Why Spotify and Epic Games are unhappy with Apple’s proposed EU App Store policies

Apple's app store policies have come under fire from developers in the past few years, which has even resulted in antitrust investigations in several countries including India.

Apple is facing a fresh wave of criticism from prominent app developers, including Spotify and Epic Games, over its proposed changes to the App Store policies in order to comply with the European Union's (EU) upcoming Digital Markets Act (DMA).

Spotify CEO Daniel Ek said in a post on X (formerly Twitter) that Apple's proposal is a "masterclass in distortion" and mocks the "spirit of the law and the lawmakers who wrote it" following which X owner Elon Musk joined the debate saying the move was "very concerning". Epic Games CEO Tim Sweeney also mentioned that the iPhone maker's plan is a "devious new instance of malicious compliance".

What are Apple's proposed changes?

On January 25, Apple announced a series of changes that will be implemented in iOS, Safari, and the App Store for users in the 27 EU countries, starting from March 2024.

These changes are part of the company's efforts to comply with EU's Digital Markets Act after it was designated as one of six “gatekeepers” companies along with Meta, Alphabet, Amazon, ByteDance, and Microsoft in September 2023.

The European Commission had also listed Apple's App Store, Safari and iOS operating system as "core platform services" that will have to comply with DMA's obligations by March 2024. Failure to comply would result in fines of up to 10 percent of the company's total worldwide turnover, which can go up to 20 percent in case of repeated infringement.

As part of these new changes, Apple will be allowing third-party app marketplaces on iOS. This includes enabling marketplace developers to install apps and manage updates on behalf of other developers from their dedicated marketplace app as well as providing new Application Programming Interface (APIs) and tools that enable developers to offer their iOS apps from these alternative app marketplaces.

Users will also be able to select a third party app marketplace as their default store on their device.

Users will be able to download third-party app marketplaces from external websites

Apps that are to be distributed through these alternative app marketplaces, however, will need to be notarised by Apple. The company said that this process will involve a combination of automated checks and human review to help ensure that apps are free of known malware, viruses, or other security threats.

The third-party app marketplaces will also have to be authorised by the iPhone maker, following which it will provide them access to new app marketplace frameworks and APIs that let them receive and retrieve notarised apps from Apple Developer Program members among other functionalities.

Developers can use Apple's new App Store Connect distribution tools to notify users of app updates. This suggests that the company will maintain some control over the app distribution process, citing the necessity to mitigate privacy and security risks posed to Apple users and their devices by these new options.

Apple also requires a €1,000,000 letter of credit from an “A-rated” financial institution (or equivalent by S&P, Fitch, or Moody’s) in order to open an alternative app store in the region.

Reduced commission, but with a catch

Apple is also making changes to its fee structure as part of the new business terms being introduced for app developers in the EU.

Developers looking to use the new capabilities of alternative distribution or payment processing must adopt these new business terms, the company said.

Under the new terms, iOS apps on the App Store will pay a 17 percent commission on the sale of digital goods and services, instead of the existing 30 percent commission. Apps that are part of the company's App Store Small Business Programmme (businesses that earn up to $1 million per year) or auto-renewing subscription purchases after the first year will pay a 10 percent commission.

Developers that choose to use Apple's payment processing system will have to shell out an additional 3 percent fee. Alternatively, they can use a payment service provider within their app or link users to their website to process payments for no additional fee to Apple.

Apple is also introducing a new type of fee called Core Technology Fee, that will apply for apps distributed both from the App Store and alternative app marketplaces. Developers will have to pay €0.50 for each first annual install per year after it crosses a threshold of 1 million installs, irrespective of the distribution channel. This will apply for developers even if they choose to not use Apple's App Store or payment systems in the region.

Apple claims that over 99 percent of developers will either “reduce or maintain the fees" they owe to the company under the new business terms and that “less than 1 percent” of developers would pay a core technology fee.

Developers can also choose to stay on Apple's existing terms, wherein it levies 30 percent commission on the sale of digital goods and services, with the fees reduced to 15 percent for participants for App Store Small Business Programmme.

Why are app developers criticising the move?

To be sure, Apple's App Store policies have come under fire from developers in the past few years, even resulting in antitrust investigations in several countries, including India.

However, the latest flashpoint in this battle appears to be the core technology fee that significantly impacts all the big app makers or those that are experiencing rapid growth.

