The Antitrust App Store Wars Come to India

We’re pleased to bring our readers an insightful post by Dr. Vikas Kathuria looking into the latest ‘digital gatekeeping’ controversy that Big Tech has found itself in in India, with the Competition Commission of India having ordered an investigation into Google’s conduct relating to Google Pay and the Play Store.

Dr Vikas KhaturiaDr. Kathuria is a Senior Research Fellow at the Max Planck Institute for Innovation and Competition, Munich and was formerly a Research Associate at the Competition Commission of India (CCI). He has many publications to his credit and is a regular contributor to policy discussions at the interface of IP and competition law. He has previously written for us here.

The Antitrust App Store Wars Come to India

Dr. Vikas Kathuria

The Competition Commission of India (CCI) ordered an investigation against Alphabet, the parent company of Google India Private Limited, on 9th November 2020, for abusing its dominant position in the Play Store and Android Operating System (OS), by favouring Google Pay over other competing apps. By opening this investigation, India has joined the EU and the US, where app developers have challenged the practices of Apple (for the App Store) and Google (for the Play Store).

The CCI’s investigation is part of several antitrust challenges world-over against those firms that have acquired the role of Gatekeepers in digital markets through their size, control over data, presence across several markets, and significance in intermediation. In the following, I provide an analysis of the present case. From the standpoint of policy implications, while the CCI can scrutinize Google’s behaviour in the analytical framework of abuse of dominance, a need has arisen to set out ex-ante code of conduct for digital gatekeepers who, even without dominance, can cause significant harm to welfare.

  1. Brief facts

An anonymous informant submitted these allegations against Alphabet Inc. The core of allegations concern self-preferencing by Google of its own Unified Payments Interface (UPI) payment app ‘Google Pay’, through its dominance in mobile Operating System (OS) market and the market for app stores for Android OS. The specific allegations are:

a) Google was unfairly privileging Google Pay by prominent placement and search manipulation on the Play Store, which is the dominant app store on Android OS. Being factually unsubstantiated this was dismissed by the CCI.

b) Pre-installation of Google Pay on Android smartphones.

c) Mandating third-party apps to use Play Store’s payment system and Google Play In-App billing for charging their users. Allegedly, this way Google ensures a commission of 30% per transaction, which is unfair.

d) Imposing unfair terms on users by requiring them to use Google Pay, which does not comply with the data localization directive by the Reserve Bank of India and the guidelines issued by the National Payments Corporation of India (NPCI).

2. Market definition and market power

The CCI identified three relevant markets for analysis:

a) The market for licensable mobile OS for smart mobile devices
b) The market for app stores for Android OS, and
c) The market for apps facilitating payment through UPI

The CCI distinguished the markets for ‘licensable mobile OS for smart mobile devices,’ and ‘integrated OS for smart mobile devices’. It found Google to be the dominant player in the former relevant market, which is fairly uncontroversial owing to Android’s market share and high entry barriers. This implies that iOS can also be dominant in the vertically integrated OS and consequently has to comply with the antitrust norms.

This approach seems correct prima facie as it is unlikely that app developers find licensable OS and integrated OS substitutable for distributing their products. For instance, if Play Store increases its subscription by 5-10%, a developer X cannot switch to Apple’s App Store without losing out on all OEMs (and therefore final consumers) who take the license from Android. In the past, the CCI has held that the market for licensable mobile OS formed a separate market. The EC took the same approach to market definition in the Google-Android case (See Section 7.3.5 here).

It appears odd that the Informant did not allege Section 3 violations as well. The restrictions that Play Store imposes on app developers can fall in the category of anti-competitive vertical restraints. On similar facts, investigations in the EU span both Articles 101 and 102 TFEU. Even Epic Games has approached US courts against Google and Apple for their conduct in app distribution under both Section 1 and Section 2 of the Sherman Act.

