WSJ ran a piece analyzing Amazon’s tactics in defeating businesses that were first partners, but became rivals standing in the way of Amazon’s private labels. It got me to think about when behavior from big and established companies became unlawful and unacceptable and when the behavior just stemmed from the drive to be more competitive. To me, there are three different aspects to this issue: the launch of competitive products or services against smaller businesses, the price undercut and the downright bullying. Let’s look at them one by one
Big techs’ launch of services and products against smaller businesses
Critics of big techs often accuse them of antitrust behavior when the companies launch a feature similar to what other smaller businesses offer. As these big tech firms usually own the customer relationship and hence important distribution, they have a clear advantage in promoting and selling the feature than smaller competitors do with their main products. To be clear, I am NOT against giants taking advantage of the data generated from their popular platforms for several reasons:
If a company wants to launch something new that is a response to a market threat and can potentially benefit the end users, why should it not be allowed to?
Yes, platforms like Amazon or Apple have a huge advantage at their disposal: data on consumer behavior. But how is that different from getting marketing intelligence from somewhere else? The difference here is that these platforms own the data, but first they have to WORK to build these platforms and maintain them
Retailers have their own private labels all the time. It’s hardly a surprise that they observe brands that rent spaces on their premises and subsequently launch their own labels
Copying others is what almost every business does to some degree
For these reasons, I don’t think the launch of services like Apple Music itself is an antitrust behavior by Apple. Clearly, the advantages over Spotify are 1/ the app is pre-loaded and 2/ Apple owns the operating systems and customer relationship. Plus, it’s not like consumers can’t download Spotify on Apple’s devices. There is a bit more friction involved compared to the effortless experience with Apple Music, but that’s the price you have to pay for when relying on others. I wrote about Slack’s lawsuit against Microsoft before. In that piece, I argued that Microsoft, in all their Microsoft365 offerings, has at least one option that doesn’t bundle Teams. Moreover, as in the case of Apple against Spotify, companies are free to add Slack to their stack besides Office365. Surely, Slack has a lot more convincing to do as it has to persuade companies that the additional expense each month is worth the extra utility from Slack compared to Teams. Nonetheless, that’s the nature of the competition and I do think Microsoft is within its rights to bundle Teams the way it does.
In this sense, if Amazon wants to introduce a private label in a certain category, based on their data, they are within their rights. Plus, consumers have one more option at their disposal. I personally don’t see a problem with that. If I were Jeff Bezos, I would do the same and you would be hard-pressed to say you’d do it differently.
Zappos, the online shoe marketplace, and its late CEO Tony Hsieh, successfully outmaneuvered Amazon and beat them into submission in the form of an acquisition that allowed Tony and his company a degree of autonomy from the parent company. In the book “The Innovation Stack“, the founder of Square talked about the pressure from Amazon in Square’s early days. Although much smaller than the Seattle-based company, Square managed to beat Amazon with their superior products and services. Why am I mentioning these examples? They serve as a reminder that small businesses can defeat much bigger resource-rich competitors.
Predatory Pricing
From the WSJ piece:
In a June 2010 email chain that included Mr. Bezos, a senior executive laid out tactics, saying âWe have already initiated a more aggressive âplan to winâ against diapers.com in the diaper/baby space,â a plan that included doubling Amazon’s discounts on diapers and baby wipes to 30% off, and a free Prime program for new moms.
When Amazon cut diaper prices by 30%, Quidsi executives were shocked and ran an analysis that determined Amazon was losing $7 for every box of diapers, former Quidsi board members said. Senior Quidsi executives were even more surprised when, the day of the price cuts, Jeff Blackburn, a top lieutenant to Mr. Bezos, approached a Quidsi board member saying the company should sell itself to Amazon, said a person familiar with the matter. At that point, Quidsi wasnât for sale and had big growth plans.
Quidsi started to unravel after Amazonâs price cuts, said Leonard Lodish, a Quidsi board member at the time, missing its internal monthly projections for the first time since 2005. The company felt it had no choice but to sell itself because it couldnât compete with what Amazon was doing and survive. Amazon bought Quidsi in 2010 for about $500 million. It shut down Diapers.com in 2017, saying it was unprofitable.
