Monday, September 26, 2022

Epic Games' aftermarket arguments and case citations are substantially stronger than Apple's: reversal by Ninth Circuit is realistically achievable

The Epic Games v. Apple appellate hearing in San Francisco--with the DOJ supporting Epic's appeal--is less than four weeks away. With all that's going on (including my own new app project) I don't know yet how much time I will find in the coming weeks to elaborate on additional aspects of the case, but at minimum I'm now going to complete my analysis of the market definition dispute. I've done a lot of reading in recent days on the subject of single-brand markets, and I've drawn up a half-dozen charts that will make it easier to follow.

In order for Epic to convince the United States Court of Appeals for the Nith Circuit of its single-brand market definition under the Supreme Court's Kodak precedent, it has to proffer a (competitive) foremarket and a (monopolized) aftermarket. Then the focus is on whether Apple abuse its aftermarket monopoly.

I've previously explained in detail why Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California got the law, the economics, and the technology wrong with respect to the foremarket part. I realized the full extent of the judge's fundamental misconceptions only after identifying outrageous absurdities such as the judge

  • saying that Epic chose the smartphone operating system market because Apple has a greater market share in that one than in the smartphone market (when there is no iPhone without iOS, and the iPhone is the only smartphone running iOS, i.e., a one-to-one relationship), and

  • referring to multiple App Store operating systems, when there is just one (iOS).

It was Apple's own admission that iOS does compete with Android (which reduces to absurdity its denial of the existence of a smartphone OS market) that pointed me to this in the first place.

What the Supreme Court held in Kodak 30 years ago is that if certain criteria are fulfilled, there are exceptions to the general rule that a market is characterized by more than one vendor offering products (which includes services) that have the potential to substitute each other. The most important one of those requirements is also the only one that matters here (as Judge YGR didn't see any issues with the other three): that competition in the foremarket fails to discipline a defendant's conduct in the aftermarket.

The Supreme Court didn't resolve the case after a full trial: it merely held that the complaint should survive a motion to dismiss in light of plausible factual allegations according to which Kodak enjoyed market power in the aftermarket of spare parts for its high-volume photocopiers despite having to compete with other makers of photocopiers in the foremarket. In other words, if the allegations were taken as true, Kodak could--with impunity--act anticompetitively in the aftermarket without customers defecting in the foremarket or competitors seizing an opportunity to undercut Kodak on the total cost of ownership (TCO), such as by adopting a similar razor-and-blades type of business model and slashing photocopier prices, which would serve as a competitive constraint on Kodak.

That is merely consistent with what characterizes market power: it's a state of affairs in which a monopolist can make certain decisions (such as price increases or degradations of quality) without having to worry too much about competitive constraints. That's what the SSNIP test (Small but Significant Non-transitory Increase in Price)--as in Epic v. Apple--and its SSNDQ equivalent (Small but Significant Non-transitory Decrease in Quality)--as in the EU's Google Android case--are all about. So Kodak says that the question of whether an aftermarket is a relevant antitrust market hinges on whether there are competitive constraints by virtue of competition in the foremarket. If there are, that's good. If not, then the markets are dissociated, and there may be an issue in the monopolized aftermarket. Here's my first chart (click on the image to enlarge):

As simple as it may seem, this chart visualizes something that is easily misunderstood. The notion of competition in the foremarket disciplining an actor in the aftermarket presupposes a feedback mechanism. There must be a price for the actor to pay in the foremarket if it raises prices (such as by driving out competitors in order to command higher service prices) in the aftermarket. That price may be paid as a result of reduced demand (TCO-savvy customers buying from competitors) or pressures on the pricing of the original equipment (as other vendors give them away below marginal cost as they look at lifecycle revenues that include the aftermarket). All that matters in the end is that there is such a feedback mechanism. In that case, some customers may still feel they are treated unfairly, but the damage (also called deadweight loss) is limited, and therefore not worthy of antitrust intervention.

So, whoever says that competition the foremarket disciplines decisions in the aftermarket implicitly means that installed-base opportunism in the aftermarket will be a boomerang that hits--and really hurts--the actor in the foremarket.

Here's a chart that shows Epic's proposed market definition--one foremarket, two aftermarkets (click on the image to enlarge):

In this chart and in a few others, the dotted line is labeled "singularity"--a key point in evolution--because I want to stress how important that point is: it's the transition from a competitive market to a world of monopolies. Once you're past that threshold, there may also be a second-degree aftermarket (here, IAP) or even nth-degree aftermarkets. But the critical point is where actions to the right don't have consequences to the left of the dotted line anymore. Thereafter, it's game over for competition.

Epic said that iOS does compete with Android, as Apple has meanwhile admitted, but it can abuse its App Store monopoly in really bad ways without losing market share in smartphone operating systems (or at least not to an extent that would discourage Apple).

Unfortunately, Judge Rogers misunderstood Epic and thought that Epic chose the smartphone OS rather than smartphone (device) market in order to describe iOS as a monpoly, i.e., that the antitrust theory begins with Apple not allowing other operating systems on the iPhone than iOS (click on the image to enlarge):

As a result of that misconception, she moved the singularity to the left.

She then rejected the foremarket. As iOS isn't sold or licensed separately, she said there could not be a market for something that isn't sold. The DOJ disagrees sharply, as do other amici. This plays a role in this case in a second way: Apple's in-app payment service is not offered outside the App Store (though other payment services, like Paypal or Stripe, obviously are).

I can't imagine that anyone reviewing that fundamentally flawed part of the judgment would not be inclined to reverse Judge YGR with respect to the foremarket. But Epic also needs to prevail on the aftermarket.

