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Apple Goes on App Store Defense

By Evan Niu, CFA – May 29, 2019 at 9:10AM

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Meanwhile, a former employee speaks out.

Regulatory scrutiny of Apple's (AAPL 1.56%) App Store has been intensifying in recent months, in part due to a formal complaint by rival Spotify to European regulators earlier this year, which alleged that Apple engages in anticompetitive behavior. Dutch regulators have now opened an antitrust probe to investigate the allegations. The fundamental criticisms -- that Apple derives unfair advantages by competing on its own platform, while undercutting competition by taking a 15% to 30% cut of sales -- aren't exactly new.

Rather, the chorus of disgruntled third-party developers that compete with Apple has only grown louder over time. As Apple launches more and more services, the list of developers that become rivals is only going to grow, too. In a major legal blow earlier this month, the U.S. Supreme Court ruled that consumers can sue Apple for antitrust violations. The Mac maker is now going on the defense.

Examples of App Store cards showcasing different apps and content

Image source: Apple.

Just because competition exists doesn't mean it's fair

Apple has now put up a webpage about the "Principles and Practices" of the App Store in an effort to justify how it operates the digital storefront. The Cupertino tech giant notes that distributing apps exclusively through the App Store allows it to maintain high standards for privacy, security, and content. Regarding those aspects of mobile app distribution, Apple is worlds above Android and its Google Play store, where malicious malware apps are regularly discovered, undermining trust in the Alphabet subsidiary's mobile platform.

Apple also points to the massive app economy that it has helped create, having paid out a cumulative $120 billion to developers to date since opening the App Store's digital doors in 2008. There are now 20 million registered Apple developers, and the company says the app industry has created over 1.5 million jobs in the U.S. and around 1.6 million jobs in Europe.

"We believe competition makes everything better and results in the best apps for our customers," Apple says before pointing to numerous categories where third-party developers compete with Apple's own first-party apps. However, that oversimplifies the controversy.

There is no doubt that competition exists. The issue is how Apple competes with third-party developers and whether or not the playing field is level. Apple's apps and services enjoy deeper levels of integration throughout iOS, and third-party offerings typically cannot be made the default app for a particular function. Apple regularly violates various guidelines that third-party developers must abide by and isn't burdened with having to pay out 15% to 30% to a middleman.

Apple's "complete and unprecedented power"

Separately, Philip Shoemaker, the former head of App Store approvals, sat down with Bloomberg's Mark Gurman to discuss the controversy. Shoemaker was in charge of the team that reviewed and approved apps from 2009 to 2016, and he expressed concerns that Apple was indeed undermining competition. "There is now a conflict as Apple goes into these spaces that are ripe with competition," Shoemaker told the outlet. "I'm really worried about the competition."

Shoemaker had previously penned a Medium blog post in March after Spotify filed its complaint, making various policy suggestions on how Apple could address the criticisms. "With the App Store being the only way to install apps onto your iPhone and iPad, Apple has complete and unprecedented power over their customer's devices," Shoemaker wrote. "The decisions they make with regards to third party apps needs to be above reproach, and currently are not."

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of Apple and SPOT. The Motley Fool owns shares of and recommends GOOG, GOOGL, and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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