Mobile devices, and the ecosystem of products, content, and services associated with them, are already central to our lives. The fundamental importance of these ecosystems, which are international in scope, is only set to increase, as the network of connected products and services extends into the ‘internet of things,’ ranging from smart watches to necessities such as the security, light, and heating of our homes. User activity on mobile devices accounts for the majority of internet usage in the UK. Such devices are the main channel through which products and services are now accessed and consumed, and are a platform through which millions of apps from hundreds of thousands of app developers are made available to users. Given their fundamental role, it is vital that the markets associated with these ecosystems are working well, and in the interests of consumers.
These markets indeed are working well in many respects, and consumer approval ratings are understandably high. However, there are warning signs in several key areas, primarily due to the market power of Apple and Google, who stand as the two great global gatekeepers to these mobile ecosystems. In its recently issued Market Study on Mobile Ecosystems (the “Market Study”), the UK Competition and Markets Authority (“CMA”) has provided invaluable insights into the areas where competition is weak in these markets, and where remedies or interventions should be considered to protect competition and consumers.
The CMA’s detailed provisional conclusions in its Market Study Interim Report are likely to set the tone for both public and private enforcement of competition law in this sector in the UK and elsewhere. We are seeing that already the CMA’s insights are being deployed to guide and inform enforcement efforts globally, where regulators, consumers, and competitors are grappling with national and regional solutions to international competition concerns. Here, we review the key harms identified by the CMA, and survey the solutions under consideration, both in the UK and elsewhere.
The CMA launched its Market Study on 15 June 2021 with a view to, amongst other things, informing the establishment and development of the proposed new pro-competition regime for digital markets in the UK. The new regime follows recommendations by the CMA in its earlier market study into online platforms and digital advertising and by the CMA’s Digital Markets Taskforce, and is intended to address concerns relating to digital platforms with ‘strategic market status’ (“SMS”). A Digital Markets Unit (“DMU”) has been established within the CMA on a non-statutory basis to begin work to implement the regime, and the UK government plans to introduce new legislation to put the regime on a statutory basis in the near future. The government consulted during 2021 on proposals for the final design of the regime, which include enforceable codes of conduct for SMS firms and powers for the DMU to impose pro-competitive interventions as well as fines of up to 10% of a firm’s worldwide revenues for competition law infringements.
Against this backdrop, the Market Study is intended to inform the DMU’s future assessment of (i) whether Apple and/or Google should be found to have SMS in relation to any of the activities in their respective mobile ecosystems and (ii) if so designated, how the tools available under the new regime might be used to address the potential harms to competition and consumers arising from their activities.
In terms of the scope for the Market Study – on which Hausfeld previously submitted comments – the CMA has adopted a holistic approach towards its consideration of the competition issues throughout the platforms’ ecosystems, analysing the potential incentives, benefits and potential harms for each stakeholder in the ecosystems at different points of the value chain.
The CMA has structured the Market Study according to four specific themes, as follows:
- competition in the supply of mobile devices and operating systems;
- competition in the distribution of mobile apps;
- competition in the supply of mobile browsers and browser engines; and
- the role of Apple and Google in competition between app developers.
The CMA’s interim findings
Overview and summary
Overall, the CMA concluded that there is weak competition within and between Apple and Google’s mobile ecosystems, leading to consumer harm in the form of reduced innovation, lack of choice, and supra-competitive prices. In the UK, consumers effectively face a binary choice between two ‘mobile ecosystems’– either Apple’s or Google’s.
The CMA identified that, within a mobile ecosystem, there are three main ways that users can access content and services: (i) through native
- As suppliers of the two main mobile operating systems – namely iOS and Android, which are each installed on roughly half of active smartphones in the UK – Apple and Google can make key decisions that are important to users and providers of content and services online. For example, they can control, to varying degrees, which apps are pre-installed on devices, and are also able to place restrictions on the channels through which apps can be downloaded on devices.
- Apple and Google are providers of the two main app stores within the ecosystems – Apple’s App Store and Google’s Play Store – which allows them to effectively control the terms of access between consumers and app developers, and, inter alia, to impose supra-competitive commissions on app developers’ revenues.
