II took less more than four hours for the nine jurors to reach a verdict. On Dec. 11, in a San Francisco courthouse, they unanimously agreed that Google's app store was a monopoly and that the company had engaged in anticompetitive behavior. This decision is a blow to the search giant, which is at the same time embroiled in other legal battles. It could also redefine the economics of app stores.
Most smartphones run on one of two operating systems. I'm from AppleOperating system is a walled garden with only one app store: its own. Other device makers tend to use Google's Android, which, on paper, provides access to app stores other than the Google Play Store. The question was whether this was the case in practice. In 2020, Epic Games, a gaming studio, urged players to use its payment system to make purchases in “Fortnite,” its blockbuster shoot 'em up. The idea was to get around the 30% discount Apple and Google put on most in-app purchases in their app stores. “Fortnite” was briefly banned from both.
Epic continued. Its lawyers argued that Google stifled competition by striking deals with, among others, smartphone makers such as Samsung and LG, to give the Play Store a prime location on their devices in exchange for a cut of revenue. Jurors didn't buy Google's defense that it competes fiercely with Apple, as well as other app stores on Android devices.
So far, it's so simple. What makes the situation strange is that the verdict contradicts that of Epic's almost identical case against Apple. It ended in 2021 with Apple winning nine points out of ten (on the tenth, related to the use of alternative billing systems, it lost).
This difference may be explained by the fact that Google's fate was decided by a jury and not a judge. Public opinion is skeptical of big tech, which two-thirds of Americans view as having too much power. Jurors may also have difficulty understanding the nuances of antitrust laws. Another explanation is, ironically, that Google tried to make its mobile software too open. Anyone can use Android's open source code for free to create their own Operating system. In contrast, Apple's customers and developers know they control every aspect of the iPhone. Being locked into Apple's walled garden may be more acceptable if consumers know what they're getting into. This is less so if the limits are imposed solely by the manufacturer of the operating system, which it claims to be open.
The verdict could influence two other lawsuits against Google filed by the US Department of Justice. The first was brought to court in September. It focuses on Google's offerings to ensure it is the default search engine on various devices, including Apple's, and web browsers. Such arrangements cost it $26 billion in 2021. The second is expected to start next summer and concerns Google's advertising activities.
The judge in the Epic case will decide on a solution early next year. One possibility would be that app developers would be freed from Google's billing system. Last year, South Korea forced Apple and Google to allow alternative payments. THE EUThe country's new digital law contains similar provisions. This could make the app store economy more competitive, especially for games. Microsoft, which just completed its $69 billion acquisition of Activision-Blizzard, a major game developer, is considering creating its own app store for games. Epic already has one, for example PCs. Riot Games, a rival, could launch its own.
The tech giants don't like this at all. According to Sensor Tower, a research firm, people around the world will spend around $160 billion on apps this year. Commissions from Google and Apple represent perhaps 5% of each company's overall revenue. Operating margins for both app stores are said to be above 70%, according to testimony in both court cases. (Google argued in court that this figure did not take into account certain App Store costs, such as research and development.) This is much higher than the overall margins of 26% for Google and 30% for Apple last year.
Google is already seeing revenues from its Play Store decline, estimates Sensor Tower (see graph). Neither company will therefore give up without a fight. Google is challenging the jurors' decision in an appeals court, where a panel of judges will hear the case. Apple is appealing the payments decision in its Epic case. Both find ways to circumvent rules like those in South Korea, where they allow alternative billing methods and quickly impose a commission of up to 26% on any money paid using those methods. ■
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