Spotify, a long term critic of Apple App Store's business policies, termed this fee as "extortion" in an official blogpost, a move that will impact developers, potential startups and those offering free apps most.

"From our reading of Apple’s proposal, a developer would have to pay this fee even if a user downloaded the app, never used it and forgot to delete it," it said.

In a series of posts on X, Ek argued that Apple's move is a "masterclass in distortion," since it provides app developers a choice to stick to their current terms or switch to a "convoluted new model" that may initially look attractive on the surface but has potentially even higher fees.

He pointed out that any popular free app with tens or hundreds of millions EU users, now faces a tax on every download and update annually. "Imagine the impact on popular apps like WhatsApp, Duolingo, X, and Pinterest, all free to users, but now potentially incurring fees to the tune of tens to hundreds of millions of Euro," Ek said.

For example, as per Apple's fee calculator, a free app with 100 million annual app installs in the EU region will have to shell out nearly $4.5 million in monthly fee under the new business terms. This amounts to about $54 million per year. In comparison, the same app wouldn't need to pay this fee if it remains exclusively on Apple's App Store under the old business terms.

Apple's Core Technology Fee will apply for developers even if they choose not to use Apple's App Store or payment systems in the region.

"Apple's alternative is no alternative at all for some of the world's most popular apps. It just repackages the old terms and the 30 percent in-app purchases they want to protect," he added.

Without the presence of many popular apps, alternative app stores will lack appeal, thereby rendering the EU's efforts to foster digital market competition futile, Ek said.

He said that Spotify cannot afford these fees if they want to be a profitable company. "Our only option is to stick with the status quo. The very thing we’ve been fighting against for five years," Ek said.

"Spotify itself faces an untenable situation. With our EU Apple install base in the 100 million range, this new tax on downloads and updates could skyrocket our customer acquisition costs, potentially increasing them tenfold," he added.

David Heinemeier Hansson, the creator of Ruby on Rails and an outspoken critic of Apple's app store policies, also expressed a similar sentiment, saying that the Cupertino tech giant's new proposed core technology fee will discourage all big app developers from using alternative app marketplaces.

"At first glance, it could seem like Apple actually attempted some semblance of good faith compliance with the Digital Markets Act...But once you start peeling the onion, you realize it’s stuffed with poison pills so toxic you can scarcely believe Apple’s chutzpah," he said.

Sweeney said that Epic has always supported Apple's notarisation and malware scanning for apps but the Fortnite maker strongly rejects Apple "twisting this process to undermine competition and continue imposing Apple taxes on transactions they're not involved in". He also called out the company's new terms as "illegal anticompetitive scheme rife with new Junk Fees on downloads"

"Apple proposes that it can choose which stores are allowed to compete with their App Store. They could block Epic from launching the Epic Games Store and distributing Fortnite through it, for example, or block Microsoft, Valve, Good Old Games, or new entrants," he said in a post on X.

On January 26, Epic Games announced plans to launch its Epic Games Store on iOS in the EU later this year and also bring along its flagship game Fortnite to iOS users in these countries.

Rick VanMeter, Executive Director of the Coalition for App Fairness, an advocacy group that counts Epic Games, Spotify, Tile, Basecamp, and Match Group among its members, said that the tech giant's fees on direct downloads and payments violates the law.

"This plan does not achieve the DMA’s goal to increase competition and fairness in the digital market – it is not fair, reasonable, nor non-discriminatory," he said.

VanMeter argued that this is yet another attempt by Apple to circumvent regulation, similar to what has happened in the United States, the Netherlands and South Korea.

It is yet to be seen whether the European Commission approves these proposed changes from Apple. EU industry chief Thierry Breton told Reuters that they will assess the companies' proposals from March 7 and warned that if the "proposed solutions are not good enough, we will not hesitate to take strong action"

What about India?

Over the past year, Apple has taken various steps, including undertaking a significant expansion, to grow its presence in India. But, the company's overall market share in the country's smartphone market remains relatively small at an estimated 6 percent, as per industry estimates.

In December 2021, India's competition regulator initiated an investigation into Apple's business practices in the country. The Competition Commission of India (CCI) expressed the prima facie view that the tech giant had violated certain provisions of the Competition Act. In October 2023, CCI chairperson Ravneet Kaur said the investigation against Apple was still underway, according to multiple media reports.