Good morning,

Due to an editing error (by me), every instance of “Judge Gonzalez Rogers” in The Apple v. Epic Decision was, after the initial spelling, misspelled Gonzales Rogers. I am very sorry for the mistake.

On to the update:

Apple Makes the Rules

I got a fair number of questions about how specifically the anti-steering provision — assuming it stands up to appeal (which Apple has not yet filed) — might be implemented, and what the effects might be.

The most important takeaway, which I spent considerable time explaining yesterday, is that the ruling seems quite clear that the injunction on anti-steering provisions does not allow for any sort of purchase to happen inside of the app that does not use Apple’s IAP system (and thus pay Apple its commission). This definitely means that building an experience that “feels” like it is inside of the app, even if it using a web backend, will be out of bounds; note, by the way, that this is what Epic did with their Project Liberty stunt, and the end result of that was getting kicked out of the App Store and having to pay Apple 30% of the money they grossed for good measure. I also believe this rules out a webview (where you load a browser window inside of the app); the best developers can hope for is a link that opens in Safari.

More broadly, though, Judge Gonzalez Rogers wrote in her conclusion:

Thus, and in summary, the Court does not find that Apple is an antitrust monopolist in the submarket for mobile gaming transactions. However, it does find that Apple’s conduct in enforcing anti-steering restrictions is anticompetitive. A remedy to eliminate those provisions is appropriate. This measured remedy will increase competition, increase transparency, increase consumer choice and information while preserving Apple’s iOS ecosystem which has procompetitive justifications. Moreover, it does not require the Court to micromanage business operations which courts are not well-suited to do as the Supreme Court has appropriately recognized.

This bit about not micromanaging business operations is, as Judge Gonzalez Rogers notes, an important part of how the Supreme Court thinks about antitrust cases. From Verizon v. Trinko:

Against the slight benefits of antitrust intervention here, we must weigh a realistic assessment of its cost. Under the best of circumstances, applying the requirements of § 2 “can be difficult” because “the means of illicit exclusion, like the means of legitimate competition, are myriad.” The cost of false positives counsels against an undue expansion of § 2 liability…Judicial oversight under the Sherman Act would seem destined to distort investment and lead to a new layer of interminable litigation…

Even if the problem of false positives did not exist, conduct consisting of anticompetitive violations…may be, as we have concluded with respect to above-cost predatory pricing schemes, “beyond the practical ability of a judicial tribunal to control.” Effective remediation of violations of regulatory sharing requirements will ordinarily require continuing supervision of a highly detailed decree. We think that Professor Areeda got it exactly right: “No court should impose a duty to deal that it cannot explain or adequately and reasonably supervise. The problem should be deemed irremedia[ble] by antitrust law when compulsory access requires the court to assume the day-to-day controls characteristic of a regulatory agency.”

In short, not only does Judge Gonzalez Rogers not want to exert day-to-day decision-making on the App Store, she is well aware that doing so would render the entire injunction subject to reversal. That means that the most likely outcome will not be developers continually pushing the bounds of what is an in-app purchase, but rather Apple making the rules and Judge Gonzalez Rogers approving them at first, and largely deferring to the company from there on out.

So what might those rules look like? Well first of all, as I noted above, Apple will likely allow links to the web, but not anything approaching an in-app purchase flow or even a webview.

The next question is price: people forget now, but when Apple first instituted its anti-steering provision, it also required that prices in the app match prices outside of the app. Apple could push its luck and reinstitute that rule, but I doubt that would fly with Judge Gonzalez Rogers, given that the entire point of the injunction against the anti-steering provision is to let customers know about prices that may be lower due to Apple not taking its commission; letting Apple effectively export its commission, at least as far as the final price is confirmed, would defeat this. That noted, might Apple insist that in-app purchases only be priced 30% above prices elsewhere, to prevent developers from pushing customers to the web with drastically lower prices? That’s possible, but I’m guessing that Apple will rely on developers’ economic interest to keep the price range reasonable; Judge Gonzalez Rodgers would likely favor that as well.

The last bit is language and design; currently Apple has a plethora of rules about how in-app purchase options can be displayed, and I would expect those rules to extend to steering language. I think a reasonable compromise would be to state that all buttons and text, whether it points to IAP or the web, has to be of equivalent size and weight; here I could imagine Apple pushing for something much more lightweight — remember, they only promised the Japan Fair Trade Commission “a single link” — and I can also see Judge Gonzalez Rogers not wanting to get involved to this degree of specificity.

Again, though, whatever the initial rules, I do believe that Apple will be given significant deference to enforce it; I just don’t see a world where this is decided App Store rejection by App Store rejection. And, more importantly, this language is in addition to IAP, not in place of.

