Wednesday, December 14, 2022

Potential transatlantic divergence in tech competition regulation: App Store legislation, Activision Blizzard acquisition--can the cradle of antitrust law regain thought leadership?

The United States is more advanced than Europe in various ways, though not in every respect. Over the past couple of days, I have seen some news--primarily from Bloomberg--concerning mobile app stores as well as vertical mergers that surprisingly suggest the EU is currently has smarter priorities in place when it comes to tech competition regulation. The cradle of antitrust law can regain its thought leadership, but must get its act together--such as its Open App Markets Act (OAMA).

On Tuesday, Bloomberg reported on a statement by Microsoft President Brad Smith at his company's annual shareholder meeting the same day, according to which he's confident in his case for the acquisition of Activision Blizzard King (NASDAQ:ATVI), but also said this:

"I’m disappointed that the FTC didn’t give us the opportunity to even sit down with the staff to even talk about our proposal to even see if there was a solution there."

The Federal Trade Commission didn't dispute this specifically and merely told Bloomberg that remedy proposals will always be considered. But it's one thing whether a company can submit a proposal and it will be read (more or less) and another whether a competition authority constructively resolves a potential issue through dialog. It's a lot easier to work out a solution if the two sides meet and talk.

The FTC's press release that announced the complaint on Thursday made it clear to me that the FTC was suing for the sake of suing, as I called it in my immediate reaction. That impression was based not only on the press release (and later reinforced by the actual complaint, which has shocking deficiencies as well as reports that Microsoft even offered a Call of Duty commitment to the benefit of Sony's PlayStation Plus multi-game subscription service), but in the build-up to the decision there had been some media reports that indicated the FTC simply wanted to sue, period.

The misleading part about post-acquisition Microsoft-exclusive Bethesda games was clarified by the European Commission when MLex reached out. It's not that the FTC had lied, but it had blown things out of proportion and misled people by making it sound as if Microsoft had reneged on a commitment, formal or informal.

On Monday, the EC's Directorate General for Competition (DG COMP) published a policy paper on how to address digital mergers (PDF). What's typically European is that the first section focuses on interoperability--a priority that I agree with and that I believe is increasingly recognized in the U.S. as well. Interoperability is obviously a non-issue with respect to Microsoft-ActivisionBlizzard. The paper also says: "Under the Commission’s long-standing policy, divestiture commitments are the best way to eliminate competition concerns resulting from horizontal overlaps." There's no divergence in that regard, and it's not an Activision Blizzard issue either. What about vertical mergers, though?

"[T]he Commission’s recent decisional practice shows that many mergers in the digital and tech sectors involve players active in vertically-related or neighbouring markets, which can mean that a divestiture may not always be the most appropriate method to solve competition concerns. If competition concerns can be removed by targeted, clear-cut and enforceable changes to market practices, non-divestiture remedies can allow, and have allowed, the Commission to intervene in a proportionate manner to address non-horizontal concerns."

Remedies are not a binary question. There are behavioral remedies and there are divestitures, but besides divestitures there can be other structural remedies--such as long-term license deals. That is something the FTC should be more receptive to.

Analyst Ben Thompson published a very interesting article on Microsoft-ActivisionBlizzard, most of which is a walk down memory lane all the way back to the first video games and the Atari 2600 console. The article makes a lot of valid points, though I don't even see a threat to Sony's market leadership in any scenario, and I consider it a non sequitur that there should be any obligations on the acquirer as this is, by traditional legal standards, a case for unconditional clearance. But those are questions on which reasonable people can disagree. I did, however, chime in to defend the FTC against an accusation of doing nothing about mobile app store abuse because it seems to me that there is simply an inter-agency agreement that the Department of Justice would deal with that part (and its support of Epic's case against Apple is a very significant first step) while the FTC focuses on other problems:

That said, I do agree with Ben Thompson that "the real threat to gaming today is the dominance of storefronts that exact their own tax while contributing nothing to the development of the industry." Apple makes more money with games than any other company, without actually making games. It's a clear case of a monopolist (here, a single-brand aftermarket monopolist) simply leveraging a monopoly in one market to impose unfair conditions on actors in other markets.