As I said further above, the focus must be on the singularity: the line between the foremarket and the first derivative aftermarket. So let's simplify the chart accordingly as things will get a bit more complex in a moment (click on the image to enlarge):

Building on the previous chart, let's now look at why this is a Kodak case, i.e., why Apple can get away with terrible actions in the aftermarket without paying a dissuasive price in the foremarket (click on the image) to enlarge):

First, on the left side of the above chart you can see that the foremarket is a duopoly (which I sometimes call "Goopple"). This is not like the photocopier market where you have dozens of vendors, and there are plenty of companies who could enter the market if they so elected. It's a network effects-driven market where even Microsoft's Windows Phone didn't stand a chance at some point as developers were writing their apps only for iOS and Android.

If Google wasn't only marginally more open than Apple ("fauxpen"), but decided to turn true openness into a competitive advantage, smartphone buyers as well as developers would really have a choice, and then the feedback mechanism might work after a while. But at this point--and presumably (unfortunately) for much longer--Google is going to continue to impose a similar app tax and restrictions on app developers as Apple.

At any rate, there is a substantial problem here with switching costs (the double arrow on the left side), which also go beyond the photocopier situation because photocopier customers will replace a device, but smartphone OS users mostly buy their next phone with the same OS.

On the right side of the above chart, a thick black line indicates that either mobile app store (Apple's App Store and Google's Play Store) are walled gardens. There is no meaningful level of substitutability. You may be able to buy a digital item or content on one platform and use or consume it on another, but the App Store doesn't sell Android apps and the Google Play Store doesn't offer iOS apps.

Epic told the Ninth Circuit that its Kodak case is stronger than Kodak itself, and I agree. But Apple obviously tries to muddy the water, and certainly succeeded in confusing the district judge. Also, the judge imposed hard requirements for the aftermarket that simply aren't indispensable under the law, and which Epic now has to convince the Ninth Circuit to consider legally erroneous. I'll discuss them all further below. One of the implicit requirements she wrongly established is that the aftermarket cannot be a two-sided market (like the Amex market).

But in the mobile app store context, the aftermarket simply is a two-sided market with app stores matching developers and users (click on the image to enlarge):

If we (re)focus on what the Supreme Court really cared about it in Kodak, the fact that the aftermarket is two-sided is not irreconcilable with a single-brand market definition. If anything, it even strengthens the case. As Judge Rogers heard when she quizzed Tim Cook, Apple's CEO doesn't even get reports on developer satisfaction. So Apple's abusive behavior vis-à-vis developers only affects end users (who in turn might buy Android smartphones) if developers reduce their commitment to developing iOS apps. with a billion-plus people (which are presumably part of the 1.2 billion richest people on the planet) using iOS, that's not an option for developers. That's why Apple gets away with its conduct, with ever more restrictions, with doing damage to nascent product categories like NFT apps, with ads on individual app pages (another way of taxing developers), and so forth.

The fact that the app distribution business is a two-sided market even further insulates Apple from a potential backlash in the foremarket.

Before we discuss the wrongly imposed requirements on Epic in the aftermarket context, let me show you just one more chart. Android as a whole is actually even a three-sided market as Google intermediates between device makers, developers, and end users (click on the image to enlarge):

Google makes direct dealings between developers and device makers unattractive by limiting the appeal of device makers' own app stores. But developers wouldn't make Android devices if there weren't all those Android apps made by third-party developers. (Oherwise Windows Phone would have succeeded.)

The European Commission's Google Android decision and the affirmance of its largest part by the EU General Court correctly analyzed all three sides of that market and the choices they had (no alternative to device makers in the licensable mobile OS market; end users are locked in; developers have no choice but to develop for Android).

Unreasonable explicit and implicit aftermarket requirements

The district judge took extreme positions on what Epic would have to prove with respect to the proposed aftermarket being dissociated from the foremarket because she saw some other cases in which other courts (no matter if out of circuit anyway) applied Kodak to particular fact patterns and discussed ways in which an antitrust plaintiff could prove foremarket-aftermarket dissociation--but didn't say (and especially the Supreme Court and the Ninth Circuit never said) that those were absolute requirements.

Explicit requirement of customers' total unawareness: While it's obvious that end users weren't even aware of the app tax until Fortnite was ejected from the App Store in the summer of 2020, the district judge essentially criticized Epic for not having shown that iOS users are unaware of the App Store being the exclusive way to download iOS apps. But as Epic rightly notes in its reply brief, "Kodak does not require that consumers lack all knowledge of an alleged aftermarket monopolist’s conduct, just that they lack sufficient knowledge to adequately assess the full consequences of their actions when making purchasing decisions in the foremarket."

Explicit requirement of policy change: Total unawareness is obviously the case when a company changes its aftermarket terms after a cohort of customers made their purchasing decisions. But that doesn't make it a minimum requirement. Even one of the cases referenced by the district court's judgment, the Third Circuit opinion in Avaya v. Telecom Labs et al., doesn't establish a hard requirement of a policy change having occurred:

"In evaluating the evidence in Harrison Aire, we cautioned that, although '[o]ne important consideration is whether a unilateral change in aftermarket policy exploits locked-in customers,' [...] “an ‘aftermarket policy change’ is not the sine qua non of a Kodak claim,” [...] Other factors to consider include [...]"

In fact, Judge YGR herself correctly focused on competition in the primary market being dissociated from conditions in the aftermarket when she denied in part a motion to dismiss in Ward v. Apple. I've read that entire decision, and in that case there were no misconceptions. Maybe some people would disagree with parts of it, but it was all perfectly logical and also very well-written (as opposed to the sloppy Epic v. Apple Rule 52 order with almost 300 typos, similar errors, and serious stylistic issues).