âWhat Amazon did was against the law. They were selling diapers for below cost,â said Mr. Lodish. âBut what were we going to do? Sue Amazon for antitrust? It would take years and tens of millions of dollars and weâd be bankrupt by then.â
When it comes to predatory pricing, it’s a bit more complicated. First of all, to many consumers, a giant like Amazon bullying a smaller rival like Diapers.com looks very distasteful, but to the FTC, it may not necessarily be illegal. Here is what the FTC currently says about predatory pricing
Pricing below your competitors isn’t unique. What could get Amazon into legal trouble is whether it is establishing a monopoly in, as in this case, the diapers market and harming the consumers by raising the prices after eliminating competitors. Apparently, that hasn’t been the case. Last time I checked, there are more than one diaper brand on Amazon’s website and on the market in general. Plus, pricing is just one part of the value propositions a company can offer to consumers. Most car companies in the world will have a lower price than Ferrari, but the Italian company is still one of the most luxurious brands in the world and its customers still crave for its cars every year. It’s true that in some categories, prices are the dominant feature, but it’s NOT the only reason why consumers make the purchase decision.
Furthermore, one can argue that Apple Music, because it is owned by Apple, isn’t subject to the 15%/30% commission that 3rd-party app like Spotify is. Said another way, Spotify has to raise its prices to maintain its margin and as a result, make itself less competitive than Apple Music. That may be true, but once again, because there are alternatives to Apple Music on Apple devices such as YouTube, Amazon, SoundCloud and Spotify itself and because Apple Music isn’t the cheapest of all, in the eyes of the FTC, it is not illegal.
Where it gets unacceptable
Again, from the WSJ article:
At its height about a decade ago, Pirate Trading LLC was selling more than $3.5 million a year of its Ravelli-brand camera tripodsâone of its bestselling productsâon Amazon, said owner Dalen Thomas.
In 2011, Amazon began launching its own versions of six of Pirate Tradingâs top-selling tripods under its AmazonBasics label, he said. Mr. Thomas ordered one of the Amazon tripods and found it had the same components and shared Pirate Tradingâs design. For its AmazonBasics products, Amazon used the same manufacturer that Pirate Trading had used.
Amazon priced one of its clone tripods below what Mr. Thomas paid his manufacturer to have Pirate Tradingâs version made, he said. He determined it would be cheaper to buy Amazonâs versions, repackage and resell them than to buy and sell them on the terms he had been getting; he decided not to do that.
Amazon suspended Pirate Trading camera tripod models that competed with the AmazonBasics versions repeatedly, Mr. Thomas said, alleging his tripods had authenticity issues. Amazon rarely suspended the tripod models that didnât compete with AmazonBasics versions, he said. In 2015, Amazon fully suspended all Ravelli products, he said, and his companyâs tripod business is now a fraction of the size it was. Mr. Thomas said he found being a seller on Amazon too risky and has largely pivoted to real-estate investing.
Several Amazon sellers said they have received notifications from Amazon, which has been battling fraud and fake goods on its platform, that say their products are used or counterfeit. Amazon suspends their selling accounts until they can prove that the products are legitimate, which can cause big sellers to lose tens of thousands of dollars each day, they said.
To turn their accounts back on, Amazon often requests that the sellers provide details on who manufactures their product along with invoices from the manufacturer so that Amazon can verify authenticity. Several sellers told the Journal they provided those details to Amazon to get their accounts reinstated, only for Amazon to introduce its own version of their products using the same manufacturer.
This is an example of under-handed and antitrust behavior that I think should be outlawed and punished. Here, Amazon used its authority and position to extract crucial information from other sellers and in turn, took advantage of the information to launch competing products. It’s one thing for Amazon to find out where sellers source their products on their own. It’s another for Amazon to leverage its position to do so. Worse, it disrupted Pirate Trading’s business repeatedly for unclear reasons and allegedly benefited its competing private label. This type of bullying behavior should be condemned and regulated.
In that sense, I don’t think it will be right for the likes of Apple to do the following to 3rd-party apps:
Make it hard for them to publish updates and features
Prevent them from being on the App Store without just cause
Extract proprietary information and use it against the 3rd-party apps
In short, it’s complicated and nuanced to determine whether a behavior from an established form should be punished and outlawed or whether it’s just the nature of business. My observation is that people usually jump into accusations and judgements too quickly, as well as collapse multiple issues into one. Regulations regarding antitrust in the future need to balance between letting companies, regardless of size, compete out of merits and making sure that bullying behavior is punished accordingly. That’s no small feat. That’s hard as you can by now imagine. But our society only advances when we make difficult accomplishments, doesn’t it?