3. Compliance with the NPCI guidelines and violation of competition law

There were also allegations that Google impeded interoperability between Google Pay and other UPI apps by choosing different technological standards (‘collect flow’ or ‘intent flow’). The CCI found that even though the NPCI guidelines permitted both the standards, Google has reserved the ‘intent flow’ technology to itself, which provides a better user experience. This can result in users choosing Google Pay over other apps. A choice between two standards, although permitted by the NPCI, can still be violative of competition law for two reasons. First, it is doubtful that the guidelines of the NPCI have the force of law. Second, even if it had legal sanctity, compliance with the same could still violate competition law. In the EU, a dominant undertaking can be found to have violated competition law even if its actions comply with some other law if it does not have any objective justifications (see paras 129-141 here).

The Informant also accused Google of using consumer data from Google Pay for its other services in disregard of the NPCI guidelines. In turn, Google argued that the use of Google Pay data for other services was authorized by the NPCI. Even if this was permitted by the NPCI, this can amount to an ‘unfair’ condition in competition law imposed on the users by a dominant undertaking. However, approaching unfairness in data collection through the framework of competition law is highly debatable, if not completely controversial as demonstrated in the German Facebook saga. Additionally, to trigger the application of competition law, Google Pay should be a dominant player in the relevant market for UPI apps. Another way to approach the same issue is through data protection laws that call for ‘purpose limitation’. This course is yet not available in India as the Personal Data Protection Bill, 2018 is yet to become law. Moreover, this safeguard is available only for users’ ‘personal’ data.

4. International antitrust cases against app stores

These allegations remind one of the allegations against Apple in the EU. The first investigation was triggered by a complaint by Spotify, a music streaming provider and a competitor of Apple Music, and one e-books/audiobooks distributor who competes with Apple’s Apple Books app. Apple has been accused of violating competition law by (i)  mandating the use of Apple’s own proprietary in-app purchase system (IAP) for the distribution of paid digital content. Apple charges app developers a 30% commission on all subscription fees through IAP; (ii) restricting the ability of app developers to inform users of alternative purchasing possibilities outside of apps (for instance on the website of the app developer) which are usually cheaper. Additionally, the EC is also concerned about Apple getting access to valuable data about the activities and offers of its competitors.

The second investigation concerns integrating Apple Pay in merchant apps and websites on iPhones and iPads and reserving the Near Field Communication (NFC) functionality of iPhones to Apple Pay. Earlier, Pepper had filed a complaint against Apple in the US on similar grounds. More recently, Epic Games has contested the 30% fee that Apple and Google charge.

5. Analysis

5.1 Unfair and exploitative

Concerning the third allegation of mandating the use of Play Store’s payment system, the Informant alleged that the objective is to ensure that Google gets an opportunity to charge 30% commission from app providers, for paid app downloads as well as in-app purchases. As this 30% fee is not for the listing of apps (which is a separate one time 25 USD fee), the Informant claimed it is “one-sided, arbitrary and onerous”. If app developers bear this fee on their own, it will reduce resources available for further innovation. If this fee is instead passed on to users, it will result in increased cost for users.

Is charging a 30% commission per transaction fair?

At the core of the investigations against app stores, is one basic question: how Google and Apple should make money? This question can be answered by asking another question: is mandating a 30% per transaction fee the only way Google and Apple can act as intermediaries through their app store? I have the following concerns with charging a 30% commission per transaction.

a) The app store gatekeepers are tying their incentives to the popularity of the app. This revenue model seems lucrative for app stores as incentives far exceed the cost of intermediating distribution. It appears doubtful that the cost of intermediation for app stores increases significantly with the number of downloads for a particular app.

b) Apple and Google may argue that a blanket 30% fee reduces transaction cost, as app stores do not have to negotiate terms with millions of apps. The same result can, however, be achieved through other business models such as a one-time registration fee.

c) It allows app stores to prize squeeze competitors in verticals.

Revenue models of digital gatekeepers in antitrust crosshairs

This is not the first time that the revenue model of a gatekeeper in the digital economy will invite scrutiny. Several antitrust agencies have looked at the legality of “wide” and “narrow” Price Parity Clauses (or MFN clauses). While the dominant view suggests that “wide” parity clauses are illegal, opinion seems to be divided on “narrow” parity clauses that restrict a party (e.g. a hotel) to advertise prices on its own channels (both online and offline) that are less than the price for a product (hotel room) featured on a price comparison website (a hotel booking aggregator).