Implicit requirement of alleviating concerns over potential future cases involving other defendants: At the emergency-relief stage as well as in the Rule 52 order, Judge YGR faulted Epic for not explaining how a certain outcome of Epic v. Apple wouldn't also affect other walled gardens such as Sony's PlayStation. I've previously criticized the judge for that because this is too much of a good thing: yes, a sense of responsibility is an important trait in a judge; no, it's not a good idea to decide a case before a court based on facts and issues that are external to that case. It's utterly unreasonable to expect Epic--under the time constraints of its own case--to litigate hypothetical Epic v. Sony (with Sony being an Epic shareholder anyway) or Epic v. Microsoft (a company that is all for opening up app distribution and whose executives' testimony supported Epic) cases. The result was a wrong outcome in Epic v. Apple. The alternative would have been to decide Epic v. Apple without regard to those other cases, knowing that the likes of Sony and Microsoft could still defend themselves if they were sued by Epic or anybody else.

Concerns over spillover effects on other walled gardens could still have been raised at the appellate stage (where, again, Sony--as an Epic shareholder--is silent and Microsoft filed an amicus brief in support of Epic). It was always clear that the losing party would appeal.

Similarly, I believe it simply wasn't appropriate for the district court to rely on (partly misinterpreted) out-of-circuit precedent to argue that Kodak should be narrowed. Actually, today's digital markets come with network effects and switching costs that counsel in favor of identifying more--not fewer--single-brand markets. The Ninth Circuit found a single-brand market in Kodak, which the Supreme Court affirmed, and it then applied Kodak in Newcal.

Implicit requirement of aftermarket not being two-sided: As I already addressed further above, the two-sided nature of the mobile app distribution market doesn't make it ineligible for a Kodak aftermarket. The Supreme Court certainly didn't say anything like that in Amex--and while credit cards are used for the same transactions (for example, paying at a given restaurant), the Google Play Store doesn't offer iOS apps. Epic did recognize and address the two-sided nature of the App Store.

Unreasonably high hurdle for proving lock-in: Epic did present evidence that proves switching costs. Lock-in doesn't mean that no customer will switch: I remigrated from iOS to Android last year. The question is whether there's enough switching.

In this regard, the European Commission and the EU General Court took a pragmatic approach that makes a lot of sense. In Google Android, there was no question that users could theoretically change their default search engine, but the Commission and the EUGC focused on the fact that it doesn't happen sufficiently frequently to really make a difference.

Epic has pretty good chances of prevailing on market definition

I don't know the composition of the Ninth Circuit panel yet, but even if there were two or three "antitrust minimalists" on the panel, I believe Epic is more likely than not to prevail on market definition. I am 100% convinced--as an app developer and a smartphone user who has switched from Android to iOS and back--that Epic has a Kodak case. As a litigation watcher, I can see that Epic has very strong arguments for reversal. The district court got the law and some of the key facts wrong. It's telling that Apple even cites to a case decided by Justice Sotomayor back in 1997 when she was a district judge: Glob. Disc. Travel Servs., LLC v. Trans World Airlines, a case in which foremarket/aftermarket criteria played no role because there were alternative airlines selling tickets for certain routes (thus the proposed single-brand market definition in that case was just arbitrary; that case is closer to the ones in which U.S. courts rejected single-brand market definitions based on contracts, such as a claim brought by Domino's Pizza franchisees who complained after signing an agreement under which they had to buy all their ingredients from the defendant). Apple's brief mentioned Justice Sotomayor, but once the Ninth Circuit looks at the actual decision, it won't consider that citation relevant in the slightest.

If there's one part that I'm not totally sure whether it will work out in Epic's favor, that's the evidence of lock-in. There is a risk of the appeals court affirming the district judge's determination of a failure of proof. I'm not saying that it should. I's just the potentially weakest link of the chain. There's a risk of too much deference in that regard. What alleviates my concern is that virtually everyone knows what it's like to buy and use a smartphone. In a case involving products in a vertical market (like software for the administration of hospitals), an appeals court would find it harder to just overrule the district judge than when something as common and familiar as in Epic v. Apple is at stake.

Furthermore, the most impressive part of how the district judge handled the case was her deposition of Tim Cook, which made it so clear that any concessions Apple made (such as the 15% small business program) were not motivated by competition. That is, by the way, what I find so frustrating: Judge YGR actually had the situation all figured out in a certain way, but then didn't draw the necessary legal conclusions. She blamed Epic, its lawyers, and its experts for having overshot and for not having presented all of the evidence that might have been helpful. But she should nevertheless have ruled in Epic's favor, and the appeals court can easily overrule her now.

I would normally say Epic has an 80% chance of prevailing on the single-brand market definition (which would at minimum result in a remand), also because I believe the district court's judgment has so many flaws (even linguistic ones) that an appeals court can easily see there's something to be fixed there. But I do understand that courts are extra cautious about single-brand markets, and that's why my prediction is just that Epic is "more likely than not" to prevail on this one. If I had to give a number, I'd say 60%, but may adjust it once the panel is known.

Epic can win even under the "mobile gaming transactions" market definition, but I'm much less optimistic about its chances in that case, while I think Epic practically can't lose the case once the market has been defined correctly as a single-brand market.

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Saturday, September 24, 2022

Apple's imposition of its app tax on NFT sales is abusive but consistent: NFT startups must trade outside App Store or pay Apple's commission

Early on Friday, The Information published an article by Aidan Ryan on How Apple's App Store Politicies Squeeze NFT Startups. On Twitter, he summed it up as follows:

It's actually an understatement to say that Apple collects "up to 30% of the transaction": the app tax even exceeds 30% under certain circumstances, plus developers are increasingly forced to pay for Search Ads as Apple places ads even on individual app pages.

