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Epic Leaves a Big Crack in Apple’s Walled Garden

Epic Leaves a Big Crack in Apple’s Walled Garden

“I don’t know how you square all of that analysis, and all of the pro-competitive justifications Apple has for its closed ecosystem, with the judge then saying, ‘But I’m going to force Apple to permit competitors to put up signpost in Apple’s ecosystem,’” says Paul Swanson, an antitrust attorney in Denver. “I don’t see how those two things go together.”

Epic Games CEO Tim Sweeney might agree. In a pugnacious tweet Friday, Sweeney said, “Today’s ruling isn’t a win for developers or for consumers. Epic is fighting for fair competition among in-app payment methods and app stores for a billion consumers.” The Verge reports that Epic plans to appeal the verdict. (Epic Games did not respond to a request for comment.) Fortnite won’t be back on iOS until “Epic can offer in-app payment in fair competition with Apple in-app payment, passing along the savings to consumers,” Sweeney tweeted.

Games industry and antitrust experts say the ruling is impactful, but not surprising. “It was very much an uphill battle for Epic to win the case,” says Florian Ederer, associate professor of economics at the Yale School of Management. At the same time, he says, the ruling was foreshadowed by growing international scrutiny over Apple’s anti-steering provisions. In August, South Korean regulators approved a bill forcing Apple and Google, a defendant in another Epic-led case, to allow payment systems other than their own. Days later, Japan’s Fair Trade Commission closed its investigation into Apple’s App Store, determining that Apple must let so-called reader apps—which include the likes of Netflix, Spotify, and Amazon Kindle—encourage users to sign up, and potentially make payments, through those companies’ own websites. Rogers’ ruling could have a much bigger financial impact, however, because, as her opinion notes, the vast majority of App Store payments come from gaming apps.

Within 90 days, App Store developers will be able to circumvent the 30 percent commission by adding in-app buttons or links to their own websites with their own payment systems. “Developers aren’t going to get all of that—they’re not going to entirely circumvent that 30 percent,” says Ederer. “But that’s a big win for developers.” He theorizes that any more cash surplus could act as a developer incentive to help ship more products or maintain them for longer, even if some users choose to take the easy route and go through Apple’s in-app payment system.

More payment systems can bring confusion, the stated enemy of Apple’s streamline-obsessed enterprise. “In the long term, with the absence of a vertically integrated platform, you’re going to have lots of different payment providers trying to get your business,” says Joost van Dreunen, a New York University Stern School of Business lecturer and author of One Up, a book on the global games business. “They’re all going to be fighting on the margin. There will be a growing number of transactors and payment processors trying to get a piece.” That may confuse users accustomed to “click and go” or “swipe here, done” systems. And with new payment processing systems, users may feel there is less transparency and trust in an already opaque, complicated digital market.

While Epic Games won a major on-the-ground battle, Apple may have won its moral one: Apple can claim users are not trapped in its iOS ecosystem so much as inhabiting it. “Today the Court has affirmed what we’ve known all along: the App Store is not in violation of antitrust law,” an Apple spokesperson said in a statement. “Apple faces rigorous competition in every segment in which we do business, and we believe customers and developers choose us because our products and services are the best in the world.”

The ruling is another crack in Apple’s walled garden. “It’s starting to show some wear and tear,” van Dreunen says. “It’s not the pristine, impervious organization it thought it would be.” And if today’s ruling is indeed appealed, its fight isn’t over yet.

Additional reporting by Gilad Edelman.


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Tech Companies Wade Into Abortion Politics in Texas

Tech Companies Wade Into Abortion Politics in Texas

First came the statements from reproductive organizations. Then came the tech companies.

The day after the US Supreme Court decided not to block a law in Texas banning most abortions after six weeks, Dallas-based Match Group, which owns Tinder, OkCupid, and Hinge, sent a memo to its employees. “The company generally does not take political stands unless it is relevant to our business,” CEO Shar Dubey wrote. “But in this instance, I personally, as a woman in Texas, could not keep silent.” The company set up a fund to cover travel expenses for employees seeking care outside of Texas. Bumble, headquartered in Austin, set up a similar fund.

Senate Bill 8, which took effect last week, enables private citizens to sue anyone “aiding and abetting” an abortion, including providers, counselors, or even rideshare drivers providing transportation to a clinic. Uber and Lyft, which are based in California, said they would cover legal costs for drivers implicated by the law. “This law is incompatible with people’s basic rights to privacy, our community guidelines, the spirit of rideshare, and our values as a company,” Lyft wrote in a statement to drivers. The company also said it would donate $1 million to Planned Parenthood.