Reader and Productivity Apps

That leaves two big questions: what is the future of the ‘Reader’ app distinction, and how will customers react? A quick refresh from the App Store Guidelines:

3.1.3(a) “Reader” Apps: Apps may allow a user to access previously purchased content or content subscriptions (specifically: magazines, newspapers, books, audio, music, video, access to professional databases, VoIP, cloud storage, and approved services such as educational apps that manage student grades and schedules), as well as consumable items in multi-platform games, provided that you agree not to directly or indirectly target iOS users to use a purchasing method other than IAP, and your general communications about other purchasing methods are not designed to discourage use of IAP.

The second half of this rule was just deemed illegal; it is not set in stone that the first half stays around. As I noted yesterday Apple, based on this decision, could simultaneously let Netflix, Spotify, Kindle, etc. link out to their websites even as it required them to also offer IAP. However, not only would this risk running afoul of Judge Gonzalez Rogers’ order, it also might be a problem with the Japan Fair Trade Commission, which is concerned with the fact that Apple competes with some of the largest ‘Reader’ apps. To that end, my expectation is that Apple abides by its settlement and lets ‘Reader’ apps continue to not offer IAP, but also link to their websites.

That leaves non-‘Reader’ apps, like productivity applications, and games; I have long argued that Apple should treat productivity applications like ‘Reader’ apps, while preserving total control over the game purchase experience, but unless this injunction is successfully appealed, that is now off the table (this is why Apple should have acted unilaterally years ago). While my hope is that Apple will give up on the ‘Reader’ distinction and treat all non-game apps like ‘Reader’ apps — which in this case would mean allowing web-based subscriptions and purchases without IAP, which I believe would maximize innovation — my guess is that Apple will require both to offer IAP in addition to web page links.

Ironically, despite the fact that I think productivity applications could benefit the most from being allowed to monetize on the web, I think this category is the most likely to simply stick with IAP. The biggest benefit of using the web is the possibility of using the same payment system everywhere, across iOS, Android, and the web; however, if you have to support IAP, it may be simpler to only support IAP, particularly given its likely higher conversion rate.

High-spending Gamers

Games are going to be trickier. On one hand games strongly benefit from a friction-free user experience, which means they very well may stick with IAP; on the other hand, no industry is better suited to A/B test their way to the optimal conversion experience, which might be on the web. One important factor may be this bit from the decision:

Importantly, spending on the consumer side is also primarily concentrated on a narrow subset of consumers: namely, exorbitantly high spending gamers. In the third quarter of 2017, high spenders, accounting for less than half a percent of all Apple accounts, spent a “vast majority of their spend[] in games via IAP” and generated 53.7% of all App Store billings for the quarter, paying in excess of $450 each. In that same quarter, medium spenders ($15-$450/quarter) and low spenders (<$15/quarter), constituting 7.4% and 10.8% of all Apple accounts, accounted for 41.5% and 4.9% of all App Store billing, respectively. The remaining 81.4% of all Apple accounts spent nothing and account for zero percent of the App Store billings for the quarter. The trend has largely continued to the present.

This trend is also mirrored within the App Store’s games billings. Indeed, Apple has recognized that “[g]ame spend is highly concentrated” among certain gaming consumers. Similar to the above statistics, 6% of App Store gaming customers in 2017 accounted for 88% of all App Store game billings and were gamers who spent in excess of $750 annually. Breaking down this 6% population:

• High spenders, accounting for 1% of iOS gamers, generated 64% of game billings in the App Store, spending on average $2,694 annually;
• Medium-high spenders, accounting for 3% of iOS gamers, generated 20% of game billings in the App Store, spending on average $373 annually; and
• Medium spenders, accounting for 2% of iOS gamers, generated 4% of game billings in the App Store, spending on average $104 annually.

Indeed, in strategizing on the development of the App Store and Apple’s gaming business, Apple noted that it “need[s] to primarily consider how [its] service[s] would impact engagement and spend of this 6%.” Thus, in most economic ways, and in particular with respect to the challenged conduct, the App Store is primarily a game store and secondarily an “every other” app store.

Game developers will be highly motivated to figure out how to move this 6% to web-based billing. And, importantly, this 6% will likely be highly motivated to figure out how to save money. This is where this injunction — again, if it stands up (and, by extension, this is why Apple may want to appeal it) — could really bite Apple. It’s easy to, in a vacuum, envision a world where customers really do value IAP, such that it is worth the 30% for developers; the reality of the App Store, though, is that a small number of digital whales pay the bills, or, to put it another way, drive Apple’s services narrative, and every single one that is steered away from the App Store causes real damage to Apple’s bottom line.

---

This Daily Update will be available as a podcast later today. To receive it in your podcast player, visit Stratechery.

The Daily Update is intended for a single recipient, but occasional forwarding is totally fine! If you would like to order multiple subscriptions for your team with a group discount (minimum 5), please contact me directly.

Thanks for being a supporter, and have a great day!