Jessica Lessin, The Information's founder, asks a spot-on question: "Are there whole segments of the new economy that aren[']t going through the App Store?"

The founder and CEO of Epic Games, Tim Sweeney, describes this as Apple "killing all NFT app businesses it can't tax, crushing another nascent technology that could rival its grotesquely overpriced in-app payment service."

I'm not going to take a position right here and now on web3 and blockchain business models. Let's leave that for another day. All that matters here is that as long as NFT businesses are legal, the companies pursuing those business models have the same rights as other app makers (such as yours truly) under the world's competition laws.

Apple's impact on wide swaths of the economy becomes clearer every day. In the summer, venture investor Alex Gurevich said Apple's App Tracking Transparency might deserve as much blame for a recession as inflation as all sorts of businesses now face much higher customer acquisition costs. On Tuesday, I criticized Apple's dictate of currency conversion rates because it contributes to eurozone inflation. Compared to those macroeconomic issues, the impact of Apple's App Store tax on NFT startups is of limited--but definitely non-negligible--relevance.

Also, Apple has done other really outrageous things, such as astroturfing (ACT | The App Association is mostly funded by Apple, but claims to represent small app developers). If the world's richest corporation managed to benefit from the U.S. government's Paycheck Protection Program at the start of the COVID-19 pandemic, it comes as no surprise that it also figured out a way to tax NFT startups.

Far be it from me to defend the app tax. Hopefully, the Biden Administration's appearance at next month's Epic Games v. Apple appellate hearing in San Francisco will make an impact and help to bring about change. Also, the European Commission will hopefully be able to defend all reasonable gatekeeper designations in court. But let's look at it rationally and accept as a fact (which will hopefully be history soon) that Apple levies its tax on digital goods. It's an arbitrary, discriminatory distinction: while Judge Yvonne Gonzalez Rogers had some serious misconceptions that will hopefully give rise to a reversal and remand, there are issues she figured out pretty well, one of which is that she told Tim Cook Apple was charging the gamers to subsidize Wells Fargo. You could even substitute Amazon for Wells Fargo.

If Apple didn't tax NFT sales, even if platforms are merely intermediaries, developers could circumvent the app tax. And while I totally agree with Mr. Sweeney that Apple must be stopped, it's simply true that plaintiffs like his company would otherwise be likely to hold this against Apple by pointing courts to an inconsistency that they could characterize as discrimination.

In a nutshell, Apple taxing NFT startups is a bad thing, but they're being consistently bad in this regard. There are enough inconsistencies in the App Store context already, such as what I heard Apple's counsel in a patent infringement case say last week about App Store security...

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Friday, September 23, 2022

Senator Mike Lee is the lone voice of antitrust reason: allowing cartels (through the Journalism Competition and Preservation Act) is the wrong way to tackle a market-failure problem

Here's a perfect example of conflicting goals. There are three alternative ways to look at the Journalism Competition Preservation Act (JCPA) that just passed a vote in the Senate Judiciary Committee with overwhelming support (15-7), but still has miles to go before it will become enacted by both houses of Congress. Each of those alternative takes on the current version of the bill aims at a laudable goal, and is espoused by a different one of my favorite three United States Senators:

  • Sen. Amy Klobuchar (D-Minn.), to whom the app developer community (of which I am a member) is indebted for her tireless efforts to combat app store abuse, says the bill will "save local journalism" by "allow[ing] news organizations to jointly negotiate fair terms for access to their content by Google, Facebook, and other dominant platforms."

    Her concerns over "dominant online platforms’ power over news organizations" are well-founded.

  • Sen. Ted Cruz (R-Tex.) celebrates his personal achievement: he secured "secured significant protections against Big Tech censorship with an amendment to the [JCPA]." That safeguard "not only protects the content of the journalists whose outlets may be negotiating with Big Tech but it critically protects the speech of journalists and smaller media outlets who don’t have a seat at the table." It is indeed "a major win for free speech and it strikes a blow against the virtual monopoly that Big Tech has to limit the information that Americans see online." This is the Section 230-centric perspective. For app developers and others interested in fair competition in technology markets, some Republicans' focus on free speech actually paves the way for legislative as well as judicial decisions that will have very positive effects and that the GOP's antitrust skeptics of yore would have been sure to fight tooth and nail.

  • But there is an undeniable structural issue here that anyone with a principled perspective on competition enforcement must be worried about: cartels are a serious antitrust violation, not an appropriate remedy. Senator Mike Lee (R-Utah) states it very well in a video (excerpts from his Senate speech) he embedded into the following tweet:

As Senator Lee reminds us, there are--except when you pass legislation like the JCPA in its current form--even criminal consequences for creating cartels. About a year ago, Qualcomm's Fabian Gonnell remarked at an automotive patent licensing conference that everyone involved in a joint licensing negotiation group (over standard-essential patent royalties) should go to jail. This blog has consistently opposed licensee negotiation groups for well over a year, and was referenced in Acer's patent infringement against Volkswagen in the Eastern District of Virginia.

That's why I find it disconcerting to read in Senator Klobuchar's press release that the JCPA in its current form would "[e]mpower eligible digital journalism providers—that is, news publishers with fewer than 1,500 exclusive full-time employees and non-network news broadcasters that engage in standard newsgathering practices—to form joint negotiation entities to collectively negotiate with a covered platform over the terms and conditions of the covered platform’s access to digital news content."