“We are deeply concerned about how this law will impact our employees in the state,” wrote Jeremy Stoppelman, the CEO of Yelp, which has some employees in Texas. Stoppelman had previously signed a 2019 open letter calling abortion bans “bad for business,” along with the CEOs of Twitter, Slack, Postmates, and Zoom.

Such overtures have become more common in recent years, particularly among prominent technology companies. Businesses in 2021 are required to have a point of view, it seems, and have used their platforms to advocate for policies on immigration, gay rights, and climate change. Last summer, in the wake of the Black Lives Matter protests, nearly every major tech company put out a statement denouncing racism and vowing to support anti-racist work. “To be silent is to be complicit,” the official Netflix account tweeted. (Speaking out has not shielded companies from criticism of their own records, particularly on diversity and inclusion.)

One could say that corporate opinions have become the norm, at least among a certain kind of company. Companies that have remained silent on SB 8—including a number of major Texas-based employers—have been criticized for not taking a stand. Hewlett-Packard, which moved its headquarters from Silicon Valley to Houston last year, encouraged employees “to engage in the political process where they live and work and make their voices heard through advocacy and at the voting booth.” Abortion rights have become one of the most divisive issues in the United States: Six in 10 Americans say it should be legal in all or most cases, according to a recent Pew survey; nearly 4 in 10 believe the opposite.

Few major companies have come out with full-throated praise of the Texas law, which is among the most restrictive in the country. (On Thursday, the Justice Department sued Texas to stop it.) When the head of Georgia-based video game company Tripwire Interactive tweeted in support of the Supreme Court’s decision, he was criticized by thousands online, including some of his own employees. He soon stepped down from his role; the company issued a statement apologizing and committing to fostering “a more positive environment.”

For a tech company, a strong stance on social issues can be an extension of its brand, and even a recruiting tool. One LinkedIn survey, from 2018, found that the majority of people would take a pay cut to work somewhere that aligned with their values.

Lina Khan’s Theory of the Facebook Antitrust Case Takes Shape

Lina Khan’s Theory of the Facebook Antitrust Case Takes Shape

When federal judge James Boasberg dismissed the Federal Trade Commission’s antitrust lawsuit against Facebook in June, he gave the agency pretty specific instructions on how to salvage it. The problem, he wrote in his opinion, was that the FTC hadn’t offered even the barest evidence that Facebook is a monopoly, beyond the vague claim that it “maintained a dominant share of the US personal social networking market (in excess of 60 percent).” As Boasberg noted, that inexplicably left some basic questions unanswered, such as: 60 percent of what? Who makes up the leftover 40 percent? It was a bit like accusing a driver of speeding without even mentioning the speed limit. 

To get back into court and advance to the next stage of litigation, the FTC would have to come back with something a lot more specific. That presented an interesting early assignment for Lina Khan, who was confirmed as commissioner of the agency a mere two weeks before Boasberg issued his ruling. (Facebook has sought to have Khan recused from the case on the basis of her public criticism of big tech companies before her current job, though experts see little chance of that succeeding.)

On Thursday, the FTC filed its revised complaint answering those previously unanswered questions. While it’s impossible to predict how a given judge will rule, the new material seems likely to satisfy Boasberg and keep the case alive. “To my eye, they’ve scratched Boasberg’s itch,” said Paul Swanson, an antitrust attorney in Denver. Facebook, he said, may not be able to avoid “a long slog of document productions and depositions.”

To prove that Facebook is a monopoly for legal purposes, the FTC doesn’t have to show that it’s literally the only social network. They have to show that it has “market power.” In a nutshell, having market power means you face so little competition that you can do things your customers don’t like without losing any business. It’s one of the main reasons antitrust law exists: When there isn’t enough competition, companies will stop trying to please their customers and start trying to squeeze them. Think about how frustrating it is when your internet provider raises prices and you realize no one else serves your neighborhood. That’s market power.

There are two ways to show market power: indirect evidence and direct evidence. Indirect evidence usually refers to dominant market share. (That might sound counterintuitive, but the reason it’s indirect is because being big on its own doesn’t prove a company is doing anything wrong—it just raises the strong possibility.) In its initial complaint, the FTC only offered indirect evidence, and very little of it: that feeble 60 percent statistic, which Boasberg ruled was inadequate. The revised complaint, on the other hand, goes into great detail on market share. Drawing on data from the analytics company Comscore—which, the complaint notes, Facebook itself relies on—the FTC argues that just about any way you slice it, Facebook controls a dominant chunk of the market for “personal social networking services.” According to the Comscore data, Facebook has accounted for more than 80 percent of time spent since 2011, at least 70 percent of daily active users, and at least 65 percent of monthly active users.