- Finally, as providers of the two most widely used browsers (Safari and Google Chrome) and browser engines (WebKit and Blink), Apple and Google can set the standards and functionality for the provision of online content to consumers via the open web.
While the CMA acknowledged that Apple’s and Google’s control over their mobile ecosystems can give rise to a number of positive outcomes, it also provisionally concludes that the level of control they exert limits the ability of another competing ecosystem to emerge, and also limits competition from third parties in various ways within the ecosystems. One compelling example of the inability of competing ecosystems to enter the market is Amazon’s Fire Phone (based on Amazon’s Fire OS) which was launched in the UK in September 2014 but exited the smartphones market a year later.
The CMA noted that Apple and Google’s entrenched positions with respect to their mobile ecosystems have translated into consistently high (and growing) profits for over a decade for both companies, with high returns on capital employed, and high margins associated with their main revenue streams. Therefore, their prices go well beyond recovering the costs of providing the goods and services within their ecosystems, and will in most cases ultimately be borne by consumers. One example of this is Apple’s and Google’s commissions in their respective app stores, which are considered to be above a competitive rate.
Based on its assessment, the CMA provisionally concludes that Apple and Google would meet the proposed conditions for designation as firms with SMS for each of the main activities within their respective mobile ecosystems, i.e. (i) their operating systems (and, for Apple, the devices on which the operating system is installed); (ii) native app distribution; and (iii) their browser / browser engines.
The CMA has not at this stage made a market investigation reference as it considers that the DMU – through the combination of tools that it is expected to have at its disposal – should be best placed to tackle the competition concerns identified by the Market Study. The CMA is concerned that a market investigation could risk cutting across the DMU’s work, if remedies are imposed in specific markets or in respect of activities that are being assessed by the DMU at the same time under the new SMS framework. However, as noted above, given the absence of legislation putting the DMU on a statutory footing, the CMA is actively considering all options available for addressing competition concerns in respect of digital markets. In this respect it should be noted that, in parallel to its Market Study, the CMA is investigating concerns regarding Apple’s terms and conditions for in-app purchases under its Competition Act powers (as discussed further below). Similarly, on 11 February 2022, following an investigation under the Competition Act 1998, the CMA accepted commitments offered by Google in respect of Google’s proposal to remove third-party cookies and other functionalities from its Chrome browser (the Privacy Sandbox proposal).
Competition in the supply of mobile devices and operating systems
In the Market Study, the CMA focuses primarily on adverse impacts on consumers’ interests and has not carried out a formal market definition assessment when analysing the competitive constraints faced by Apple and Google in relation to their operating systems, or the other dimensions of their mobile ecosystems.Instead, it has been considering issues including the extent of price competition, barriers to user switching that ‘lock’ consumers into a certain mobile ecosystem, and barriers to entry and expansion.
At the mobile operating system level, the CMA has found that Apple and Google have a de facto ‘duopoly’ in the UK, and have substantial and entrenched market power over the users of their mobile operating systems. Apple is the largest manufacturer of mobile devices (on which only Apple’s iOS is used) and has a share of 50-60% of active smartphones as well as 50-60% of active tablets in the UK. Google’s Android is the second largest mobile operating system, with Android devices representing around 40-50% of all active smartphones and between 20-30% of active tablets in the UK in 2020.
Overall, there appears to be limited user-driven competition between devices using different operating systems, and between the iOS and Android operating systems in particular. The CMA outlines various reasons for this, including limited price competition between iOS and Android devices, and practical barriers to switching with regard to, for example, the transfer of data and content between devices.
Importantly, Apple and Google benefit from material external barriers to entry and expansion faced by rival providers of operating systems. According to the CMA, these take various forms, which also reinforce one another:
- iOS and Android, which both have large app ecosystems, benefit from large indirect network effects. This is because the benefit to users of an operating system increases with the volume and quality of apps they can access on that operating system, and similarly the benefit to app developers increases with the number of users they can access on an operating system.