There is, of course, at least one fundamental difference between automotive licensing negotiation groups (LNGs) and what the current JCPA envisions: in the car industry, they want the big guys to form cartels, like Volkswagen, Toyota, or Ford. With the JCPA, there is at least a limitation to smaller publishers ("fewer than 1,500 exclusive full-time employees"). I've previously said that I might view a joint licensing effort by a few small IoT startups differently than a VW-Toyota-Ford cartel--but only because of the threshold (market share of 15%) that already exists under EU competition law.

To allow cartels in order to redress an alleged or actual market imbalance sets a terrible precedent. Two wrongs don't make a right--and the second wrong that you condone in order to deal with the first will haunt you in other fields.

Getting Google to pay for links is quite a challenge. After the EU's 2019 copyright reform bill, Google initially just stopped displaying snippets and linking to publishers unless they waived their rights--but they need the traffic that Google generates. The French antitrust authority then fined Google, and Google quietly gave up on its appeal.

There must be a better solution, but this is is not the place to discuss alternative approaches. Legalizing cartels is not the answer, as a matter of principle. One can have more sympathy for a small local newspaper than for Google--frankly, that's easy--but still warn against an ill-conceived approach that legalizes cartels. As does Senator Lee. Thankfully so.

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Thursday, September 22, 2022

Plot is thickening that Apple, Google, and possibly other gatekeepers will seek to derail, defang, or delay Digital Markets Act and Digital Services Act in court

Yesterday, Handelsblatt (Germany's leading financial newspaper) reported on something that Politico already covered on August 10: law firms are preparing what could be an avalanche of lawsuits challenging the European Union's Digital Markets Act (DMA) and Digital Services Act (DSA) in court.

Six weeks apart, the two media reports corroborate each other. A common element is that both articles quote Gerard de Graaf, who runs the EU's liaison office in San Francisco and told reporters that the European Commission sometimes faces 15, 20 or 25 lawyers when it meets the major digital gatekeepers that the new legislation is intended to keep in check.

Handelsblatt quotes an unnamed Big Tech lawyer--it is not 100% clear but sounds like the source is outside counsel to Apple or Google--as saying that "everything's ready to go, we just need board approval."

The designation of what platforms confer gatekeeper power upon their operators is going to be the first obvious opportunity for Big Tech to challenge the law. Companies can't sue over the mere fact that the law is passed. In some countries it would be possible to have courts review the constitutionality of new legislation (and I wouldn't rule out that some companies may challenge the DMA and DSA in the constitutional courts of key EU member states, or that they would challenge national implementation rules, which could be draconian in some places). At the EU level, companies can only challenge specific Commission decisions affecting them. The initial designation decisions will be critical. Andreas Schwab MEP, the European Parliament's rapporteur on the DMA, told this blog that map services should be treated like other search engines, and I agree, but Google presumably won't. That's just one example of a Commission decision that might be appealed.

The term ex ante regulation is often used to set the DMA's approach to gatekeepers apart from traditional antitrust enforcement. This should not be misunderstood as meaning that the new legislation would prevent gatekeepers from emerging in the first place. It's just about a streamlined process. Traditional antitrust law is slow, and the burden on enforcers weighs heavy. If it takes years to make and defend a decision against a certain form of abusive conduct, but the defendant can then modify its business model and implement a new approach within a matter of weeks or months, the whole process may have to start all over again, while market realities (such as competitors being driven out of a market) are created and may become irreversible.

Compared to its U.S. counterparts (FTC and DOJ-ATR), the European Commission's Directorate-General for Competition (DG COMP) already has two major advantages even prior to the DMA and DSA entering into force:

  • EU antitrust law tends to be stricter.

  • While the FTC and the DOJ have to sue an infringer and prove everything in court (almost) like a private plaintiff, European Commission decisions are like a first-instance decision and do get some degree of deference. The standard of review is more like whether the Commission followed proper procedures (due-process rights were particularly important in the Qualcomm case, and the Commission didn't appeal further, which I also felt wouldn't have been a good use of resources) and had a reasonable basis for reaching its findings of fact. One could have a lengthy debate over what standard of review in the U.S. would be comparable to that applied in an EU General Court review of a DG COMP ruling, but it's probably somewhere between the "arbitrary and capricious" and "substantial evidence" standards. And once the EUGC has spoken, there is no more opportunity to challenge factual findings--which is going to complicate a Google appeal of last week's Google Android judgment.

    One problem I see in the U.S. is that extremely complex, high-stakes antitrust cases are decided at the district court level by a single judge (with or without a jury). Those judges are extremely busy as they preside over a wide range of cases (even criminal cases)--so busy that, for example, there are almost 300 typos and similar errors in the Epic Games v. Apple judgment. They sometimes make mistakes that I believe would be much less likely to happen if big cases were put before panels of three judges, simply because six eyes see more than two. Again, Epic v. Apple serves as an example. It may be a bit of an outlier because that judge, despite understanding some of the issues (such as Appel not caring about developers and Apple's currency conversion dictate being too inflexible) very well, got other parts terribly wrong, even saying absurd things such as that Apple would have a different market share in smartphone operating systems than in smartphones, and unfairly accused Epic of wanting a free ride when the opposite is demonstrably true. In that case, it benefited an antitrust defendant, though I expect at least a partial reversal and remand. In other cases, it resulted in district court judgments holding defendants liable for something that wasn't go to withstand review.

The Commission is bracing for those court challenges, and we may all have to live with the delays they may cause. Of course, we all want the rule of law, and that's why we have to await and see what issues those lawsuits raise. The Commission is, of course, confident that despite its lawyers being outnumbered, they can win. And indeed, government lawyers are virtually always at a resource disadvantage when going after large enterprises. It's the same in the U.S., and nevertheless governments win very often.

