App stores’ vice-like grip over third-party software could be severely loosened and Big Tech’s data access could be curtailed after the European Union reached agreement on a landmark law Friday.
The Digital Markets Act, or DMA, is set to take effect next year and is likely to free developers from onerous commission fees charged by Apple Inc. AAPL, -0.26%, Google parent Alphabet Inc. GOOGL, -0.29% GOOG, -0.27% and other major app platforms, potentially costing Apple billions of dollars. Other provisions target Big Tech tactics that European regulators have previously attacked: Search engines such as Google giving preference to their own services in results, advertisers like Facebook parent Meta Platforms Inc. FB, +0.32% tracking users around the web, e-commerce platforms such as Amazon.com Inc. AMZN, +0.22% using data from third-party sales to inform their own products, and more.
“Facebook is the major loser since they are the most dependent on data monetization,” Vasant Dhar, a professor at the Stern School of Business and the Center for Data Science at New York University, told MarketWatch. “Google and Amazon are somewhat worse off and lose some of their their ill-gotten monopolistic power in their spaces, but again, they are growing fast in other areas like AI and the cloud.”
The law is squarely aimed at Big Tech, but will wrap in some smaller companies: DMA will apply to companies with a market value of 75 billion euros ($ 82.4 billion) or that have 7.5 billion euros ($ 8.26 billion) in annual revenue within the EU, as well as at least 45 million monthly end-users and 10,000 yearly business users of at least one core platform, including web browsers and virtual assistants. It also ramps up potential penalties, after a series of European fines failed to create much change in how large tech companies operate. Under DMA, European regulators would be allowed to fine companies between 4% and no more than 20% of their annual global revenue if they break the law.
This could mean heftier fines than Big Tech has faced in recent years. Google, for example, was hit with a record fine topping $ 5 billion in 2018, one of three fines of more than $ 1 billion European regulators have tossed at the company for its practices in the search and mobile markets. But with 2021 sales topping $ 250 billion, the new law would allow for fines up to more than $ 50 billion for the repeat offender. Apple, with $ 365.8 billion in sales in its most recent fiscal year, would also face much larger recriminations.
For more: Europe’s new Big Tech law could actually produce results, like iMessage and Facebook Messenger playing nicely and big-money fines
“The gatekeepers will now have to comply with a well-defined set of obligations and prohibitions,” Europe’s antitrust chief Margrethe Vestager said in a statement. “This regulation, together with strong competition law enforcement, will bring fairer conditions to consumers and businesses for many digital services across the EU.”
App stores could be the first to see change from the new law, as Apple and Google have already been slightly tweaking their business models in response to legal and legislative pressure globally to weaken their hold on high-margin businesses that impose commission fees of up to 30% on larger developers. Google appeared to be out in front of DMA’s passage with a significant deal just ahead of the law being finalized.
Google on Wednesday reached a deal with Spotify Technology SA SPOT, -3.12% to offer an alternative payment method within its app for users. Users can choose Spotify’s alternative payment method or stay with Google Play, which takes as much as a 30% cut of revenue.
That is the type of change large app makers like Spotify and Fortnite maker Epic Games Inc. have sought amid a fight with makers of the dominant mobile operating systems. Epic has sued both Apple and Google for what it considers an anticompetitive tax, and both sides are appealing a split-decision ruling in federal court last year. Epic is scheduled to take on Google in federal court in 2023.
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Spotify did not say what Google’s cut of revenue from the alternative payment method would be when it becomes available later this year. On Twitter TWTR, -1.42%, Spotify Chief Executive Daniel Ek boasted the arrangement “sets the stage for what the next generation platform should look like.”
The Digital Markets Act would force Apple to allow alternatives to its App Store for downloading apps and allow payment methods for the App Store other than Apple’s own. Apple did not respond to an email message seeking comment on Google’s move.
In November, Craig Federighi, Apple’s senior vice president of software engineering, generally lauded the “admirable goals” of DMA, but he called out the provision for “sideloading,” or allowing alternate app stores. He said it “would take away a more secure” iPhone and unlock a “side door” for cybercriminals to potentially access consumers’ personal information.
“European policy makers are ahead of the curve, but sideloading would open a Pandora’s box of compromised security,” Federighi said at the Web Summit conference in Lisbon. “Sideloading is a cybercriminals’ best friend, and providing it would be a gold rush” for identity thieves, he added.
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Jeff Joseph, president of Software & Information Industry Association, a nonprofit whose 450 members include Google and Meta, on Friday warned DMA will “put large U.S. tech companies at a disadvantage compared to their foreign competitors.”
Apple’s chief tormentor, meanwhile, lauded the EU’s action and is pressing for more legislation to tamp down what it claims are antitrust violations by Apple.
“Europe is completely in the right to reign in the platform monopolies and open markets to fair competition,” Epic CEO Tim Sweeney tweeted Thursday. “Everyone will benefit even, ironically, the platform monopolies themselves.”
A decision on Apple and Epic’s appeals in their case isn’t expected before mid-2023. In a 135-page filing in federal court late Thursday, Apple contended “Epic did not lose the trial due to any legal error” and that Epic offers no alternative to its in-app purchasing setup.
For more: Epic v. Apple could be a legal marathon as appeals wend through system
The DMA and Epic antitrust lawsuits are just part of the global pressure on Apple and Google to change their app-store approach. In January, India’s Competition Commission launched an antitrust investigation into Apple’s App Store practices several months after the U.K.’s Competition and Markets Authority did the same. South Korean law already bars dominant app-store operators like Apple and Google from forcing app developers to use their payment systems.
Meanwhile, rumors persist that the Justice Department is moving closer to a full-fledged investigation of Apple that could include the App Store. The U.S. Senate is considering the Open App Markets Act that would prevent app store operators like Apple and Google from forcing app developers to use their proprietary payment systems.
For more: Bills targeting Apple and Google face biggest test yet
Apple has steadfastly maintained that App Store fees and strict in-app payment systems are necessary to ensure user privacy and security protections. Apple CEO Tim Cook has gone to great lengths to brand the company as a haven of data management compared with the likes of Facebook.
Apple doesn’t disclose App Store sales. Instead, it is included as part of Apple Services business, which hauled in $ 68.4 billion last year, or about 19% of Apple’s total revenue.
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When developers use Apple’s in-app payment system on the iPhone’s iOS platform, Apple collects 15% from developers that make less than $ 1 million a year, and 30% fee from developers that make more than $ 1 million a year.
Separately, U.S. and EU officials hammered out a preliminary deal allowing trans-Atlantic data flow between the two markets on Friday.