Tuesday, August 9, 2022

Korea Communications Commission launches 'fact-finding investigation' into Google Play, Apple's App Store, and (local player) ONE store: Google's rejection of KaTalk updates apparently triggered this

It took only one month and two days for my headline according to which Google was on a collision course with the Korean goverment to be vindicated. I predicted this after Google rejected updates to KakaoTalk (commonly referred to as KaTalk), a messenger app used by about 93% of Korean smartphone users, the reason for those rejections being KaTalk's use of external payment methods (via its website).

The Korea Communications Commission (KCC) teed up today's announcement of a "fact-finding investigation" into three mobile app stores quite nicely, and I'll say further below why I think they're playing it smart. First, here's a report by the Yonhap news agency, according to which the KCC will start a probe in a week from today to look into potential violations of the in-app payment rules the country's legislature adopted last year.

The idea of that legislative amendment was and remains that app developers should be able to bypass Apple's, Google's, and other app store operators' taxes on in-app payments. Korea is not the only jurisdiction in which Apple and Google have made announcements of what constitutes bad-faith pseudo-compliance with rules or regulatory decisions. It has also happened in the Netherlands, where an antitrust decision is being appealed, and Google recently announced such plans with a view to the EU's Digital Markets Act, though it turned out only a few weeks later that the real reason for doing it at this particular time was, presumably, a preliminary investigation by the European Commission's Directorate-General for Competition (DG COMP).

In South Korea, Apple and Google impose a 26% commission on in-app payments processed by third-party payment services, which effectively means that the total cost to a developer of (a) the platform operator's tax and (b) the fees charged by third-party payment processors (which are apparently a bit higher in Korea than in some Western countries, where Apple and Google impose a 27% tax on third-party transactions) is not--or at least no more than negligibly--lower than simply using Google Play Billing for Android or Apple's IAP for iOS apps. As a result, developers have nothing to gain, as they'd need to be able to offer users substantially lower prices in order to convince them to use alternative payment systems--and without the developer losing money on those cheaper transactions, of course.

The Korean law doesn't state specifically that mobile platform operators are not allowed to charge commissions; and it probably couldn't say so, as companies may own valid and enforceable intellectual property rights that entitle them to royalty payments.

There can be no doubt about the spirit of the law: it's about giving app developers choice. Consumers already had the choice of making payments using different credit cards or other payment methods.

Instead of just talking price regulation at an abstract level, the KCC is now going to analyze whether the targets of the investigation are "enforcing certain in-app payment methods and refusing developers who use external payment methods to register and renew their apps on their markets." (quoting Yonhap)

The second part--"refusing developers who use external payment methods to register and renew their apps on their markets"--is precisely what the KaTalk situation was all about. TechCrunch reported in mid-July that Kakao, the company that makes KaTalk, removed its external payment options. Kakao seemingly caved after some short-lived resistance (by contrast, Epic Games' Fortnite was kicked out of Google's and Apple's stores two years ago--almost to the day--and still hasn't returned), but it may now have the last laugh.

I don't mean to suggest that Kakao coordinated this with the KCC. I would, however, assume that Kakao at some point complained to the KCC, and that the KCC appreciates the fact that Google's repeated rejection of updated KaTalk versions gives the regulatory agency some ammunition: there was some actual harm to the developer as well as to consumers, even if only during a short window.

That is just the first of two reasons why I think the KCC teed this up nicely. The other is that it's politically clever to investigate not only Apple (over the App Store) and Google (over the Google Play Store), but also South Korea's large telecommunications carrier, SK Telecom, over its ONE store (yes, the official capitalization is "ONE store"). On the web, ONE store describes itself as "Korea's leading app store."

Going after a local hero in addition to two American behemoths makes it all look a lot more principled than otherwise. No doubt that ONE store would also like to squeeze developers. But ultimately the South Korean economy stands a lot more to gain from opening up mobile payment systems.

Samsung's Galaxy Store is also very significant, but apparently compliant with the new IAP statute. It's also telling that the Galaxy Store became the #1 Fortnite Mobile distribution channel after Google and Apple ejected that game: it means Samsung allows developers some things that Apple and Google don't.

It's not 100% certain at this stage the investigation will lead to further action, but I'd be surprised if the KCC ended up concluding that Apple's and Google's terms and policies--and the implementation of those terms and policies--are compliant. The Telecommunications Business Act would enable the KCC to fine Apple and/or Google to the tune of 2% of their Korean revenues.

The Yonhap report doesn't specifically indicate that the KCC may consider the 26% app tax rate a violation of the country's IAP rules. Maybe the KCC is going to focus on behavioral rather than numerical issues, at least for now--they've got to start someplace. We'll certainly hear from that Korean enforcement action again in the not too distant future. I think there's potential there.

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