For the avoidance of doubt, I want the DMA to open up certain markets such as iOS and Android app distribution as soon as possible. And when Apple's and Google's lawsuits over DMA-related decisions are finally filed and their legal theories become known, they may very well be meritless, which would raise the question of whether all they want to achieve is delay. But for now we don't know, and that's why we have to wait.

The Handelsblatt article I linked to at the start of this post also mentions that Apple and Google are scaling up their EU lobbying efforts, with Apple almost doubling its spend last year over the year before. Apple deservedly got bad press this week for its astroturfing in Washington and Brussels.

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Wednesday, September 21, 2022

Mission accomplished for Avanci: virtually entire automotive industry licensed to 4G standard-essential patent portfolios of 51 licensors--now on to 5G

Reuters just reported that the Avanci patent pool has concluded 4G (including 2G and 3G) standard-essential patent (SEP) license agreements with several major Japanese and European car makers: Toyota, Nissan, Honda, and the Stellantis group (Fiat Chrysler, Opel, and other brands). Litigation by Avanci licensors was pending only against Nissan and Stellantis (in Munich, the world's #1 SEP enforcement hotspot), and will now obviously be withdrawn.

If a pool sets out to provide a one-stop licensing solution for a given industry, and then reaches the point at which its licensors own the vast majority (80% or so) of all patents essential to the standard(s) in question and where virtually all implementers in that industry (80-85% according to Reuters) have taken that license, then that's what's called "mission accomplished."

It appears that Avanci's "final boarding call" (as I dubbed it) has been heeded: various automakers preferred to take a license now over possibly paying $20 (instead of $15) per car later. The first automaker that became known to have taken an Avanci license after that final boarding call was the Hyundai-Kia group.

Let us now look past 4G and on to 5G, which thanks to higher throughput and (which may be even more important) lower latency is going to be at the heart of increasingly autonomous driving technologies. I have a lot of faith in Avanci being able to determine, once again, a sweet spot at which most patent holders and most implementers will determine that licensing is more efficient than litigation. What that rate will be remains to be seen. Who the initial licensors and licensees will be is also going to be interesting. Last time, BMW was an early adopter, and others were slow followers.

What do the critics say? Let's make a distinction between people being entitled to their own opinion (as we all are) and some believing they're entitled to their own facts (which we are not). Continental's Michael Schloegl ("Schlögl") in German claimed at a Frankfurt Auto IP conference less than five months ago (the next edition of which will be held in Munich by the way) that Avanci's license fees were rejected by the automotive industry. At the time, Avanci already had quite some significant market penetration, but by now, Mr. Schloegl's position is indisputably untenable. No wonder Conti's U.S. litigation failed at all levels.

It is not unreasonable for car makers to argue that they'd rather have their suppliers (tier 1 suppliers make telematics control units, tier 2 suppliers make network access devices, and tier 3 suppliers make chipsets) take patent licenses. That's how the automotive industry apparently has been handling patent licensing in other fields for a long time. But in telecommunications, the end product is typically the licensing level, and with the vast majority of connected vehiclse in the world now being licensed to the Avanci pool, no one can reasonably claim anymore that end-product level licensing isn't workable. It clearly is--otherwise we'd have heard about problems with the performance of all those license agreements.

I voiced criticism as well, but realized that Avanci was unstoppable after Daimler's settlement with Nokia last year, which showed that in the end it was just about money, not principle. Apparently a few others don't have the same degree of flexibility to adjust their positions to reality. They may ignore their customers' decisions to take car-level licenses and prefer to throw good money after bad on the litigation front and on policy initiatives.

With what Reuters has just reported, there can be no doubt that there would have been a lot more 4G SEP litigation targeting automakers if the Avanci pool option had not been created. If dozens of car makers had been sued by dozens of patent holders, that would have meant hundreds of patent infringement disputes--some of which would likely have been far more protracted.

That's why my advice to the automotive industry is the following:

  • Set the right priorities. Understand the difference between fundamental threats and a mere cost of doing business. SEP licensing is the latter; Apple's and Google's schemes to take control over the most lucrative revenue streams are what you should really be concerned about. If you want to spend money on lobbying, by all means, fight for such important goals as making sure that map services will fall under the Digital Markets Act's search engine rule. You're not going to make much headway devaluing SEPs: that's Apple's agenda, and let them rely on their astroturfers.

  • Support Avanci's 5G efforts because the alternative will almost certainly be costlier.

    A few years ago, some people in the automotive industry appeared to blame Avanci for the problem the pool firm was simply trying to solve efficiently. Would car makers have gotten a free ride if Avanci had not been around? Obviously not. In the aggregate of those 51 patent holders, the sum of license fees and transaction costs would most likely have exceeded (even by far) $15 per car. It's not unreasonable for patent holders to seek a higher royalty for 5G--even Avanci's 4G rate increased to $20 per car this month.

    In the end, Avanci is just a platform bringing two sides together, but the two sides determine what happens. Automakers have the opportunity to indicate a willingness to pay a 5G pool rate that will make the pool attractive to 5G SEP holders large and small. If they complicate the process despite the lessons learned from 4G, they have no one to blame but themselves.

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Tuesday, September 20, 2022

Apple contributes to eurozone inflation through 20% price increase that app developers can't control due to abuse of App Store monopoly

We're way past the point at which Apple's abuse of its market power is merely a problem affecting "competitors" or a few consumers. The effects of the problem have reached a scale that we must take a macro-economic perspective, as did venture investor Alex Gurevich a few months ago when he discussed the plausible hypothesis of Apple's App Tracking Transparency (ATT) program contributing to a recession.

