January 27, 2023

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Apple plans to open App Store as tough EU laws loom

Apple is laying the groundwork for compliance with tough new EU rules that will allow iPhone users to choose apps outside of its own app store, as developers try to sidestep the US tech giant’s surcharge of up to 30 percent.

The move comes in response to the EU’s Digital Markets Act, which went into effect last month and is part of the biggest overhaul to the laws governing the world’s biggest tech companies in more than two decades.

The DMA, which won’t be enforced until March 2024, poses the biggest threat to Apple’s control of its closed operating system in the past 15 years.

EU officials believe Apple will be disproportionately affected by the new rules. “They are in a situation where it’s not going to be easy for them to escape,” said a person directly involved in drafting the rules, adding that it potentially generates billions of dollars in revenue every year could lose.

Apple has struggled for years to keep all app downloads and payments on the App Store, arguing that its “curation process” is vital to user safety. It has faced ongoing criticism and legal challenges from app developers, including Fortnite maker Epic Games and music service Spotify.

The US tech giant has set up teams dedicated to complying with the new Brussels legislation but is working out the details as it interprets what the sweeping laws entail, according to people familiar with the matter. The move was first reported by Bloomberg. Apple declined to comment.

“This is big and very necessary for innovation,” said Nicolas Rieul, chairman of IAB Europe, an advertising association that believes Apple is abusing its power.

Europe, a market of 450 million smartphone users, is Apple’s second largest after America, valued at $95 billion. The EU has warned that “repeated breaches” of its DMA legislation could result in penalties of up to 20 percent of global revenue. In the case of Apple, that would be $80 billion.

CFRA Research’s Nicholas Rodelli said Apple’s global operating profits could be “massively” cut by 15 percent from the DMA, noting that the EU is serious about enforcing rules aimed at creating more competition.

Apple is expected to explore ways to limit changes.

EU rules state that “gatekeepers” – major online platforms – “must enable and technically enable the installation and effective use of third-party software applications or stores for software applications”.

The “or” could give Apple leeway to offer so-called sideloading — where users install software through a browser — but not competing app stores.

Another part of the DMA that would impact Apple’s business is the requirement to allow developers to install third-party payment systems instead of being forced to use Apple’s.

One of the biggest questions is whether Apple will charge its usual 15 to 30 percent fee on apps installed outside of the App Store.

Rodelli said Apple will likely take “a minimalist approach” and only comply where it needs to, but use security flaws to keep the iPhone as locked down as possible.

Apple has previously made it clear that it would fight for what it sees as legitimate intellectual property payments.

In his Epic Games study last year, Apple CEO Tim Cook said the 15-30 percent “in-app purchase” (IAP) fee isn’t just a payment processing fee, but a broader commission for Apple-made tools and customer service.

“Without IAP, we’d have to come up with another system to bill developers, which . . . I think it would be a mess,” Cook said.

Apple’s dispute with the Dutch competition authority last year sheds light on how the company’s regulatory playbook might apply to the DMA.

Last December, Dutch regulators told Apple that it was “inappropriate” to block dating apps from using alternative payment systems. It gave the tech giant two months to allow consumers to pay outside of the App Store.

Apple complied after initially paying 50 million euros in fines for missing the Dutch Consumers and Markets Authority’s deadline. However, it replaced its 30% commission with a 27% fee, leaving the developer with only up to 3 percentage points of additional revenue, of which payment processing fees would also have to be paid.

Apple also requested pop-up messages warning the user that they “would no longer transact with Apple.” Early drafts stated that “only purchases made through Apple’s App Store will be secured”, which critics saw as an attempt to dissuade users from leaving Apple’s platform and was only changed after pressure from Dutch authorities.

Many in the industry expect that Apple – which has been very contentious in the past – will seek to challenge some aspects of the DMA in court.

EU regulators point out that it is the company with some of the most aggressive lawyers trying to derail or water down the rules. This has led to confrontations between the European Commission and Apple over how to implement the new rules, a senior EU official said.

“I anticipate litigation and disputes over the implementation details. Maybe Apple doesn’t question the legislation itself, but they might question what it means to take proper security measures, for example,” Rodelli said.

Apple requires additional safeguards for the iPhone because a compromised device could provide access to a user’s location, highly personal health or financial information throughout the day.

Even if Apple allows third-party app stores, Morgan Stanley analyst Erik Woodring expects hardly anyone would use them.

He called any potential overhaul “more bark than bite,” adding that Apple customers enjoyed the “security, centralization, and convenience that the App Store brings,” and estimated a worst-case sales slump of just 1 percent.

Another option could be that Apple fully complies with the Brussels rules, but chooses to introduce fees in apps that currently pay nothing, such as B. Banking apps or driving services.

Others suggest Apple could decide to lower all of its fees to 10 or 15 percent if EU enforcement is draconian.

Such a move could thwart any emerging competition from alternative app stores and even open up new revenue streams like Spotify and Netflix, big apps that consumers can sign up for and pay for online.

Both streaming groups have ditched in-app purchases from Apple because they think the fee is outrageous, but Ben Bajarin of research group Creative Strategies said 10-15 percent might be more tolerable if it translates to higher traffic.

“This is money Apple never would have had,” Bajarin said. “One could argue that they are actually making more money from these cuts than they are taking in.”