The new complaint also tightens up the FTC’s definition of the market itself, which is another crucial part of any monopolization case. You can’t prove a company has market power without explaining which market they have power in. According to the agency, the market for personal social networking services has three key attributes: First, a network has to be “built on a social graph that maps the connections between users and their friends, family, and other personal connections.” Second, it has to have features for users to interact with each other in a “shared social space,” like a news feed or group. Third, it has to allow users to look each other up. (Think about how you can search for someone by name on Facebook, but not in iMessage.)

A New Antitrust Case Cuts to the Core of Amazon’s Identity

A New Antitrust Case Cuts to the Core of Amazon’s Identity

“I founded Amazon 26 years ago with the long-term mission of making it Earth’s most customer-centric company,” Jeff Bezos testified before the House Antitrust Subcommittee last summer. “Not every business takes this customer-first approach, but we do, and it’s our greatest strength.”

Bezos’ obsession with customer satisfaction is at the center of Amazon’s self-mythology. Every move the company makes, in this account, is designed with only one goal in mind: making the customer happy. If Amazon has become an economic juggernaut, the king of ecommerce, that’s not because of any unfair practices or sharp elbows; it’s simply because customers love it so much.

The antitrust lawsuit filed against Amazon on Tuesday directly challenges that narrative. The suit, brought by Karl Racine, the Washington, DC, attorney general, focuses on Amazon’s use of a so-called most-favored-nation clause in its contracts with third-party sellers, who account for most of the sales volume on Amazon. A most-favored-nation clause requires sellers not to offer their products at a lower price on any other website, even their own. According to the lawsuit, this harms consumers by artificially inflating prices across the entire internet, while preventing other ecommerce sites from competing against Amazon on price. “I filed this antitrust lawsuit to put an end to Amazon’s ability to control prices across the online retail market,” Racine said in a press conference announcing the case.

For a long time, Amazon openly did what DC is alleging; its “price parity provision” explicitly restricted third-party sellers from offering lower prices on other sites. It stopped in Europe in 2013, after competition authorities in the UK and Germany began investigating it. In the US, however, the provision lasted longer, until Senator Richard Blumenthal wrote a letter to antitrust agencies in 2018 suggesting Amazon was violating antitrust law. A few months later, in early 2019, Amazon dropped price parity.

But that wasn’t the end of the story. The DC lawsuit alleges that Amazon simply substituted a new policy that uses different language to accomplish the same result as the old rule. Amazon’s Marketplace Fair Pricing Policy informs third-party sellers that they can be punished or suspended for a variety of offenses, including “setting a price on a product or service that is significantly higher than recent prices offered on or off Amazon.” This rule can protect consumers when used to prevent price-gouging for scarce products, as happened with face masks in the early days of the pandemic. But it can also be used to inflate prices for items that sellers would prefer to offer more cheaply. The key phrase is “off Amazon. In other words, Amazon reserves the right to cut off sellers if they list their products more cheaply on another website—just as it did under the old price parity provision. According to the final report filed by the House Antitrust Subcommittee last year, based on testimony from third-party sellers, the new policy “has the same effect of blocking sellers from offering lower prices to consumers on other retail sites.”

The main form that this price discipline takes, according to sellers who have spoken out against Amazon either publicly or in anonymous testimony, is through manipulating access to the Buy Box—those Add to Cart and Buy Now buttons at the top right of an Amazon product listing. When you go to buy something, there are often many sellers trying to make the sale. Only one can “win the Buy Box,” meaning they’re the one who gets the sale when you click one of those buttons. Because most customers don’t scroll down to see what other sellers are offering a product, winning the Buy Box is crucial for anyone trying to make a living by selling on Amazon. As James Thomson, a former Amazon employee and a partner at Buy Box Experts, a brand consultancy for Amazon sellers, told me in 2019, “If you can’t earn the Buy Box, for all intents and purposes, you’re not going to earn the sale.”

Jason Boyce, another longtime Amazon seller turned consultant, explained to me how this works. He and his partners were excited when the last third-party seller contract they signed with Amazon, to sell sporting goods on the site, didn’t include the price parity provision. “We thought, ‘This is great! We can offer discounts on Walmart, and Sears, and wherever else,’” he said. But then something odd happened. Boyce (who spoke with House investigators as part of the antitrust inquiry) noticed that once his company lowered prices on other sites, sales on Amazon started tanking. “We went to the listing, and the Add to Cart button was gone, the Buy Now button was gone. Instead, there was a gray box labeled ‘See All Buying Options.’ You could still buy the product, but it was an extra click. Now, an extra click on Amazon is an eternity—they’re all about immediate gratification.” Moreover, his company’s ad spending plummeted, which he realized was because Amazon doesn’t show users ads for products without a Buy Box. “So what did we do? We went back and raised our prices everywhere else, and within 24 hours everything came back. Traffic improved, clicks improved, and sales came back.”