Late on Monday--the very day that Apple's astroturfing through ACT | The App(le) Association was exposed by Bloomberg--Apple announced "upcoming prioce and tax changes for app and in-app purchases." At least Apple's announcement is forthright enough to say that "[a]s early as October 5, 2022, prices of apps and in-app purchases (excluding auto-renewable subscriptions) on the App Store will increase in [various countries on different continents], and all territories that use the euro currency."

As 9to5Mac's Filipe Espósito and others have already noted, the lowest price tier (tier 1) increases from €0.99 to €1.19, and as far as I can see, that 20% increase of in-app payment and app download prices in the eurozone is consistent all the way up to the maximum tier, which--as MacRumors' Joe Rossignol mentioned--goes up from €999 to €1,199.

There is an exception for auto-renewable subscriptions, but that's just a limited part of App Store revenues as those higher prices will affect new subscriptions. By and large, Apple now wants 20% more.

This is also an antitrust issue because Apple doesn't allow app developers to control their prices in local currencies. As an app developer (I've personally configured IAP items on multiple occasions), you only get to selec a tier--and Apple then performs the conversion. Now, an app developer with most of its customers in the eurozone would presumably think very hard before increasing the entry-level price from €0.99 to €1.19, given that it's psychologically very advantageous to stay below €1. That is, of course, why Apple has waited for a while, and now goes substantially beyond €1: once you go over that threshold, whether you charge €1.09 or €1.19 doesn't really make much of a difference for demand. But again, many app developers might actually prefer to just keep their euro prices below those psychologically critical numbers.

Those higher euro prices are not justified by consumers' purchasing power either. The average U.S. per capita GDP is a lot higher than that in Europe (even substantially higher than that of Germany, which is a relatively wealthy one among large European countries).

Apple has its own formula: it knows that in the U.S. the iPhone is a lot more affordable than in various other major markets, and in the U.S., also as a result of Google's fauxpenness not really working, Apple now has market leadership even by volume. Compare Dial's iPhone 14 Index is instructive: it's a table that shows what percentage of an average annual salary a person has to pay to afford an iPhone 14 in local currency. In Nigeria, that figure is 69.12%, with other not-so-rich countries like Kenya and Bangladesh following. By contrast, the figure is only 1.84% in the USA. In Europe, it's from about 1.6% in places like Switzerland and Luxembourg (small but super-affluent populations) to 26% in Turkey, 29% in Albania, and 46% in Armenia. In Germany and the UK, the number is close to 3%; in France it's above 3.5%; and in Italy and Spain it's between 4% and 5%. In other words, the average-earning Italian or Spaniard has to work 2 to 3 weeks to afford an iPhone 14.

Only a limited part of the difference can be explained away with different Value Added Tax or sales tax regimes.

It's simply that Apple has a strategy of appealing only to the parts of certain countries' populations that earn substantially more than the average person in that country. Disparity as a driver of profits. Classism--which is also the primary reason Apple refuses to make its messenger more interoperable with Google's Android messenger. Forget interoperability, just "buy your mom an iPhone," as Tim Cook recently put it.

There's no denying that the U.S. dollar is fundamentally stronger than the euro. I'm not against the EU, but I have always been against the euro because it puts the cart before the horse (common currency before common economic and fiscal policies). European integration culminating in a common currency could and probably would have worked, but not the other way round. If there's one EU institution that I despise, it's the European Central Bank. If Apple wants to raise its own prices in the eurozone, that's one thing. But it's unacceptable for Apple to deprive app developers of the opportunity to decide what's best for their products in the eurozone.

Apple is the dictator that rules everything.

This issue of Apple deciding on currency conversion even came up in the Epic Games v. Apple litigation in the Northern District of California, the antitrust case that will be heard by the United States Court of Appeals for the Ninth Circuit in one month from tomorrow, with the Department of Justice supporting Epic. Judge Yvonne Gonzalez-Rogers, who got a whole lot wrong, understood the problem at least in part:

  • In footnote 199 of her Rule 52 Order, the incorrectly says that "[t]he tiers generally require the same price across all countries."

  • But two footnotes later, she doesn't buy Apple's claim that currency conversion is a benefit of Apple's IAP regime:

    "To the extent this true, Apple has not explained why it cannot afford more flexibility in unique circumstances. Mr. Gray testified that Apple selected 99 cent tiers based on its prior experience without apparently consulting developers."

  • Footnote 554:

    "In its proposed findings of fact, Apple claims that IAP helps developers with currency conversion and tax collection, but its record citations do not support that claim."

The issue is becoming more serious than ever as we live in a difficult macro-economic environment.

I'd also remind everyone of my May 1, 2021 blog post on how Apple decided to deal with some countries' digital taxes at app developers' expense: Apple raised its effective App Store commission rate in certain geographic markets to (respectively) 31.4%, 32.1%, and 35.25% in September

It will take time before the EU's Digital Markets Act opens up the iOS app distribution market, but once it happens, we'll be sure to see entry-level IAP offerings below the €1 mark. I'm quite sure an iOS version of the Epic Games Store would make it possible, as would other app stores as well as developers electing to distribute directly ("sideloading").

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INSANE: Apple benefited from Paycheck Protection Program for small businesses in early stage of pandemic through ACT | The App(le) Association

While I continue to believe that there was no impropriety called "state aid" in Apple's Irish tax structure, there is a serious issue in the U.S. involving Apple and taxpayers' money that a reader has drawn my attention to:

If there's one thing the federal government didn't envision the Paycheck Protection Program (PPP), an element of the $3.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act stimulus package, to be used for, that would be the world's richest corporation's lobbying activities--especially such lobbying activities that directly run counter to the interests of small businesses.