Disclaimer: I own Apple, Microsoft, Spotify and Amazon stocks in my portfolio
Will you exchange privacy for some money every month? If yes, Amazon will pay you $10/month for 10 receipts of non-Amazon purchases through a service called Amazon Shopper Panel
Doordash is still the market leader in the meal delivery space with 49% market share in September 2020, according to SecondMeasure
A story on how Iceland managed to persuade teenagers to stay away from drinking & drugs
The percentage of 15- and 16-year-olds who had been drunk in the previous month plummeted from 42 percent in 1998 to 5 percent in 2016. The percentage who have ever used cannabis is down from 17 percent to 7 percent. Those smoking cigarettes every day fell from 23 percent to just 3 percent.
The 2nd stimulus package, if passed, is going to be an important event in our fight against Covid-19 and its implications. Both parties offered their own version of the package. The New York Times broke it down visually so that everybody can follow
More than 20 African countries have joined together to plant a giant wall of trees that will run across the continent to stop the spread of the Sahara Desert. The Great Green Wall of Africa will stretch for 7,000 kilometres, from coast to coast right across the continent. pic.twitter.com/WlpOuQeIYQ
With the opening of this cycle bridge "Jan Linzel Viaduct A4", the snelfietsroute (fast cycling route) between Ypenburg and the city center of DenHaag has been completed. And yes it has a small #cycling#roundabout.
Today, the long anticipated hearing by The House Subcommittee on Antitrust, Commercial, and Administrative Law which features Jeff Bezos, Tim Cook, Sundar Pichai and Mark Zuckerberg, the four powerful CEOs of big tech companies, took place. Suffice to say, I am not surprised at what transpired, but I am pretty disappointed. I don’t think that there is an objective or a desirable outcome from this hearing. While Democratic officials focused more on the issue at hand which concerns antitrust practices by these companies, their Republican colleagues, in particular Representative Matt Gaetz and Jim Jordan, were more interested in an entirely issue: alleged bias and censorship of conservative views on social media. Jim Jordan even compared Apple’s famous 1984 ads campaign to the so-called cancel culture almost 40 years later! Ranking Member Sensenbrenner even mistook Facebook with Twitter when he tried to question Mark Zuckerberg on Twitter’s decision to temporarily suspect Don Jr’s account. You don’t need to spend time on the hearing, but you can get some idea on the quality of this event based on those incidents.
Notwithstanding the difference in pointed questions, every lawmaker in this hearing did more grandstanding than listening. The 5-minute rule is there to ensure that every lawmaker has a chance to ask questions and that witnesses don’t digress. However, the rule’s side effect is that lawmakers don’t wait for witnesses to answer. Instead, they push their own assumptions/allegations on witnesses or just restrict complicated matters to a “Yes/No” question. If this hearing is to uncover how these CEOs approach competition, why is it that they weren’t allowed to talk more and elaborate?
The format of the hearing needs to change in order to yield results. I have a few thoughts in mind on what can be implemented:
Every question at a hearing should stick to a topic. Anyone who violates this rule twice should be kicked out of a hearing. For example, Jim Jordan today didn’t ask questions on anti-competition. He threw allegations towards the witnesses on alleged bias to conservatives. So did several other GOPs. How do those questions belong to the Antitrust conversation at hand?
Every lawmaker should have 5-10 minutes, but there should only 5-10 questions allowed. A limit on the number of questions can help ensure the quality of questions, give witnesses more time to elaborate and reduce grandstanding. Many issues are complicated and take some explanations.
Before a hearing, questions should be compiled in advance on a portal/website and witnesses must answer in writing before appearing in front of lawmakers. Written answers offer witnesses space and time to elaborate and remove the constraints of time. During hearings, lawmakers can just build off of the written answers submitted in advance.
Similarly, there should be a collection of follow-up questions that are answered after a hearing.
Not every acquisition of a competitor violates antitrust laws
Facebook and Google were grilled today on their previous acquisitions: Facebook on Instagram, WhatsApp and Google on DoubleClick. I was baffled by this line of question. Take Facebook’s acquisition of Instagram several years ago as an example.
