Friday, September 30, 2022

Apple's Korean offices raided by antitrust authority over allegations it charges 33% commission to developers: yes, its App Store collects even more than 30% in some countries

On Monday (September 26), it was confirmed that Apple's Korean headquarters in the city of Gangnam-gu were subjected to a dawn raid by the Korea Fair Trade Commission (KFTC), which is Korea's antitrust authority . ChosunBiz, the business publication of Korea's oldest daily (The Chosun Ilbo), apparently was first to report, citing industry sources. At least one other major Korean paper, The JoongAng, reported as well. I've become aware of this development--which means that formal investigations of Apple's abuse of market power are now ongoing in Korea (as they already are in multiple other jurisdictions)--thanks to a LinkedIn post by Sangyun Lee, a competition law researcher at the Korea University Legal Research Institute.

Let me highlight two very important aspects of this:

  1. The mobile game developers who brought the complaint that gave rise to this dawn raid argue that Apple charges even more than 30% to developers with respect to the revenues they generate in South Korea.Apple charges 30% of the price paid by end users, which includes value added tax (VAT) and, therefore, is 10% higher than the ex-VAT amount on which Google bases its 30% commission. As a result, Korea's Mobile Game Association is spot-on when it alleges that Apple actually collects 33% (30% of 110%), not the headline 30% rate.

    The above example presumes that a developer doesn't benefit from the 15% rate that applies to small businesses or to subscriptions after the first year. However, the vast majority of App Store revenues are still subject to the 30% (or, in Korea, 33%) tax, which is why it makes sense to focus on the 30%/33% scenario--and even where the reduced 15% rate would apply, it's effectively 16.5% in South Korea because of Apple collecting a commission on the gross price (inclusive of VAT).

    FOSS Patents already brought up this issue last year with a view to other countries and noted that the effective App Store tax amounted to 35.25% in Turkey, 32.1% in France and Italy, and 31.5% in the UK. It's just that apparently no one complained in those countries--I would very much encourage app developers in those countries to take similar actions as their Korean colleagues.

    The Korean developers would disagree with the 30% tax as well, but just the difference between the nominal 30% and the effective 33% app tax in South Korea amounted to approximately 345 billion won (US$240 million) in the period from 2015 to 2020.

  2. Apple is now actually being investigated by two Korean government agencies in parallel. In August, the Korea Communications Commission launched a "fact-finding investigation" into Google Play, Apple's App Store, and a local app store (ONE) that was apparently triggered by Google's rejection of updates to the KaTalk messaging app, which is as ubiquitous in South Korea as it gets.

    The KCC is investigating whether Apple, Google, and a local player are in compliance with last year's amendment to the country's Telecommunication Business Act, which requires app stores to allow third-party in-app payment services. Apple and Google (and possibly that local Korean player) don't really do that: they act in bad faith by making it prohibitively expensive to use alternative payment services.

    So there is a fundamental issue that affects Apple and Google alike, but the practice of charging a commission on transaction value inclusive of VAT is unique to Apple. It's unsurprising that Apple is more combative and even greedier than Google. That's why it's now facing a two-front regulatory war in South Korea over its App Store terms and practices.

There is also a potential for antitrust complaints in various jurisdictions by NFT startups, whose transactions are taxed by Apple like any other sale of digital goods, which is abusive but consistent. A major problem for NFT startups is the inflexibility of the App Store with respect to setting prices: you have to predefine your IAP offerings in your app's App Store configuration (I've personally done so in the past, so I have hands-on experience with that process), which makes it impossible to conduct auctions or other types of transactions requiring greater flexibility.

I'm cautiously optimistic that the United States Court of Appeals for the Ninth Circuit may correct the district court's various errors relating to market definition and agree with Epic Games' single-brand aftermarket under the Kodak and Newcal precedents (both are from the Ninth Circuit, and Kodak was affirmed by the Supreme Court).

Apple is also facing a risk of potentially having to dole out tens of billions of dollars to U.S. iPhone users at the end of what may become the lengthiest U.S. antitrust litigation in history (it already started more than a decade ago, with one key question already having been decided by the Supreme Court, and is still years from final resolution).

The Assistant Attorney General running the Antitrust Division of the United States Department of Justice urged the adoption of the Open App Markets Act (OAMA) in Senate testimony last week. The OAMA would definitely address certain issues, and could do so more swiftly than antitrust litigation.

While South Korea is a small country compared to the U.S., and Apple's market share is a lot lower there, the country's legislature did the right thing last year by amending its Telecommunication Business Act to curb App Store abuse, which has clearly been watched with interest by policy makers around the globe. Meanwhile the European Union has adopted its Digital Markets Act (DMA), and apparently we will very soon see litigation brought by Apple and Google against the actual implementation of that law.