Thursday, October 27, 2022

Apple has recognized one error: gambling ads on app pages have been paused--but they didn't do this for app developers, which is key to consider under the Supreme Court's Kodak caselaw

MacRumors has updated its Tuesday article on all the outrage over ads appearing on app pages with the following final paragraph:

In a statement, Apple said it has "paused ads related to gambling and a few other categories on App Store product pages."

That is only one aspect--of only one part--of various policy changes that sparked massive outrage this week. Shockingly, gambling ads even appeared on children's app pages--and what's possibly even worse, gambling ads were shown when people were searching for therapy on the same subject:

Epic Games CEO Tim Sweeney criticized not only Apple's promotion of gambling apps but also of "pay-to-win games with loot boxes":

For those who are not familiar with the topic of loot boxes, they are virtual treasure chests in games, and there's a right way and a wrong way to do them. There's nothing wrong with people finding--or winning, such as by defeating another player in a duel--digital gifts in games that they don't have to pay for. And even paying for them is OK if you at least know what to expect. What is highly controversial and has also drawn regulatory attention in various jurisdictions, however, is when those loot boxes become like an in-game lottery: gamers don't know what's in those boxes and are asked to pay to open them. Games raise hopes that super valuable items are to be found, but often you just get a consolation prize. What's a related problem is when games have rigged wheels of fortune where it looks like each item has an equal chance of being drawn, but one just has to play the game for some time to realize that the most valuable items are hard to come by. Some games charge for using such a wheel of fortune, and may even charge an exponentially increasing amount for each turn.

While Apple says the gambling (casino app) problem has been addressed, I assume the in-game equivalent of a casino called loot boxes, and related issues such as rigged wheels of fortune, are issues that persist. That's because you can't ban those based on categories: the category is games (or a game genre). Apple's app review theoretically could identify such issues, but then they'd have to play certain games for hundreds of hours, and they only have a few minutes of manual review time per app submission--with the focus being on the enforcement of their rules, above all: the app tax.

The solution would be competition among app stores, but before I get there, let me show you a really humorous tweet that shows some iOS 17 (the version after the one Apple just released) mock screens that promote other products under the You Might Also Like headline (below which Apple is now showing ads on individual app pages):

Unfortunately, Apple's recognition of its error with respect to gambling ads (and some other--unspecified--categories) cannot be described as a victory for app developers.

That relates to the single most important question--market definition--in Epic Games v. Apple, the App Store antitrust case that the United States Court of Appeals for the Ninth Circuit will hear in 2 1/2 weeks.

I discussed Epic v. Apple market definition in detail in previous posts, most recently this one on the parties' aftermarket arguments. A short explanation of the relevant legal concept is this: normally a market is characterized by two or more companies competing, such as "smartphones" (Apple, Samsung, Google Pixel, and so forth). But under exceptional circumstances (the key precedent is the Supreme Court's Eastman Kodak decision), the relevant antitrust market may be a single-brand market. In order for that to be the case, there has to be a competitive foremarket (here: smartphone operating systems--iOS competing with Android) and a derivative aftermarket (here: iOS app distribution) that is dissociated from the foremarket in the sense that a company can do in the aftermarket what only a monopolist can do without losing market share in the foremarket.

This does not mean that they can do anything. Even a monopolist can't do "just anything." But a monopolist can do a whole lot of things without giving a damn that a company in a competitive market wouldn't even dare to think of.

It was remarkable how Judge Yvonne Gonzalez Rogers--which is separate from whatever she got wrong in her subsequent decision--quizzed Tim Cook on the last day of testimony at the Epic v. Apple trial. She got him to concede that Apple's reduced 15% (instead of 30%) app tax rate was not the result of competitive constraints. Mr. Cook even admitted that antitrust considerations played a role, and he then added that they wanted to help small companies. The latter is even less credible now that we can see some of the devastating effects of App Tracking Transparency (ATT) on not only the Metas and Snapchats of the world but also on the little guys. In any event, the key thing is that litigation/regulation is not a substitute for competition, which Judge YGR also noted (she said that if that was the solution, it would invite ever more litigation).

The most interesting part of that examination was, however, that Mr. Cook said he never received reports on developer satisfaction with the App Store. That proves the aftermarket (iOS app distribution) is dissociated from the foremarket: developers are just serfs without property rights as someone wrote on Twitter a few days ago. A feudalistic ruler doesn't have to worry about serfs' satisfaction unless so many of the serfs stop working that the system collapses. There is, however, too much money to be made on iOS for that to happen: one billion of the world's richest people.

What has likely led Apple to backtrack on gambling ads?

It's a really safe assumption that Apple didn't care about developers' criticism per se. It's just that developers raised an issue that also concerned end users--and Apple has to compete for them in the foremarket or they'll buy Android phones. (Google obviously has a lot more experience with advertising and wouldn't make a beginner's mistake like letting gambling app makers place their ads in other categories.)

Some of what Apple does hurts developers and users, but the latter won't find out, especially since the former aren't allowed to tell them in the app (such as the impact of the app tax on prices, or restrictions such as that NFT apps can't offer transactions at arbitrary prices as Apple imposes its "price tiers"). Those ads, however, were also visible to end users.

In the end, it was all about the impact of bad press on the foremarket. No developer credibly threatened to stop making iOS apps.

Presumably, Apple was also thinking of implications in politics and in litigation. Showing gambling ads on children's app pages is bad idea when you're taking paternalistic positions in the political debate, arguing that only Apple can protect users from the evils of this world.

On Twitter I wrote that "Apple should think about the evidence with which its execs will be confronted in future App Store trials." It's a credibility problem, and while Epic v. Apple is all about injunctive relief, there are damages claims pending from others (particularly consumer class actions) and there will be more, meaning that some cases will be put before juries where psychological considerations are even more important than in bench trials (where a professional judge decides alone).

We need alternative app stores so that there are competitive constraints on Apple. In a competitive environment, it's still possible that some app stores would run ads. Developers might choose to distribute their products through an app store that displays ads--even on individual app pages--but charges a lower commission than an ad-free alternative. But at least there would be choice--for developers and for consumers, and when I say "consumers" I also mean that they have a choice after being locked into a particular smartphone operating system, not just before.

In India, Apple's market share is tiny (about 3%), so the focus of regulators and app developers there is on Android. Given that the issues are very similar, the approach of the Competition Commission of India (CCI) to Android should serve as a beacon for policy makers, regulators, and courts in other jurisdictions. In a first ruling (which came down last week), the CCI found that app developers are "super dependent" on Google and ensured that third-party app stores and "sideloading" would be able to compete effectively. This week the CCI handed down a second decision that requires Google to tolerate alternative in-app billing systems and prohibits Google from imposing non-FRAND terms on developers.

Google will try to get those decisions overturned, and even if they are upheld, they will have to be enforced against a creative and resilient player. There will be debates over what is FRAND (though Apple has a track record of saying FRAND means ultralow royalty rates). There could be issues where a platform operator makes certain APIs available only to apps that are distributed through the default app store. But those are narrower issues and could be addressed much more easily and cost-effectively than starting an antitrust case like Epic did, where you have to prove everything in the first place and Apple can put up all sorts of smokescreens such as claiming that iOS doesn't compete with Android (a question on which Apple later contradicted itself in its principal brief on appeal).