When Facebook paid $1 billion to acquire Instagram in 2012, nobody could be 100% sure that it would be what it is today. At the time of the acquisition, Facebook was already a big player primed for its IPO and heavily invested while even though it was growing fast, Instagram had around 30 million users, generated no revenue and was valued at $500 million. The startup was struggling to grow its team and infrastructure. Joining Facebook did give Instagram benefits on the way to having more than 1 billion users, as the book No Filter noted below
âIt was the most dire server problem in company history. Instagram was now important enough to be mentioned in every press story about the meltdown, alongside Pinterest and Netflix. Coworkers, none of whom did that kind of engineering, sent ice cream to the office as support. Sweeney ate several scoops to try to make it through the night, though he accidentally fell asleep multiple times on his keyboard.â
âThe infrastructure wasnât the only problem bubbling up to an intensity the tiny team could barely handle. Spam was everywhere on Instagram. So was troubling and abusive user content, which the community team could no longer finish sifting through in its shiftsâand which was starting to appear in their nightmares. Frustration over the financials aside, selling to Facebook might give employees their lives back.â
Excerpt From: Sarah Frier. âNo Filter.â Apple Books.
âSystrom gave four reasons. First, he reiterated Zuckerbergâs argument: that Facebookâs stock value was likely to go up, so the value of the acquisition would grow over time. Second, heâd take a large competitor out of the picture. If Facebook took measures to copy Instagram or target the app directly, that would make it a lot more difficult to grow. Third, Instagram would benefit from Facebookâs entire operations infrastructure, not just data centers but also people who already knew how to do all the things Instagram would need to learn in the future.â
Excerpt From: Sarah Frier. âNo Filter.â Apple Books.
âSo that summer, Zuckerberg directed Javier Olivan, Facebookâs head of growth, to draw up a list of all the ways Instagram was supported by the Facebook app. And then he ordered the supporting tools turned off. Systrom again felt punished for Instagramâs success.
Instagram was also no longer allowed to run free promotions within the Facebook news feedâthe ones that told people to download the app because their Facebook friends were already there. That had always brought a steady stream of new users to Instagram.
Another of the new changes would actually mislead Facebook users in an attempt to prevent them from leaving for Instagram. In the past, every time an Instagram user posted with the option to share on Facebook, the photo on Facebook said it came from Instagram, with a link back to the app. Instagramâs analysis showed that between 6 and 8 percent of all original content on Facebook was cross-posted from Instagram. Often, the attribution would be a cue for people to comment on the photo where it was originally posted. But with the change mandated by the growth team, that attribution would disappear, and the photo would seem as if it had been posted to Facebook directly
Excerpt From: Sarah Frier. âNo Filter.â Apple Books.
Consolidations in the same industry always involve reduction of competition. The fact that Facebook is a giant company doesn’t make every single acquisition it made illegal or inappropriate. That’s why I don’t get folks are so upset about Facebook’s acquisition of Instagram. I think it’s safe to say that having Instagram at its current size benefits end users, entrepreneurs and small businesses. There is no guarantee that without Facebook, Instagram would have had the same achievement. It’s also worth noting that the FTC, at the time, approved this merger. As a result, why suddenly did this issue become trending again?
Using data to launch private labels isn’t illegal or bad in and of itself
One of the popular themes in this hearing is the use of data from other businesses by big tech companies to launch competing products. Amazon is accused of using data from startups that work with its investment arm and from sellers on its website to launch competing products. First of all, if Amazon violates any confidentiality term to gain illegal access to sensitive data, then yes they should be held accountable. However, I don’t think using aggregate data stemming from activities on its own website to launch private labels is inappropriate or illegal. What do you think Target, Walmart, Kroger or a litany of other retailers do? Where do you think they got intelligence before launching their own private labels? Here is the revenue share by private labels of retailers. The practice went back to several decade. So, why suddenly is it an issue?
% of Revenue from Private Label Goods (Store Brands)
Furthermore, even though Amazon has 35%-40% of the US eCommerce, it still has to compete with brick-and-mortar stores. Hence, if you account for physical stores and the whole US retail market, Amazon occupies only 6%, according to Ben Evans. It’s a bit of a Catch-22 situation for lawmakers. Focus on eCommerce alone and it’s not fair. Look at the whole retail segment and Amazon is likely off the hook as they have only 6% of market share. Imagine that as a successful business owner, you were told not to venture in a different segment, how would you feel? You’d probably say: “wait a minute, that’s unAmerican and against capitalism. Why aren’t I allowed to compete in another category just because I was successful in one?”
What I’d have a problem with is if Amazon abuses of its power to promote its private labels without merits. Specifically, if Amazon pushes its own labels which don’t have any positive reviews at all ahead of more established brands with a lot of reviews, then it’s problematic and not in the best interest of consumers. In that case, Amazon’d deserve scrutiny and criticisms.
