Apple is laying the groundwork to comply with strict new EU rules that will allow iPhone users to choose apps beyond its own app store, as developers seek to circumvent the up to 30 percent fee imposed by Apple. American tech giant.
The move comes in response to the EU’s Digital Markets Law, which was enacted last month and is part of the biggest overhaul of the laws governing the world’s biggest technology companies in more than two decades.
The DMA, which will not take effect until March 2024, represents the biggest threat to Apple’s control over its closed operating system in the last 15 years.
EU officials believe Apple will be disproportionately affected by the new rules. “They are in a situation where it will not be easy for them to escape,” said one person directly involved in writing the rules, adding that it could potentially wipe out billions of dollars in revenue every year.
Apple has been fighting to keep all app downloads and payments within the App Store for years, arguing that its “curation” process was critical to user security. It has faced sustained criticism and legal challenges from app developers, including Fortnite creator of Epic Games and the music service Spotify.
The US tech giant has established dedicated teams to comply 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, president of IAB Europe, an advertising association that believes Apple is abusing its power.
Europe, a market with 450 million smartphone users, is Apple’s second-biggest after the Americas, with a value of $95 billion. The EU has warned that “repeated breaches” of its DMA legislation could lead to penalties of up to 20 percent of global revenue. In the case of Apple, it would be 80,000 million dollars.
Nicholas Rodelli of CFRA Research said Apple’s global operating profit could see a “huge” 15 percent hit from the DMA, noting that the EU was serious about enforcing rules designed to create more competition.
Apple is expected to find ways in which it can limit the changes.
The EU rules state that “gatekeepers” (large online platforms) “shall technically enable and enable the installation and effective use of third-party software applications or software application stores.”
The “or” could give Apple leeway to offer so-called sideloading, where users install software through a browser, but not rival app stores.
Another part of the DMA that would affect Apple’s business is the requirement to allow developers to install third-party payment systems, rather than 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 is likely to take “a minimalist approach,” delivering only where it must, but using security loopholes to keep the iPhone as locked down as possible.
Apple previously made it clear that it would fight for what it considered to be legitimate payments for intellectual property.
In his Epic Games test last year, Apple CEO Tim Cook said the 15-30 percent “in-app purchase” (IAP) charge was not simply a payment processing fee, but a larger fee for Apple-made tools and customer service.
“If it wasn’t for IAP, we would have to come up with another system for billing developers, which is . . . I think it would be a disaster,” Cook said.
Apple’s standoff with the Dutch competition authority over the past year provides insight into how the company’s regulatory playbook might apply to the DMA.
Last December, Dutch regulators told Apple that preventing dating apps from using alternative payment systems was “unreasonable”. 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 penalties for missing the deadline from the Netherlands Consumer and Market Authority. However, it replaced its 30 percent commission with a 27 percent fee, leaving only up to 3 percentage points of additional revenue for the developer, of which they would also have to pay fees for payment processing.
Apple also required pop-up messages warning the user that they “would no longer be transacting with Apple.” Early drafts included the warning that “Apple only guarantees purchases through the App Store”, which was seen by critics as an attempt to discourage users from leaving Apple’s platform and was only changed after pressure from the Dutch authorities.
Many in the industry expect Apple, which has a history of being highly litigious, to try to challenge some aspects of the DMA in court.
EU regulators point to it as the company with some of the most aggressive lawyers seeking to derail or water down the rules. This has led to confrontations between the European Commission and Apple over how the new rules should be implemented, a senior EU official said.
“I expect litigation and disputes around the implementation details. Apple may not challenge the legislation itself, but it might question, for example, what it means to have reasonable security measures,” Rodelli said.
Apple requires additional security measures on the iPhone because a compromised device could give access to a user’s location around the clock, as well as highly personal health or financial information.
Even if Apple allows third-party app stores, Morgan Stanley analyst Erik Woodring expects almost no one will use them.
He called any potential fixes “more bark than bite,” adding that Apple customers enjoyed the “security, centralization, and convenience that the App Store provides” and estimated a worst-case revenue hit of just the 1 percent.
Another option could make Apple fully comply with the Brussels rules, but choose to introduce fees on apps that currently don’t pay anything, like banking apps or transportation services.
Others suggest that Apple may choose to lower all its fees to 10 or 15 percent if the EU’s enforcement is draconian.
Such a move could thwart any fledgling competition from alternative app stores and even generate new revenue streams from Spotify and Netflix, big apps where consumers can sign up and pay on the web.
Both streaming groups have abandoned in-app purchases at Apple because they find the fee egregious, but Ben Bajarin of the Creative Strategies research group said 10-15 percent might be more tolerable if it results in higher traffic.
“That is money that Apple would never have had,” Bajarin said. “You could argue that they could actually make more money than they get from those cuts.”