A Bloomberg article that came out yesterday reminded not only me but also other people of Microoft's plans to use the popularity of Activision Blizzard King's mobile games to compete with the incumbent mobile app stores. In order for that to happen, it takes merger clearance on the one hand but also demonopolization of mobile app markets on the other hand. The fact that there is meaningful progress concerning the latter makes the former even more relevant. Bloomberg's Mark Gurman reported that Apple is working on features in iOS 17 that will enable third-party app stores as mandated by the EU's Digital Markets Act (DMA) by early 2024.

To give further credit to the author who got that scoop, let me show you a couple of Mr. Gurman's tweets here:

Let me repeat this: "If similar laws are passed in additional countries, Apple’s project could lay the groundwork for other regions." This means U.S. consumers might actually get the benefit later. But it's now increasingly unlikely that Congress will adopt the OAMA during the remainder of the lame-duck period. Next year, I'm sure the bill would be reintroduced, but things would take time. In the end, it could be that the schedule set by the EU then effectively also becomes the one for the U.S. market--and in a worst-case scenario, Europe would open up the market while the U.S. would continue to listen to Apple's and Google's lobbyists. I still hope the OAMA will be passed into law ASAP.

Whether Apple will comply with the EU DMA in good faith is rather questionable. As Bloomberg notes, Apple still plans to charge developers for access to iOS, even if their apps were to be installed directly ("sideloading") and not through Apple's App Store. There will be issues, and Apple is probably going to litigate or create situations in which the enforcers have to. But the noose is tightening.

It's also possible that the timing of Apple's revelation of working on those changes has to do with an imminent decision in the EU's Spotify case or some other App Store investigation.

The best solution for determining fair compensation for Apple would be to let Apple try to enforce its intellectual property against app developers who bypass the App Store. As I explained a while ago, there's no way that IP enforcement would earn Apple a commission in the 30% range, and there would actually be quite a possibility that Apple would get zero. Would that be unfair? No, because Apple makes enough money with those devices. Microsoft doesn't charge Windows developers. Apple isn't collecting anything from Mac app makers who bypass the App Store. And consoles are a different product category.

A Twitter user who according to his profile "loves [...] Apple"--but doesn't seem to love competition and the benefits it brings--warned against "all kinds of [unspecified] dangers." The tweet with which I responded has already received more than 200 likes even though it was not retweeted by a power user with hundreds of thousands (or even millions) of followers:

Some people's fundamental misconception is to argue that a restriction of choice by Apple constitutes consumer choice. They argue that app developers--including some who make apps that people really want or even have to use--will then have a choice to avoid Apple's fees and rules. But the solution is, again, competition: if Apple made reasonable rules and didn't impose unreasonable fees, why would any maker of a major app (and only those apps are "must have" apps) not be prepared to offer it on the App Store (even if maybe not exclusively)?

Apple's (and Google's) app review guidelines are simply optimized for the purposes of locking in end users, keeping end users in the dark (anti-steering), and taxing and tyrannizing developers. It would be up to Apple to compete on the merits. If Apple decided not to do that, then users should blame Apple, not developers or alternative app stores.

I can see why some people--such as Apple-dependent journalists--rush to Apple's defense and even make nonsensical arguments, such as denying the difference between portable general-purpose devices (that for large parts of the day are the only device we have available) and niche products like video game consoles (which are used in a setting where we have alternatives at hand), ignoring that hardly anyone will carry an iOS and Android device at the same time, describing Android as a fundamental alternative when users are locked in and face high switching costs (and Android app distribution faces largely the same problems anyway since alternative distribution methods exist but are fundamentally disadvantaged). But none of their arguments withstands scrutiny. In the end, if any Apple fans want to live in an Apple tyranny, just like there were a few lunatics in West Germany who preferred to live on the other side of the Iron Curtain, that option will always exist: just install 100% of your apps from the App Store.