App Store commissions
I’ll write about this issue in more details later, but here are a few basic points I want to bring up. Every company that plows resources properly into an operation earns the right to make money from such an operation. Even as one of the biggest and richest corporations in the world, Apple should be able to do that too. As a result, when Apple is responsible for manufacturing its own devices and creating the operating systems that include the App Store, Apple earns the right to monetize their effort. It’s unreasonable to expect Apple to run a charity out of the App Store. Whether the 30% or 15% commission is too high warrants a legit discussion, but I strongly disagree with folks who say Apple should just charge developers its cost of running the App Store.
While developers are important, they are just one side of the coin. The other side is Apple customers. Apple needs to ensure that the user experience on the App Store is as pleasant as possible. Otherwise, they wouldn’t sell as many devices and make as much money any more in the near future. That’s why they have guidelines on the App Store. It’s not reasonable to expect Apple let developers do whatever they want when Apple’s brand is on the line. In life, there is no free lunch. Developers shouldn’t expect to leverage Apple’s infrastructure and reach to customers without abiding by their rules. We all know the saying that goes “my house, my rules”, don’t we?
There is a legitimate concern over the inconsistency of Apple’s rule enforcement. The concern is amplified when it comes to select cases in which Apple has a conflict of interest with regard to its own apps. On that front, I do agree Apple should be held accountable and scrutinized by users, developers, media and the authorities.
In summary
The hearing is a waste of time for the most part, in my opinion. There are interesting discoveries revealed by the committee in the documents submitted by the companies; which you can find here, but the format of these hearings needs upgrading and the answers we got today from the CEOs weren’t that meaningful. I do believe that some of the anti-competition claims on big techs should be fleshed out more.
Disclaimer: I own Apple and Amazon stock in my personal portfolio
Slack filed an antitrust complaint against Microsoft over Teams to the EU. On the surface, I don’t think Slack is going to win the case, if the EU decides to formally launch an investigation. How Microsoft structures their Microsoft 365 offers does give customers a choice to include Teams or not, a counterpunch to the core of Slack’s complaint. I wrote my thoughts here
In investing, when truly exceptional opportunities present themselves, Charlie Munger said: use a shovel, not a teaspoon
Both strategies yield the same result: that foreign affiliate employment increased as a direct response to increasingly stringent restrictions on H-1B visas. This effect is driven on the extensive and intensive margins; firms were more likely to open foreign affiliates in new countries in response, and employment increased at existing foreign affiliates. The effect is strongest among R&D-intensive firms in industries where services could more easily be offshored. The effect was somewhat geographically concentrated: foreign affiliate employment increased both in countries like India and China with large quantities of high-skilled human capital and in countries like Canada with more relaxed high-skilled immigration policies and closer geographic proximity. These empirical results also are supported by interviews with US multinational firms and an immigration lawyer
Disclaimer: I own Microsoft stocks in my personal portfolio.
Today, Slack filed an antitrust complaint against Microsoft in the EU over Microsoft Teams. Here is what Slack says in their blog
The complaint details Microsoftâs illegal and anti-competitive practice of abusing its market dominance to extinguish competition in breach of European Union competition law. Microsoft has illegally tied its Teams product into its market-dominant Office productivity suite, force installing it for millions, blocking its removal, and hiding the true cost to enterprise customers.
Slack’s objective is to force Microsoft to unbundle Teams from Microsoft Office 365 and sell it as a separate feature. The company reportedly had been discussing legal matters concerning Teams with the US authority for a while (per WSJ), but just decided to launch a formal complaint today. Given what has happened between the EU and big tech companies, it’s not difficult to see why Slack lodged the complaint there. Last year, the EU fined Google almost 1.5 billion euros for abusive practices in online advertising. It is also looking into Apple’s antitrust behavior with App Store rules. In 2004, Microsoft was fined half a billion euros for bundling Windows Media Player into its Windows. Perhaps, Slack is banking on the fact that the precedent and the current events as of late will be favorable to them in this case.