The German competition authority, the Bundeskartellamt, is critical of “narrow” parity clauses as among other reasons such restrictions allow aggregators to reap incentives that are greater than the risk they undertake (see pages 70-71 here). Indeed, Austria, Belgium and Italy have prohibited any kind of parity clauses altogether. Similarly, the restrictions imposed by app stores allow them profits that appear unjustified against their cost. In these circumstances, gatekeepers can be asked to opt for a more benign business model.

5.2 Exclusionary vis-à-vis competing UPI apps

In CCI’s view, the mandatory use of Google Pay by developers and users may result in the exclusion of other competing UPI apps. Although UPI apps are interoperable, at least for two reasons competitors of Google Pay appear to be at a disadvantage. First, while in principle it is possible to transact through other UPI apps, Google has allegedly made transacting through other UPI apps inconvenient. Likewise, in the EU, Apple has been accused of prohibiting competing payment apps from using the near field communications (NFC) technology that makes possible tap-and-go payments using one’s iPhone. Second, since transactions through UPI are still new and increasing, new users are compelled to download Google Pay. These new users are unlikely to switch to other UPI apps due to the status quo bias.

This theory of harm is tricky and hard to prove, as the restriction of choice is limited only to those users who are downloading or making an IAP. Consumers who are making Person-to-Person fund transfer and Person-to-Merchant payments are free to use (or new users are free to download) other UPI apps. This should, however, be seen in addition to the allegation of pre-installation, which can lead to leverage of Google’s dominant position in the market for licensable mobile OS into the market for UPI apps.

Even if there is a fear that Google may leverage its dominant position to monopolize the UPI app market, it should be assessed against the new NPCI guideline. Recently, the NPCI has capped the market share (by transaction volume) at 30% for any UPI app provider starting Jan 1, 2021.

5.3 Exclusionary vis-à-vis Google’s competitors in app vertical

A presumably high fee of 30% that Google’s competitors in verticals such as music streaming, e-books etc. pay has the potential to raise their cost in comparison to Google’s own apps and therefore can make them unviable. This is a classical ‘raising rivals’ cost scenario.

5.4 Access to competitors’ data

Mandatory use of Google Pay allows Google to access the commercially sensitive data of its competitors that can be used to improve its own services. It remains a strong possibility that a dual-role platform that also competes with its customers in a vertical can gain a significant advantage over its rivals by accessing their non-public data. Last week, the EC formed a preliminary view that Amazon might have abused its dominant position by using the non-public data of independent sellers who use its platform and compete directly with Amazon’s own retail business.  The Informant in the present case, however, will have to adduce evidence to show that Google has misused competitor’s data.

6. The path ahead for digital gatekeepers in India

The present case is the fifth case that the CCI is pursuing against Google. Considering the gatekeeper role that some big-tech firms have acquired, there are bound to be many more such cases against them. Fast-moving technology markets are characterized by network effects, economies of scale and scope, where the market often ‘tips’ before it is subjected to meaningful antitrust enforcement. Additionally, by now, it is clear that even below the level of dominant position, a digital entity can still acquire the role of gatekeeper and hence distort competition. For instance, the Furman Report advocates ex-ante regulation for those firms that hold ‘strategic market status’ –a position where these firms can exercise market power over a gateway or bottleneck in a digital market, where they control others’ market access. Against this backdrop, the EU is introducing a Digital Services Act package that among other provisions also sets out ex-ante rule for gatekeepers in digital markets. India, being one of the prominent stakeholders in digital markets, should follow suit and come up with ex-ante code of conduct for digital gatekeepers to complement its competition law framework.

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2 thoughts on “The Antitrust App Store Wars Come to India”

  1. Very lucid analysis Vikas. India must certainly follow suit, however, going by the Contents of the e-commerce policy published last year there needs to be greater understanding of the digital market, tech platforms and digital india initiatives.

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