- Apple’s operating system – iOS – is the only operating system permitted on Apple devices. Whilst Google licenses its Android system to third-party device manufacturers, and is therefore not completely insulated from competition, access to its Google Mobile Services (“GMS”) suite, including Google’s popular bundle of core proprietary apps, and APIs which are critical to the proper functioning of many Android apps, is dependent on a complex set of agreements with (as well as payments to) manufacturers. This means that (i) any new entrant operating system provider looking to attract manufacturers would have to financially compensate manufacturers and offer them attractive alternative options to Google’s core apps and services; and (ii) even a new entrant using the Android operating system, but without access to the GMS suite would not have access to Google’s APIs and therefore many (non-Google) Android apps.
Competition in the distribution of mobile apps
The CMA found that both Apple and Google have substantial and entrenched market power in native app distribution. Together, the App Store and Play Store accounted for over 90% of native app downloads in the UK in 2020. The CMA estimated that the App Store’s gross profit margin was 75-100%, and that the Play Store’s global operating margins were 50-75% in 2020.
The CMA found that the two app stores place very limited competitive constraints on each other, due to limited user switching between their two respective mobile ecosystems (as mentioned above) and the fact that the largest app developers accounting for the most downloads tend to multi-home on both app stores and would not delist from either store due to the volume, value and uniqueness of users on each. The evidence received by the CMA from app developers also suggests that usage of web apps is significantly lower than native apps and app developers do not regard web apps as a suitable alternative to native apps, mainly because of gaps in functionality and performance, as we discuss further below.
Further, the App Store and the Play Store face very limited constraints from competing methods of native app distribution.The App Store does not face any constraint at all, because Apple does not allow any alternatives on its iOS devices. While Google’s ecosystem is not completely closed, alternative app stores and the sideloading of native apps are not widely used by users or app developers, with the Play Store retaining over 90% of native app downloads across Android, HMS, and Fire OS devices. This is due to various factors which the CMA analyses in some detail, including: indirect network effects; the pre-installation and prominent placement of the Play Store on the vast majority of Android devices; the security warnings put in place by Google in respect of sideloading; and various recent initiatives through which Google encourages developers to distribute their apps via the Play Store, and financially incentivizes mobile manufacturers to meet certain additional requirements in relation to the Play Store, including setting it as the default app store.
The CMA goes on to find that Apple and Google are likely to exercise their market power in the rules they set for access to their respective stores, including in respect of the commission charged on in-app purchases.
In this regard, Apple and Google recently introduced reductions in the 30% commission in respect of smaller apps and app subscriptions, which they submitted to the CMA was driven in part by competition.However, the CMA notes that these discounts apply only on a small proportion of transactions, and are likely to have limited impact on Apple’s and Google’s app store revenues as the vast majority of those revenues come from a smaller number of larger apps which do not benefit from the discounts.
Alongside app stores, mobile browsers (supported by their underlying browser engines) are another key gateway in the mobile ecosystem between users and content providers; they enable mobile users to access web pages and web apps and, on Android devices, to install native apps through sideloading.
Based on the data available at this stage, the CMA finds that the combined share of Apple’s Safari and Google’s Chrome browser on mobile devices in the UK amounts to around 90%, while the combined share of their browser engines,WebKit and Blink, amounts to almost 100%.
The CMA considered that there are material barriers to competition in the supply of both mobile browsers and browser engines, with Apple and Google maintaining significant market power. Specifically:
- By requiring all browsers on iOS devices to use WebKit, Apple controls and sets the standards of the quality and functionality of all browsers on iOS. It also limits the potential for rival browsers to compete with Safari as, for example, they are less able to accelerate page loading and cannot display videos in formats not supported by WebKit. The evidence received by the CMA suggests that WebKit offers limited feature support, in particular with respect to web apps, and as a result, web apps are a less viable alternative to native apps from the App Store for delivering content on iOS devices. This, in turn, increases development costs of apps as the efficiency saving from having to only develop one app (i.e. one web app as opposed to a native app for each of iOS and Android) is lost.
- By using pre-installation and default settings as well as restrictions on access to APIs and interoperability to maximise use of their own browsers within their respective ecosystems.
The CMA expressed concerns that Apple and Google may be able to use their control over browsers / browser engines to reinforce or strengthen their market position in other activities, such as the distribution of native apps or, in the case of Google, revenues from digital advertising. Such concerns include that:
- Apple could use its position as the steward of WebKit to (i) limit the success of web apps and increase the take up of native apps which are only accessible through its App Store, thereby further cementing its market power in app distribution, and (ii) make display advertising less effective and lucrative on iOS by limiting user tracking through its implementation of Intelligent Tracking Prevention (“ITP”) in WebKit. In doing so, Apple could decrease the competitive constraint of display advertising on search advertising (where it shares in Google’s revenue streams), reduce the viability of the web as a content distribution channel, and harm online content providers, app developers and ultimately, consumers.