When I read the main part of the complain above, I was a bit surprised. My company is a bank in a highly regulated industry. We use licensed Microsoft Office 365, yet Cisco Jabber, not Teams, is our chat and video application. I don’t have a lot of confidence in our IT department to think that they can go around Microsoft and remove Teams if it’s not allowed by the Seattle-based company. In fact, if you look at how Teams is marketed, you will see that there are options to customers. There are three ways to get Teams: Office 365 Enterprise, Microsoft 365 Business and Microsoft 365 Enterprise. I know it’s not the easiest thing in the world to differentiate between the three, but here are the plans
Figure 1 – Office 365 Enterprise. Source: Microsoft
Figure 2 – Microsoft 365 Business. Source: Microsoft
Figure 3 – Microsoft 365 Enterprise. Source: Microsoft
As you can see from the three figures above, customers have at least one option in each category that allows them to use Microsoft Office 365 without Teams. To be clear, the screenshots above do not capture all features under each plan. It’s plausible that the other features which are not shown can force businesses to choose plans that only come with Teams. As a result, there are two points I want to make:
On the surface, the claim that Teams is forced on customers doesn’t seem true. Customers do have a choice to use Teams or not.
If Microsoft uses some indirect tactics to force Teams on customers, the onus is on Slack to prove it. However, the fact that companies whose products compete with Microsoft’s such as Slack, Cisco, Zoom, AirTable or Tableau, just to name a few, have a market does seem to me that it’s entirely possible to use non-Microsoft applications in addition to the popular Microsoft Office.
From Microsoft’s side, the company issued this following statement:
We created Teams to combine the ability to collaborate with the ability to connect via video, because thatâs what people want. With COVID-19, the market has embraced Teams in record numbers while Slack suffered from its absence of video-conferencing. Weâre committed to offering customers not only the best of new innovation, but a wide variety of choice in how they purchase and use the product.
A big advantage that Microsoft has over Slack when selling a competing product is that the former, in most cases, already has an established relationship with customers through Microsoft Office and other products. To sign any customer, Slack has to cultivate the relationship from scratch. The task is even made more difficult when Slack has to convince potential customers to make additional investments, on top of what they already pay for Microsoft applications. Imagine if a company already pays from $5 to $35/month for every one of hundreds of employees to use Microsoft Office, in case Teams is included, there has to be a very good reason why it should incur more expenses to use Slack.
The last publicly revealed figures put Microsoft Teams and Slack at 75 million and 12 million daily active users, respectively. Microsoft revealed that in Q4 FY 2020, there were 69 organizations that had more than 100,000 users of Teams, up from 20 organizations in Q3 FY 2020. In the past, Slack insisted that Microsoft Teams isn’t a true competitor to their product; a claim that I found bewildering. It’s clear that Slack has a big problem at hand and the fact that they are formally complaining about Teams contradicts the previous claim.
I am all for competition as it benefits end users. If Microsoft deployed underhanded tactics during negotiations with companies and it’s not publicly known or if Slack can prove that the dizzying and head-scratching offerings by Microsoft indirectly force customers’ hands, by all means, I do think Microsoft should be held accountable. However, I am not convinced that it’s harmful to the end users that Microsoft can offer value through bundling and establish a direct relationship with customers more easily than Slack. Microsoft has to invest a lot of resources in building and maintaining a lot of other features, not just Teams.
The difference between the 2004 case and this, I suspect, is that Microsoft didn’t give users a choice whether they wanted to install Windows Media Player while they do with Teams, at least on the surface. My guess is that Slack’s complaint won’t go any far, but it’ll be interesting to see how this actually pans out.
What do you think about this complaint from Slack? Let me know in the comment. Have a good day and stay safe!
If you follow tech Twitter, you likely won’t miss one of the big stories today: Hey’s fight with Apple. Hey is a new email service developed by Basecamp and was launched a couple of days ago. Right now, the only way to use Hey is to get invited on its website and pay for a subscription. The app was rejected by Apple twice because there is no in-app purchase option through which users could pay to use the service and through which Apple could financially benefit by taking its standard 30% cut. Apple issued an ultimatum: comply with our rules or get removed from App Store, along with access to millions of people who own Apple device. There are a few issues at hand here, so I’ll go through it one by one.
Before we begin, a bit of disclaimer right upfront: I own Apple’s stock in my portfolio, but I don’t think I am too partial to the company here. You’ll be the judge.
So, what are the rules?
Here is what Apple says in their guidelines
3.1.1 In-App Purchase:
If you want to unlock features or functionality within your app, (by way of example: subscriptions, in-game currencies, game levels, access to premium content, or unlocking a full version), you must use in-app purchase. Apps may not use their own mechanisms to unlock content or functionality, such as license keys, augmented reality markers, QR codes, etc. Apps and their metadata may not include buttons, external links, or other calls to action that direct customers to purchasing mechanisms other than in-app purchase.
