Nikolas Kokovlis/NurPhoto via AP
There’s been an enormous amount of discussion about what holds back markets in physical commodities like housing and energy, but also what prevents innovation and invention. One argument is that there are too many government-generated rules and regulations that slow everything down. Another is that the absence of government structuring leads to private regulations, imposed by dominant firms on their own terms to often exclude rivals and extract money. When those private regulations are forced into remission, markets can explode with new products and offers.
That’s happening right now in real time in the market for mobile phone apps, and particularly the distribution of those apps to customers. It represents the first real, thorough, and permanent consequences to a Big Tech company for monopolizing markets. And literally within 24 hours of a federal court’s Wednesday ruling imposing sanctions for this misconduct, competitors have been rushing into the space in ways that will make the market fairer, more affordable, and more abundant.
The case before the court concerned Apple’s monopoly power over its iOS App Store. Apple has built a tollbooth whereby apps that offer items for purchase must pay a 30 percent tax to Apple. (A few select apps have a smaller 15 percent tax.) Epic Games, the makers of Fortnite, wanted to offer game purchases off the app through a link at a cheaper price point, but Apple barred Fortnite from the App Store for such circumvention, and denied any developer the ability to steer people to off-app purchasing. This discouraged app developers, since they would not be able to load on iPhones and would therefore lose access to a huge number of potential customers. (Google has a similar 30 percent tax for its Android phones.)
Epic Games took Apple to U.S. district court in a private antitrust case. And it won a narrow injunction in May 2021, while losing on other claims. As a result, Apple would have to allow app developers to communicate with consumers and direct them to alternative “purchasing mechanisms.” But Big Tech firms like Apple see these impositions only as minor obstacles to work around by devising more private rules to maximize profits.
Apple did that first through delay, while their preferred tollbooth tax stayed in place. It appealed the ruling, lost, and appealed again to the Supreme Court, which didn’t take the case. Therefore, by January 2024, Apple had to comply with the original injunction. Instead, it decided to simply transfer its tax.
Previously, Apple had barred any off-app purchases. Now, it allowed them, but demanded a new 27 percent tax on anything bought off-app with the link, up to seven days after the initial click. The 3 percent “discount” was less than the cost to app developers for setting up their own payment processing, making this alternative not viable.
Apple also limited the placement of links to alternative purchases, barred user-friendly designs like buttons, restricted the “call to action” language to generic asks, required a “static URL” that could not maintain a user account to the offline link, and added a “scare screen,” warning customers who clicked on an outbound link that “You’re about to go to an external website. Apple is not responsible for the privacy or security of purchases made on the web.” The effect of all of these rules has been to make customers reluctant to proceed to the link.
This was all deliberate and calculated, as subsequent hearings showed after Epic took Apple back to court for violating the injunction. Apple immediately strategized to fake-comply with the injunction while maintaining practices that brought it billions in profits. At one point, CEO Tim Cook himself broke a tie on how much to charge for off-app purchases; he chose the more lucrative option. When questioned in court about it, the VP of finance, Alex Roman, lied under oath repeatedly, for example claiming that Apple didn’t come up with the 27 percent off-app tax, when internal documents showed it had been debated and planned for years. Even when questioned by the court, Apple delayed discovery so it could keep the revenue stream going a bit longer.
Finally, on Wednesday, Federal District Judge Yvonne Gonzalez Rogers ruled. And I think the technical term for what happened is she lost her shit. “Apple sought to maintain a revenue stream worth billions in direct defiance of this Court’s Injunction,” Rogers wrote. “Remarkably, Apple believed that this Court would not see through its obvious cover-up.”
Gonzalez Rogers’s ruling was swift, punitive, and dramatic. She permanently barred Apple from imposing any fee on off-app purchases, lifted all restrictions on app developer communications with customers, banned the full-frame scare screens, and enabled the dynamic URLs that keep users logged in. “There are no do-overs once a party willfully disregards a court order,” Gonzalez Rogers said, immediately putting the ruling into effect even as Apple plans to appeal. Moreover, she sent a criminal referral to the U.S. Attorney in Northern California for Apple and Alex Roman, for contempt of court.
We’ll see if Trump’s U.S. attorneys bother with that. But the ruling redesigned the app market, and what’s interesting is how things have quickly proceeded from there.
Epic Games had previously launched its own app store called the Epic Games Store, but only in the European Union for iPhones and iPads. On Thursday, just one day after the ruling, Epic improved that store for app developers, imposing no fees on the first $1 million in sales annually, and a 12 percent fee after that, much lower than the 30 percent Apple tax. Epic also announced new “webshops” that developers can launch inside the Epic Games Store to enable off-app purchases. “With new legal rulings in place,” the announcement stated, “developers will be able to send players from games to make digital purchases from webshops on any platform that allows it, including iOS in the European Union and United States.”
Separately, Stripe established a simple payment mechanism to support developers for off-app purchases. “The biggest leap forward in usability of the iPhone was just engineered by a judge,” said David Heinemeier Hansson, an app entrepreneur who also once took Apple to court over its App Store rules.
So what we have here is a legal ruling—in this case due to private antitrust litigation, though the Justice Department has an active monopolization case against Apple for related conduct, and the EU has fined Apple for similarly violating prescribed rules under its Digital Markets Act. The court’s decision has fully revitalized a market, under more favorable terms for everyone who participates in it. “Developers can now offer lower prices, invest in better products, and innovate without fear of retaliation,” my Organized Money podcast co-host Matt Stoller said in a statement for his organization, the American Economic Liberties Project.
Applying this kind of standard to other markets dominated by single firms is as simple as securing structural remedies that allow competition to take hold. There are plenty of other ways to nurse markets—public financing or loan guarantees, active prioritizing, and yes, even cutting through red tape. But preventing market monopolists from devising private rules to funnel money and power their way has considerable force and a demonstrable track record.
When the Justice Department required Bell Labs in a 1956 consent decree to license its patents, it essentially created Silicon Valley, unlocking markets that had been frozen by the AT&T monopoly. IBM, at the outset of an antitrust case that started in 1969, unbundled software from its computer systems, giving rise to the software market.
Government (and in this case private litigants with the resources and persistence of Epic Games) can impose rules of the road that allow commerce to flourish. For the last half-century, we’ve heard a lot about markets succeeding if the underbrush of rules would just get cleared out. But it’s the presence of rules, democratic rules that are not co-opted by private regulation, that can ensure prosperity as well.