- Google may use its market power in browsers / browser engines to reinforce its very strong positions in the supply of ad inventory and in the supply of ad tech services, through its Privacy Sandbox Proposals.
Role of Apple and Google in competition between app developers
The CMA concludes that Apple and Google are able to use their control over app stores and operating systems (and, for Apple, also mobile devices) to effectively set the “rules of the game” for competition between app developers. In summary:
- Apple and Google, through their ownership of their respective operating systems, can control access to APIs and therefore determine the functionality available to apps. Apple, for example, reserves access to certain hardware functionality, such as the technology that enables contactless payments, thereby protecting its services that use this technology from competition and potentially restricting innovation.
- Apple and Google require developers to submit their apps for review before they can be distributed through their respective app stores. Based on feedback from developers, the CMA found that app review processes are opaque and review criteria appear to be inconsistently applied. The resulting delays and uncertainty can increase development costs and hinder innovation by app developers, as well as potentially resulting in Apple and Google giving preferential treatment to their own apps. The CMA’s current view is that Apple and Google appear to have both the ability and the incentive to give preference to their first-party and certain third-party apps in search rankings or via app features, particularly apps which depend on their proprietary in-app payment systems, as the increased use of these apps would lead to a direct financial gain.
- As set out in more detail above, Apple and Google can influence users’ choice of apps through pre-installation and defaults, and through the design of their app stores. Although this can bring convenience to consumers, this can also restrict consumer choice and allow Apple and Google to favour their own apps.
- By virtue of their market power in operating systems and app distribution, Apple and Google have access to large volumes of commercially sensitive information from third-party developers, including information on new app features, data on download and usage, and sales data via their in-app payment systems. The CMA reported concerns that this information may be used by Apple or Google to develop products, enter new markets or gain a competitive advantage against rival app developers.
The CMA discussed in detail some further risks to competition between developers posed by Apple and Google. The first concern was the obligation for app developers to use Apple’s and Google’s proprietary payment systems for in-app purchases, and its possible impact on developers and consumers. In addition to the supra-competitive level of commission (as discussed above), app developers raised concerns with the CMA that the requirement to use these payment systems may reduce their control over pricing and refunds, distort competition between Apple’s / Google’s apps (which do not have to pay the commission) and third-party apps, and make it harder for users to switch devices.
The CMA then examined the risks posed by Apple’s new privacy framework for apps, “App Tracking Transparency” (“ATT”).Whilst it acknowledged that ATT has introduced a greater degree of choice and control to users over whether and how their personal data is used for personalised advertising, the CMA found that ATT might lead to further consolidation, by reinforcing the role of the App Store as a source of discoverability for apps on iOS, and advantaging Apple’s own advertising services (as well as the services of other large companies, including Google), as well as driving app developers to begin charging for previously free apps, together with other impacts on consumer choices.
Finally, the CMA found that Apple has inhibited the emergence of cloud gaming on iOS to protect (i) Apple’s position in app distribution, given cloud gaming represents an alternative method of game distribution and (ii) Apple’s position in mobile devices and operating systems, as cloud gaming may reduce the importance of high-quality hardware (which is the core of Apple’s existing business model) and facilitate user switching.
The Interim Report considered a variety of possible remedies to address (i) the source of market power held by Apple and Google, via pro-competitive interventions, and (ii) harms to competition and consumers that result from Apple’s and Google’s ability to exercise such market power, via SMS firm-specific codes of conduct. Remedies considered include:
- In respect of operating systems, requirements for Apple and Google to not unreasonably restrict third-party access to hardware and software features (including, for example making such features available within the open-source version of Android).
- In respect of native apps distribution, requiring Apple to allow alternative app stores on iOS, making sideloading easier (or, for Apple, allowing it), and breaking the link between Google’s Play Store and the payments made under Google’s network of agreements with manufacturers.