3.1.3(a) âReaderâ Apps:Â 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 classroom management apps), provided that you agree not to directly or indirectly target iOS users to use a purchasing method other than in-app purchase, and your general communications about other purchasing methods are not designed to discourage use of in-app purchase.
3.1.3(b) Multiplatform Services:Â Apps that operate across multiple platforms may allow users to access content, subscriptions, or features they have acquired in your app on other platforms or your web site, including consumable items in multiplatform games, provided those items are also available as in-app purchases within the app. You must not directly or indirectly target iOS users to use a purchasing method other than in-app purchase, and your general communications about other purchasing methods must not discourage use of in-app purchase.
I am not a lawyer, but based on the text above which was referred to by Apple in correspondence to Hey indicates that consumers can still use services from apps like Hey, even though they are not acquired in-app, provided that in-app purchase is an option and not discriminated by app creators. My understanding of the issue here is that, barring any unpublished behind-the-scene details, Apple wanted Hey to add in-app purchase, but the email service refused to.
Here is the communication between the two
Here's the rejection letter. I love how they frame their shakedown as "offer customers the option". Not a single mention of the fact that Apple will take 15-30% of our business through this. THIS IS ALL JUST FOR THE CONSUMER GOOD, YOU SEE. pic.twitter.com/rzQbsfCHvs
Clearly, when a consumer is presented with an option to buy goods or services in app, he or she will jump at it. Apple prohibits languages that discourage the use of in-app purchases. As a consequence, text such as “you can subscribe here, but it will help us more if you do on our website” will likely be banned. Because of those two factors, it’s understandable that Hey doesn’t want to have an in-app purchase. Most of the time, consumers will choose that option and Hey will have no choice, but to give Apple the commission. From Apple’s point of view, without forcing apps to include in-app purchase as an option, what app would voluntarily shoot itself in the foot and lose 30% of revenue? Also, it’s certainly not a good user experience to juggle back and forth between a website and an app, especially for new users that don’t subscribe yet to an app.
What I think is problematic are
The inconsistency in their handling that makes the rules look arbitrary and their enforcement look like an abuse of power
By making users, after downloading an app, go to a website to subscribe and then come back to use the app, Apple creates friction; which becomes problematic in the context of an app competing with Apple’s own service such as Spotify (which I will talk about later).
“Why do we have to pay while some others get a special treatment?”
One of the main arguments from the CTO of Basecamp is that there are other apps that get a special treatment from Apple and can bypass the rules on in-app purchases. Why is there such an inconsistent enforcement of the rules?
But this is preposterously false and inconsistent. The Basecamp app has been in the App Store for YEARS offering access to a subscription bought elsewhere. The store is FULL of apps doing just that. Even other email apps! A few examples we compiled: pic.twitter.com/MYC1KF1Xfr
This is indeed frustrating. I tried Fastmail and Spark on my phone. You have to pay for Fastmail on a browser first before you can log in on its mobile version. Spark app is available to use, but there is no in-app purchase option that I can find. The same applies to Netflix. While it’s not a fair comparison between Hey and a household name with bargaining power like Netflix, being treated differently than your peer email services is unfair and I can see why Hey folks are frustrated.
In fact, I think Hey did the exact same thing as those two email apps did. The app only has these screens
How is that different from the likes of Fastmail, Netflix or Spotify (I’ll talk about it later)? Yes, by not having an in-app purchase, Hey violated Apple’s verbatim guidelines, but since other apps and especially some offering the same service get exempted, you can’t help but feel for Hey for being singled out. Worse, Apple threatened to delete Hey app from the App Store
Apple told me that its actual mistake was approving the app in the first place, when it didn’t conform to its guidelines. Apple allows these kinds of client apps — where you can’t sign up, only sign in — for business services but not consumer products. That’s why Basecamp, which companies typically pay for, is allowed on the âApp Storeâ when Hey, which users pay for, isn’t. Anyone who purchased Hey from elsewhere could access it on iOS as usual, the company said, but the app must have a way for users to sign up and pay through Apple’s infrastructure. That’s how Apple supports and pays for its work on the platform.
I still don’t see why Hey isn’t allowed on the App Store when Netflix and Spotify should have most of their users as consumers. The inconsistency in enforcement of its own rules makes the rules arbitrary and the double down makes the company look like an outrageous bully.
Does Apple deserve to earn the 15-30% commission?
