Analysis: Apple vs Spotify

Frank Lenk

Published: 03/19/2019 01:21:07 PM EST in Sound

Analysis: Apple vs Spotify

Apple and music-streaming service Spotify are embroiled in a dispute that could have a major impact on the online service landscape.

At the core of the dispute is the way that owners of dominant platforms, like Apple, treat other vendors who wish to sell products and services on that platform. In this case, Spotify is selling its music straming service in the Apple App Store, but feels that Apple is giving its competing Apple Music preferential treatment.

As in most such battles, there are no easy answers. But there are lots of interesting questions.

Claim and Counterclaim

Spotify kicked things off by filing a complaint against Apple with the European Commission (EC). It contends that Apple's pricing rules in the App Store "purposely limit choice and stifle innovation at the expense of the user experience," and that Apple is "essentially acting as both a player and referee to deliberately disadvantage other app developers."

The problem, says Spotify, is that "Apple is both the owner of the iOS platform and the App Store-and a competitor to services like Spotify." It is also "the gateway to the Internet" for "over a billion people around the world," giving it an unusual amount of clout.

It is no secret that sellers of apps in the App Store pay Apple a 30% commission. The problem comes in when the app is essentially just a front end to a paid service, such as Spotify's Premium tier. For subscribers who join through Apple's In-App Purchase (IAP) system, that commission applies per month, effectively raising the cost of the service from €9.99 monthly, to €12.99. Apple notes that the commission drops to 15% after the first year, which would then bring the cost down to €11.50 per month.

Launched in 2015, Apple Music is in the same store, and also offers a €9.99 monthly subscription. However, regardless of bookkeeping details, any commission clearly stays in Apple's pocket.

That's the starting point. But the details stretch on. For example, Spotify states that services such as Uber and Deliveroo do not pay a commission on their IAP sales. Apple counters that it takes no commission on sales of "physical goods" - which, oddly enough, do include "ride hailing." Spotify also states that Apple has forbidden it from offering upgrades to its paid Premium tier in the Spotify app, or even from directing users of the app to other purchasing alternatives, such as Spotify's own Web site.

For it's part, Apple notes that the App Store "has helped create many millions of jobs" and "generated more than US$120 billion for developers." It says that Spotify has used the App Store "to dramatically grow their business," and now "seeks to keep all the benefits" of that ecosystem "without making any contributions to that marketplace."

Unfortunately, Apple does not directly address fundamental questions. For starters: while it may be fine for Apple to take 30% of an app's purchase price, is it okay for it to take 30% (or 15%) of a monthly service subscription - in perpetuity? Is it okay for Apple, as owner of a dominant retail platform, to prohibit vendors from running promotions that lead outside of that platform? And, finally: is it okay (or even wise) for Apple to compete with a service that sells on its app platform, while imposing a pricing structure that just happens to give its own service a sizable cost advantage?

All the claims and counter-claims are difficult to sort out. Spotify claims that Apple music sends "the very type of promotional push notifications that it forbids its rivals to send." And it says that Apple has prohibited Spotify from recommending its podcasts to users.

Apple, meanwhile, points out that Spotify's free, ad-supported app "makes no contribution to the App Store," since no commission is charged on free apps. (According to Apple, these constitute 89% of the apps in the App Store.) Apple adds that "the majority of customers" use Spotify's free service. That may be technically true, but the New York Times reported in 2017 that of Spotify's 140 million "regular users," fully 50 million paid for Premium plans - not an insignificant percentage.

Historical Record

On balance, most observers would probably agree that Apple has a right to charge Spotify something for selling its app and/or service in the App Store. But it is less obvious whether Apple has a legal (or moral) right to charge Spotify customers a hefty perpetual commission on a service they merely signed up for through the App Store, and which Apple has no further role in providing. Perhaps Spotify would be mollified if the rate were lowered, or if Apple limited its commission to some reasonable one-time signup charge? There is always room for compromise.

Even then, one point would remain contentious: whether Apple steps over some sort of line by competing with vendors in its own App Store, especially while imposing rules on them that could conceivably give it an unfair advantage. An EC ruling on this question could have wider ramifications, on how online stores operate - since pretty much every store operator (Google, Amazon, Microsoft, Valve) does in fact sell products that compete to some extent with those of its client vendors - though rarely in such a direct conflict as we see between Apple Music and Spotify.

We do know that in the past the EC has not been shy about making harsh judgments. In 2004, it slapped Microsoft with a US$600 million fine and required the company to offer a version of Windows with no bundled media player, creating more of a level playing field for competitors such as Real Networks and, ironically, Apple's Quicktime.

In 2008, the EC fined Microsoft another €900 million, for imposing excessive royalty fees on essential Windows documentation. And in 2013, it fined Microsoft still another €560 million, for failing to comply with a previous ruling to give users an easier choice of Web browsers.

In 2009, the EC fined Intel over €1 billion, for giving manufacturers rebates based on their promise to buy only Intel CPUs, and for making direct payments to a major retailer as an inducement to stock only Intel-based computers.

Finally, though not related to anti-competitive practices, it's worth noting that the EC hit Apple with a bill for €13 billion in 2016, finding that the company had used Irish tax benefits to reduce its effective tax rate from 1% in 2003 to 0.005% in 2014.

None of these precedents make the results of the current Spotify v Apple bout easier to predict. But they do show that the EC is unlikely to show much sympathy for a huge US corporation such as Apple. Of course, by the same token, one might hope that it would not place undue importance on the fact that Spotify is based in Sweden, which joined the EU in 1995.

Article Tags:  Apple, Spotify, European Union, European Commission, Intel, Microsoft, streaming, music


Analysis: Apple vs Spotify

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