- In relation to mobile browsers and browser engines, requirements for Apple and Google to respect users’ choices for default browsers and to provide access to APIs and support web functionality for rival browsers.
- In respect of Apple’s and Google’s role in competition between app developers, requirements to allow alternative in-app payment options, to carry out a fair and transparent app review process, to treat Apple’s and Google’s own apps and third-party apps consistently for privacy purposes, and restrictions on the sharing and use of data / insights gained from the operation of the app stores or the app review process in the development of their own apps.
Further, the CMA has considered the role of separation remedies, in the form of either data separation or operational separation.
The CMA is specifically seeking views on the remedies under consideration, and will assess potential interventions in more detail in the second half of the market study. The CMA’s preliminary view was that many of the potential interventions under consideration would be consistent with the types of measures that the DMU might take in the future.
Should the implementation of the DMU be delayed (as noted above) and the CMA be minded to make a market investigation reference instead, the market investigation would consist of a more detailed examination into whether there is an adverse effect on competition in the markets in question, with wide information gathering powers for the CMA and the risk of a wider, far-reaching range of remedies being imposed, including possible structural divestments and stringent behavioural remedies (e.g. price controls).
Parallel ongoing regulatory action and litigation
In parallel to the Market Study, the CMA is already making use of its enforcement powers to address specific competition concerns in digital markets. For example, the CMA is currently conducting an investigation into Apple’s conduct in relation to the distribution of apps on iOS and iPadOS devices in the UK, in particular, the terms and conditions governing app developers’ access to the App Store, including the commission.
Other competition authorities and government bodies around the world are looking at similar or related issues, and the CMA’s Interim Report draws upon some of these international initiatives.
Among others, the European Commission is presently investigating whether Apple has breached competition law in relation to its distribution of music streaming apps, and it has previously fined Google for imposing anticompetitive restrictions on Android device manufacturers and mobile network operators in its Google Android decision. Competition authorities in the Netherlands and Australia have published the findings of broader studies into mobile app distribution and, most recently, the Dutch competition authority has found Apple to have abused its dominant position in the market for app store services on iOS for dating app providers by imposing unreasonable conditions, namely the requirement to use Apple’s IAP and the restrictions on referring to alternative payment options outside the iOS app.
Google’s and Apple’s practices are also the object of a range of legislative regulatory initiatives – including, for example, the EU Digital Markets Act, the U.S. Open App Markets Act, and the Korean app store bill and their conduct in their respective app stores is the subject of several private claims from app developers and consumers in several countries across the globe, including in the UK, the US, and Australia.
These international initiatives highlight the global scale and significance of the competition concerns in relation to Google’s and Apple’s conduct in mobile ecosystems. Although the CMA’s focus is the UK, the business models of Apple and Google extend across national borders, and analysis conducted in one jurisdiction is likely to be highly relevant to both public and private enforcement activity in another – as has been seen recently in the Epic Games v Apple litigation in the United States, where the amicus brief filed by Microsoft has drawn heavily on the analysis conducted by the CMA.
The purpose of its Interim Report is for the CMA to share the content of its preliminary analysis with stakeholders and open a consultation process. In the second half of the market study, over the next six months the CMA will consider any responses to its consultation and further assess the competition concerns it has identified. The CMA’s current statutory deadline for publication of its Final Report following the second stage of the study is 14 June 2022. The CMA has indicated that the interventions under consideration are consistent with the actions the DMU might take, and subject to the further analysis in the second half of the study, it is reasonable to anticipate that the DMU, once constituted, will consider remedies and / or interventions to address the harms identified.
In the meantime, the provisional analysis conducted by the CMA sheds invaluable light onto the competition considerations relevant to mobile ecosystems – and, given the global nature of the issues at hand, is instructive for both private and public enforcement initiatives on both the domestic and the international stage.
However, as mentioned above, the CMA has recently indicated that, even if the implementation of the DMU regime is further delayed, it is actively considering whether other options, such as parallel market investigations, may be appropriate against tech platforms, taking into account the similar ongoing investigations and litigation elsewhere in the world. We are therefore likely to see UK authorities intervening in digital markets in a strategic, globally coordinated way before long, and the Interim Report has set the tone for those interventions, loud and clear.