A lot of folks argue that there is no reason for Apple to generally take 15-30% commission from subscriptions and digital services sold through App Store. I tend to disagree on this. Without knowing the exact details, I still think there are expenses that go into maintaining and building the App Store. Somebody will have to review apps, keep the servers up, police content, fix bugs, authenticate payments and keep the marketplace secure. You don’t want an app that uses your data for reasons unknown to you without your consent, do you? You also want to feel that your credit cards are secured when making a payment on App Store, don’t you? None of those is born out of thin air. If Apple already invests in the App Store and makes it work well with Apple devices, why can’t they reap the fruits of their labor? While 30% commission may be too high; which is a legitimate argument, saying that Apple shouldn’t take commission at all is a bridge too far for me. Why shouldn’t they profit from their own investment? Wouldn’t you feel the same way if you were in their shoes?
Some may say that the App Store increases the value of Apple devices from which Apple already profit handsomely. Hence, the company shouldn’t be too greedy by profiting on developers. Well, maybe. But another argument is that Apple also invests a lot in designing and manufacturing their hardware. They deserve to profit from their own investment, whether it’s hardware or software. To answer the question whether Apple deserves the commission, my answer will be yes. How big that commission should be is another discussion.
In fact, Apple argued, in its response to Spotify, that the majority of apps on App Store don’t pay to Apple
If you look at this point objectively, you can see from Apple’s perspective, it makes sense to “ask” apps that use their secure payment method to contribute to the ecosystem. The problem stems in part from how Apple “asks”, as I mentioned above, and how their policy can be argued to favor its own services at the expense of others. Like Spotify…
There is a lot of bad blood between Apple and Spotify. The music streamer even created a website detailing their complaint on Apple’s unfair practices. One of the main complaints is that by forcing Spotify to have an in-app purchase option and, as a result, handing over 30% commission to Apple, Apple is abusing its power to make Spotify’s service uncompetitive compared to Apple Music.
There are two contrasting views through which you can look at this issue. On the one hand, if Apple gave Spotify a pass because one of Apple’s services competes with the Swedish company’s, 1) the argument seems arbitrary and weak, and 2) we’d go back to the point of inconsistent application of the rules.
On the other hand, does Apple commit anti-trust practice on Spotify? Well it depends. On Spotify iOS app, users can still log in with an existing account without having to pay anything, meaning that Apple will receive no revenue from Spotify
I logged in successfully, and when I tried to upgrade my plan, here was the screen
There is no option to upgrade in-app. The only instruction is to go to Spotify website. I am not sure if the change took place recently to placate regulators, but if this has been the case, existing users can still access Spotify and new users can choose to either go to pay for subscriptions on Spotify’s website or leave. Also, while the approved language (“please go to Spotify’s official website to learn more”) here doesn’t discourage any possible in-app purchase, normal users may not understand what is the issue here. They may as well just feel discouraged to have to go to a website, subscribe and go back to the mobile app. One can argue that this extra step creates friction for potential users to sign up and subscribe for Spotify, in contrast to the virtually frictionless experience with Apple Music, which is Spotify’s competitor. Another argument is that if Spotify wants to eliminate friction, it has to pay up; which hurts margin; or it has to increase prices; which hurts its competitiveness.
You can see both sides’ points in this argument.
Summary
With regard to Hey, Apple can technically enforce the rules which clearly state that there needs to be an in-app purchase option. It gets murky because they have applied their own rules so inconsistently that Hey can’t help but feel singled out for following the exact same companies that got an exemption from Apple. The double down feels like either Hey is unfairly targeted or Apple wants a payback for the PR attack that Hey caused on them. There is a sentiment that Hey knew the rules of the platform beforehand, and likely a possibility that things would come to this point. Yet, they chose to do this and piggyback on the current public narrative against tech giants’ anti-competition behavior for publicity gain and to strong-arm Apple. I don’t know for sure, but I can certainly see where such a sentiment comes from.
The price of taking advantage of a platform is that you have to follow the platform’s rules and be at its mercy. But if Apple decides to use its power in this case, it should give a better explanation as to the inconsistent application of its own rules and start being more consistent. Otherwise, it will create bad blood between itself and a key party that contributes so much to the ecosystem. Plus, well, that’s exactly the behavior of a bully. Exert power just because it can.
Regarding the “Apple Tax” on services that compete with Apple’s, I think it will be debated and decided in court. We can have many folks argue on each side’s behalf, but like other controversial issues, we likely won’t have a solution unless a court renders a decision.
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