessofApps, Google Play game revenues amounted to $37.3 billion in 2021, while non-game app revenues totaled $10.6 billion. So Google allows alternative payment methods only for the kinds of apps that account for less than a quarter of Google Play revenues.

On iOS, the split is different: $32.8 billion for non-games (39%) v. $52.3 billion for games (61%).

Google argues that its terms ensure its continued ability "to keep people safe on [Google's] platforms and invest in Android and Play for the benefit of the entire ecosystem." There is no reason for which alternative payment systems are less safe when used by games than by other apps. As for Google's ability to invest in Android, it has of course chosen a different business model than Apple. Google doesn't sell huge numbers of devices (though its Pixel business is growing); it monetizes the platform in various ways, one of which is Google Play. But that doesn't justify discrimination either.

Even non-game apps won't practically benefit from Google's new European in-app payment terms.

As I've already discussed in connection with Google's similar approach in South Korea, alternative payment systems that are taxed at the same rate (when considering the cost of using third-party payment systems like Stripe) don't open up the market in the slightest.

In the EU, that discount is 3%, which is also what Apple is trying to get away with in the Netherlands.

There's a clear pattern: Apple and Google ("Goopple") want to go into any rate-setting litigation with a maximum demand. So they impose the same app tax as before by merely reducing their commissions by what third-party payment processors charge. And they want to delay, delay, and delay.

The DMA won't change everything overnight. The Commission will have to designate gatekeepers. And there won't be public enforcement against everyone at the same time. Google may be hoping that it can just do enough that enforcement will focus on Apple for as long as possible.

Like any law, the DMA is interpretable, though it is a lot more detailed than similar legislation in other places. In Korea, just a few sentences were added to the country's Telecommunication Business Act. The DMA--including recitals--is almost 200 pages long.

Article 6(4) of the DMA focuses on app stores:

The gatekeeper shall allow and technically enable the installation and effective use of third party software applications or software application stores using, or interoperating with, its operating system and allow those software applications or software application stores to be accessed by means other than the relevant core platform services of that gatekeeper. The gatekeeper shall, where applicable, not prevent the downloaded third party software applications or software application stores from prompting end users to decide whether they want to set that downloaded software application or software application store as their default. The gatekeeper shall technically enable end users who decide to set that downloaded software application or software application store as their default to carry out that change easily.

The gatekeeper shall not be prevented from taking measures to ensure that third party software applications or software application stores do not endanger the integrity of the hardware or operating system provided by the gatekeeper, provided that such measures go no further than is strictly necessary and proportionate and are duly justified by the gatekeeper.

Furthermore, the gatekeeper shall not be prevented from applying measures and settings other than default settings, enabling end users to effectively protect security in relation to third party software applications or software application stores, provided that such measures and settings go no further than is strictly necessary and proportionate and are duly justified by the gatekeeper.

For third-party app stores this means that "Goopple" are allowed to take security measures, but those must not go beyond what is "strictly necessary and proportionate and [...] duly justified by the gatekeeper." The way Android currently treats sideloading and alternative app stores is clearly unjustified, disproportionate, and not necessary in its current form.

What the statute does not say is that gatekeepers are not allowed to charge app developers a cent. The DMA does, however, make it clear that any "general conditions of access" and other business terms must be "fair, reasonable, and non-discriminatory" (FRAND). In recital 62, the DMA specifically discusses this with a view to app stores:

"[...] In particular, gatekeepers which provide access to software application stores are an important gateway for business users that seek to reach end users. In view of the imbalance in bargaining power between those gatekeepers and business users of their software application stores, those gatekeepers should not be allowed to impose general conditions, including pricing conditions, that would be unfair or lead to unjustified differentiation. Pricing or other general access conditions should be considered unfair if they lead to an imbalance of rights and obligations imposed on business users or confer an advantage on the gatekeeper which is disproportionate to the service provided by the gatekeeper to business users or lead to a disadvantage for business users in providing the same or similar services as the gatekeeper. The following benchmarks can serve as a yardstick to determine the fairness of general access conditions: prices charged or conditions imposed for the same or similar services by other providers of software application stores; prices charged or conditions imposed by the provider of the software application store for different related or similar services or to different types of end users; prices charged or conditions imposed by the provider of the software application store for the same service in different geographic regions; prices charged or conditions imposed by the provider of the software application store for the same service the gatekeeper provides to itself. [...]"

There will be a foreseeable fight over what level of an app tax is FRAND. The Goopple duopolists have a history of making and supporting public statements in connection with standard-essential patents (SEPs), such as Apple complaining about "royalty stacking" even though its total iPhone SEP royalty spend is roughly 2%, and arguing that the royalty base should be capped. The fight over what constitutes a FRAND app tax appears inevitable, and it will likely be the biggest and hardest-fought FRAND dispute in history.