ECONOMY

Google and Apple’s app stores hit by new South Korean law

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South Korea has become the first country in the world to attack the lucrative commissions charged by Google and Apple’s app stores, after passing a law that will let mobile phone users pay software developers directly for their apps.

Despite heavy lobbying by the tech giants, South Korea’s national assembly on Tuesday passed what became known as the “anti-Google bill” and it will become law once signed by President Moon Jae-in.

The law bans Google and Apple, as well as other app store operators, from requiring users to pay for apps with their own in-app purchasing systems.

It also bans app stores from delaying approvals from apps or “inappropriately” removing them from their app stores, and from insisting on exclusivity with app developers. If they fail to comply, app stores can be fined up to 3 per cent of their revenue in South Korea.

Apple and Google at present take a commission of up to 30 per cent on sales of digital goods through their app stores, and of in-app purchases, such as subscriptions.

The legislation is likely to be closely examined by other regulators around the world, as concerns grow about the monopolies on app distribution enjoyed by Apple and Google.

Tim Sweeney, chief of Epic Games, which is suing Google and Apple alleging anti-competitive behaviour, called the law’s passage a “major milestone in the 45-year history of personal computing”.

David Heinemeier Hansson, chief technology officer at Basecamp, called the bill “the first real, big crack in the monopoly app store dam”.

Hansson had played an instrumental role trying to pass similar legislation in Arizona and North Dakota, but to no avail. He said he was hopeful South Korea would be a catalyst for other countries to take action. “Korea is going to show that the world doesn’t fall, and all of Apple’s arguments will be refuted by reality,” he said.

South Korea’s regulation was triggered by Google’s announcement last year that it would make its payment system mandatory for non-gaming apps. The move sparked an outcry from software developers that alleged an abuse of market dominance.

App stores have become hugely profitable for Apple and Google, so any action by regulators worldwide to diminish their position as gatekeepers to the mobile-application economy could put a significant dent in their earnings.

Disclosures from a lawsuit against Google from several US attorneys-general, which were unsealed last weekend, show that the company collected $11.2bn in revenues and $7bn in operating income in 2019 from the Play Store, including in-app payment and advertising within the marketplace.

That suggests that the Play Store made up as much as 20 per cent of Alphabet’s income from operations in 2019, despite contributing less than 10 per cent of the Google parent’s overall revenues.

Bills pending in the EU and US Senate seek to clamp down on app store commissions, while Brussels and Washington have also brought antitrust enforcement actions against Apple and Google, respectively, over fees charged to app developers.

The South Korean law “will become an important precedent for the US and European countries as they increase their guard against Apple and Google,” said Wi Jong-hyun, a professor of business strategy at Chung-Ang University in Seoul. “Especially European countries, with their antipathy towards US tech companies, are likely to introduce similar bills or pressure them with this.”

The law was passed as Apple awaited a ruling in a landmark lawsuit against Epic Games, the maker of hit title Fortnite. The game was removed from the App Store after deliberately bypassing Apple’s payment system with a lower-priced alternative that gave no commission to the iPhone maker.

In the face of mounting legal and regulatory pressures over alleged anti-competitive behaviour, Apple last week relaxed restrictions in a way that would allow certain apps to advertise cheaper alternatives outside the in-app payment mechanism.

Google said this year that it would halve commissions to 15 per cent on the first $1m developers earn in revenue in a year via its app store. Apple has announced a similar move.

The Korea Mobile Internet Business Association estimated that sales of mobile apps and content in the country reached Won7.5tn ($6.4bn) last year and projected growth of more than 20 per cent in 2021. About 67 per cent of last year’s sales were handled via Google’s Android operating system, while 22 per cent were through Apple’s App Store.

Apple said last week that the bill would lead to fewer opportunities for local developers by hurting user trust in app store purchases. Google said that the Play Store’s “Service fee helps keep Android free, giving developers the tools and global platform to access billions of consumers around the world.” It added that it would “reflect on how to comply with the law [ . . . ] and share more in the coming weeks.”

Additional reporting by Patrick McGee in San Francisco and Tim Bradshaw in London

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