As Bloomberg revealed yesterday, ACT | The App Association--which claims to represent 5,000 small app developers--receives most of its funding from Apple, and Apple virtually dictates the organization's agenda. In other words, ACT | The App(le) Association is part of the extended workbench of Apple's lobbying department. While claiming to speak for small businesses, it actually advocates Apple positions that are either irrelevant to small app developers (standard-essential patent enforcement) or where Apple and app developers have divergent interests (such as on the infamous app tax).

According to what Bloomberg researched, ACT has a budget of approximately $10 million. It never made sense that those funds would come from 5,000 small app developers: there's no way that small app developers would pay an average of $2K/yr. for a "membership" in a lobbying organization.

Astroturfing is bad enough in its own right. But Apple and ACT added insult to injury at the start of the COVID-19 pandemic when ACT applied for, and received, PPP funding. We're talking about taxpayers' money that was allocated to sustain small businesses--such as the ones suffering now from the effects of Apple's "App Tracking Transparency" program.

On July 16, 2020, ACT's president Morgan Reed published a report, Keep Calm and Carry On: How ACT | The App Association Used Its PPP Funding. It's unbelievable. Let me quote and comment on a few passages.

"ACT | The App Association is a small business with 20 employees in the United States and Belgium and is a 501(c)(6) [non-profit]."

COMMENT: ACT itself may formally be a small non-profit, but Apple is neither small nor a non-profit.

"We also faced a significant revenue loss [...]"

COMMENT: The term "revenue loss" is ridiculous. If they really were an organization representing small app developers, whom they call members, then they wouldn't have "revenues." They'd just receive membership dues, and those wouldn't go down unless many members suddenly left the organization. Of course, Apple sending them money to do work on different issues may technically be "revenue" for ACT.

"In order to be transparent with our members and policymakers, we want to share some of what we used our PPP loan funds for during the last few months."

COMMENT: If not for Bloomberg's top-notch investigative journalism, ACT still wouldn't have been transparent about the one who pays the piper and picks the tune.

"Our members drive everything we do [...]"

COMMENT: Sure, members pay nothing, drive everything, and Apple is even happy to sponsor advocacy efforts that would go against Apple's interests on such issues as the app tax. I wonder what they smoke.

"[...] and our immediate concerns during the start of the [public health emergency] revolved around making sure they [the so-called members] understood the complex and changing-by-the-hour approaches of both the U.S. government and the European Union (EU). [...] We quickly developed a number of resources, such as specialized webpages, webinars, and blogs for our members to navigate application processes [...]"

COMMENT: It appears that virtually no one ever actually made use of those "resources." For instance, ACT links to a "webinar" about COVID-19 and the CARES Act. According to YouTube, however, ACT merely has 20 subscribers (that's just about the size of its own staff at the time; by now they may already have more employees than YouTube scribers), and the CARES webinar they point to has been accessed a total of 13 times (including my own visit to that page) in almost 2 1/2 years (click on the screenshot to enlarge):

That level of following is consistent with pictures that have been shown from ACT events. Also, I attended an ACT event in Berlin three years ago, where I was the only actual app developer in the room. The rest was in-house and outside counsel of the usual suspects (Apple and its allies on standard-essential patent policy).

ACT's report on how it used PPP funds mentions all sorts of topics that sound like they're in the interest of small and large companies alike. But it is well-documented that even during the early stage of the pandemic, ACT engaged in lobbying for Apple on issues where Apple and app developers have completely different interests: app developers want open app markets, they don't want Apple's app review tyranny, and they don't want to be taxed by Apple.

For instance, there's a PDF dated March 7, 2020, related to testimony of ACT's president before the U.S. Senate Judiciary Committee, Subcommittee on Antitrust, Competition Policy and Consumers Rights. The headline mentions "self-preferencing by digital platforms." The key message there is that "Antitrust Concerns Specific to Softawre Platforms are Often Exaggerated and Should be Weighed Against Other Policy Considerations": in other words, move on, nothing to see here, let Apple self-preference with impunity.

Instead of combating self-preferencing by the likes of Apple and Google, Mr. Reed argued that small app developers would benefit from antitrust enforcement is the licensing and enforcement of standard-essential patents (SEPs), specifically mentioning the FTC v. Qualcomm case: but for small app developers, SEPs are simply a non-issue as this blog has explained on various occasions, and they certainly don't care about interdependencies between Qualcomm's two business areas (chipsets and patent licensing). See my April 6 blog post, Despicably deceptive: Big Tech's Save Our Standards campaign [which is essentially another ACT label, created in collaboration with other groups such as CCIA] presents small app developer as victim of standard-essential patent abuse though it NEVER had to license SEPs .

Another example of pro-Apple anti-small-developer lobbying that ACT engaged in shortly after receiving PPP funds is a June 16, 2020 statement by its chairman and founder Mike Sax "on the European Commission’s decision [to] open investigations into Apple’s App Store rules." That statement just touts the "quality, security, and better user experience" of Apple's App Store and warns against "[m]aking exceptions for larger players" (i.e., Spotify). I actually agree on the last point: regulatory and legislative action in this area should be designed to benefit companies of all sizes, and a Lex Spotify wouldn't be in our interest. But ACT said nothing in its statement about real and serious App Store issues that need to be addressed. That shows they never advocated developer interests. They always just try to discourage lawmakers and regulators from taking action against Apple.

It's bad enough that they engage in astoturfing. But using taxpayers' money to support the lobbying efforts of the richest company in the world is insane.

Administrative Law Judge Bryan Moore of the United States International Trade Commission still hasn't ruled on Ericsson's and the ITC staff's motions to compel Apple with respect to its monetary and nonmonetary contributions to, and interactions with, ACT | The App(le) Association--or in case he actually has, the decision hasn't shown up on the electronic docket system yet.

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