Publication date: March 01, 2023
On 28th February 2023, the European Commission has sent a Statement of Objections to Apple about its concern on the contractual restrictions that Apple imposed on app developers on music streaming providers. Specifically, on the contractual restrictions which prevent them from informing iPhone and iPad users of alternative music subscription options at lower prices outside of the app and to effectively choose those. The Commission thinks that this performance violates EU’s law because Apple’s anti-steering obligations are unfair trading conditions in breach of Article 102 of the TFEU (Treaty on the Functioning of the European Union).
The Commission’s argumentation focuses on that these anti-steering obligations are neither necessary nor proportionate for the provision of the App Store on iPhones and iPads. Furthermore, it thinks that they are, de facto, detrimental to users of music streaming services on Apple’s mobile devices who may end up paying more. Also, this practice negatively affects the interests of music streaming app developers by limiting effective consumer choice.
This Statement of objections comes after a previous one from 2021. In addition to the mentioned accusations, there also arose concerns about the mandatory use of Apple’s proprietary in-app purchase system for the distribution of paid digital content. Apple charged, at that time, app developers a 30% commission fee on all subscriptions bought through the mandatory IAP. The Commission’s investigation showed that most streaming providers passed this fee on to end users by raising prices. The case stems from a complaint by Spotify Technology SA, one of the competitors of Apple’s music streaming services.
Luckily for Apple, the European Commission revised the charges and narrowed the case. The antitrust investigation will only touch upon the anti-steering obligations Apple imposes upon developers. Because of that, the response of Apple is that it was pleased the Commission had narrowed the previous statement of objections, and that it would continue to work with it to understand and respond to its concerns.
Article 102 of the Treaty on the TFEU prohibits abusive conduct by companies that have a dominant position on a particular market. Any national competition authority or the European Commission can either upon receipt of a complaint or through the opening of an own-initiative investigation issue investigation. The first step in antitrust investigation is to assess whether the undertaking concerned is dominant or not. For this matter it is essential to define the relevant market because a dominant position can only exist on a particular market. The Commission has to define the product market and the geographical market. The product market is made of all products/services which the consumers consider to be a substitute for each other, in the case at hand, other music streaming providers. Geographical market is an area in which the conditions of competition for a given product are homogenous, in this instance, the App Store and the IOS ecosystem.
Usually, during the investigation process, the market shares are a useful indication of the dominance of each firm on the market. It also takes into account other factors like barriers to enter the market; existence of countervailing buyer power; the overall size and strength of the company and its resources and the extent to which it is presented at the supply chain.
While being in the predominant place in a market is not illegal, abusing the latter – is. Some examples of this abuse consist of: requiring that buyers purchase all units of a particular product only from the dominant company; setting prices at a loss making-level; refusing to supply input indispensable for competition in an ancillary market; charging excessive prices, etc.
The Commission’s investigative power are detailed in Regulation 1/2003 (Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty (Text with EEA relevance)). Some of them are sending information request to companies, enter the premises of companies or examine the records related to business and taking copies of those records. At the end of initial investigative phase, the Commission has to decide whether to go in-depth or close the investigation. Following the investigation, the Commission may issue a statement of objections and provide to the investigated company the possibility to exercise their rights of defence. This is what the Commission sent to Apple in 2021, and after their response, there was received another statement of objections in 2023. This is what the investigated company can do, that is submitting a written or oral response. After that the Commission reviews their arguments and may decide to close the case. If the Commission’s concerns are not clarified and addressed, it drafts a decision prohibiting the identified infringement. The draft is submitted to the advisory committee composed of representatives of the Member States competition authorities to be discussed.
A firm that has engaged in anti-competitive behaviour and so infringed competition law, as may be the case of Apple, may be subject to fines imposed by the Commission under Regulation 1/2003. The fine is limited to 10% of overall annual turnover of the company and is limited to a period of five years from the end of the infringement until the beginning of the Commission’s investigation. The parties have the right to appeal to the General Court for the decision to be annulled. The Court can cancel, increase or reduce the fine imposed by the Commission.
The new statement of objections comes just two months before new regulations come into force. The Digital Markets Act is a new law that meant to rein in purportedly anticompetitive behaviour. Within the measures, some could affect how Apple runs its App Store because surely it is going to be classified as gatekeeper. The Digital Markets Act establishes a set of narrowly defined objective criteria for qualifying a large online platform as a so-called “gatekeeper”. This allows the DMA to remain well targeted to the problem that it aims to tackle as regards large, systemic online platforms. These criteria will be met if a company:
– has a strong economic position, significant impact on the internal market and is active in multiple EU countries;
– has a strong intermediation position, meaning that it links a large user base to a large number of businesses
– has (or is about to have) an entrenched and durable position in the market, meaning that it is stable over time if the company met the two criteria above in each of the last three financial years.
• allow third parties to inter-operate with the gatekeeper’s own services in certain specific situations;
• allow their business users to access the data that they generate in their use of the gatekeeper’s platform;
• provide companies advertising on their platform with the tools and information necessary for advertisers and publishers to carry out their own independent verification of their advertisements hosted by the gatekeeper;
• allow their business users to promote their offer and conclude contracts with their customers outside the gatekeeper’s platform.
In turn, according to DMA, gatekeeper platforms may no longer:
• treat services and products offered by the gatekeeper itself more favourably in ranking than similar services or products offered by third parties on the gatekeeper’s platform;
• prevent consumers from linking up to businesses outside their platforms;
• prevent users from un-installing any pre-installed software or app if they wish so;
• track end users outside of the gatekeepers’ core platform service for the purpose of targeted advertising, without effective consent having been granted.
With this new rule, the EU tries to benefit businesses users, start-ups and consumers while keeping away the gatekeepers from unfair practices. The DMA will be applicable as of beginning of May 2023. After that moment, the Commission will have two months to designate the companies that are going to be gatekeepers, and then, with a maximum of six months, the gatekeepers must ensure compliance with the obligations foreseen in the DMA.