EU says Apple’s 30% cut from rival music providers violates competition law

The European Commission today charged Apple with violating antitrust law, alleging that "it distorted competition in the music streaming market as it abused its dominant position for the distribution of music streaming apps through its App Store."

The EC sent a Statement of Objections to Apple reflecting its preliminary conclusion that Apple violated European Union competition law. This kicks off a legal process in which Apple will be able to respond in writing and request an oral hearing before a final judgment is made. The EC took today's action in response to a complaint from Spotify.

"If the case is pursued, the EU could demand concessions and potentially impose a fine of up to 10 percent of Apple's global turnover—as much as $27 billion, although it rarely levies the maximum penalty," according to Reuters.

The European regulatory body said it "takes issue with the mandatory use of Apple's own in-app purchase mechanism imposed on music streaming app developers to distribute their apps via Apple's App Store" and with Apple-imposed "restrictions on app developers preventing them from informing iPhone and iPad users of alternative, cheaper purchasing possibilities."

Rules harm Apple Music competitors

The commission said it found that "Apple has a dominant position in the market for the distribution of music streaming apps through its App Store" and that it abused its dominant position by imposing rules on music streaming apps that compete against the Apple Music service.

"Our concern is that Apple distorts competition in the music streaming market to the benefit of Apple's own music streaming service, Apple Music," said EC Executive VP Margrethe Vestager, who is in charge of competition policy. Vestager said that "Apple deprives users of cheaper music streaming choices" by "charging high commission fees on each transaction in the App store for rivals and by forbidding [third-party app developers] from informing their customers of alternative subscription options."

Meanwhile, "Apple Music is not subject to any of these rules and is offered at a price of typically 9.99 euros," Vestager said. "We are concerned that Apple's rules negatively impact its rivals by raising their costs, reducing their profit margins as well as their attractiveness on the Apple platform."

EC: Two Apple rules created unfair advantage

The EC said its concerns about Apple "relate to the combination" of two rules "impose[d] in its agreements with music streaming app developers," which the EC described as follows:

• The mandatory use of Apple's proprietary in-app purchase system ("IAP") for the distribution of paid digital content. Apple charges app developers a 30 percent commission fee on all subscriptions bought through the mandatory IAP. The commission's investigation showed that most streaming providers passed this fee on to end users by raising prices.
• "Anti-steering provisions" which limit the ability of app developers to inform users of alternative purchasing possibilities outside of apps. While Apple allows users to use music subscriptions purchased elsewhere, its rules prevent developers from informing users about such purchasing possibilities, which are usually cheaper. The commission is concerned that users of Apple devices pay significantly higher prices for their music subscription services or they are prevented from buying certain subscriptions directly in their apps.

The EC noted that a "sending of a Statement of Objections does not prejudge the outcome of an investigation." But if the allegations are confirmed, "this conduct would infringe Article 102 of the Treaty on the Functioning of the European Union (TFEU) that prohibits the abuse of a dominant market position," it said. Apple has 12 weeks to formally respond to the EC, but there is no legal deadline for when the case has to finish, so it's unclear how long it will take.

Apple will fight allegations

Apple, of course, disagrees with the EC and will fight the allegations.

"Spotify has become the largest music subscription service in the world, and we're proud for the role we played in that," Apple said in a statement it provided to Ars. "Spotify does not pay Apple any commission on over 99 percent of their subscribers, and only pays a 15 percent commission on those remaining subscribers that they acquired through the App Store."

Spotify sells $9.99-per-month subscriptions directly to customers on its website, and a user who buys a subscription directly through Spotify can use that subscription on Apple devices by signing into the Spotify app. Spotify used to offer subscriptions through its iOS app for $12.99 a month, accounting for Apple's cut, but stopped offering in-app purchases in 2016. A message in Spotify's iOS app currently tells customers, "You can't upgrade to Premium in the app. We know, it's not ideal."

Spotify pays Apple a 15 percent cut on subscriptions that customers started via in-app purchasing before Spotify disabled that capability. As Apple noted in a previous response to Spotify's allegations, the typical cut of 30 percent is "for the first year of an annual subscription," and "it drops to 15 percent in the years after."

Apple is standing firm on its rule that music apps on iOS can't tell customers about alternative methods of purchasing subscriptions.

"At the core of this case is Spotify's demand they should be able to advertise alternative deals on their iOS app, a practice that no store in the world allows," Apple said today. "Once again, they want all the benefits of the App Store but don't think they should have to pay anything for that. The commission's argument on Spotify's behalf is the opposite of fair competition."

Spotify founder and CEO Daniel Ek hailed the EC's decision. "Today is a big day. Fairness is the key to competition," he wrote on Twitter. "With the @EU_Commission Statement of Objections, we are one step closer to creating a level playing field, which is so important for the entire ecosystem of European developers."