Northeast states’ legislation targeting app stores would hurt consumers—and the developers it aims to support
It’s rare for Democratic state legislators in the Northeast to see eye-to-eye with Republicans in the heartland. But anything can happen in 2022, and if last year was any indicator, these two factions might be on the same policy page. In 2021, legislators from states including Arizona, North Dakota, Massachusetts, Rhode Island and more introduced bills that would mandate contract terms between Digital Application Distribution Platforms, commonly known as app stores, and the developers who populate the platforms with their products. In short, the proposed bills would force app stores to:
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allow apps to be downloaded from websites and sources other than the device’s given app store, a process known as “side-loading,” and
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allow app developers to collect payment for in-app purchases outside the app itself, thus avoiding the app store’s commissions and fees.
While legislators believed they were siding with small businesses and targeting perennial “Big Tech” corporations in the process, in actuality, the bills simply put the weight of state law in favor of some large tech corporations over other large tech corporations. Worse still, if similar legislation were to pass in 2022, it would be consumers’ security and convenience that would face the consequences. Legislators across the country and particularly in the Northeast should put consumers first by abandoning these projects in the upcoming legislative sessions.
The Specifics of 2021 Legislation in Northeast States
Last year, remarkably similar bills targeting app stores cropped up across the Northeast. In New York, Senate Bill S4822 would have prohibited app stores from demanding that all app downloads be done through a device’s app store if the app store’s total sales to New Yorkers exceed $10 million. In other words, the legislation would force app stores to allow side-loading of apps from third-party websites. The bill would also force app stores to allow customers to pay for their apps and any in-app purchases with payment processors outside of the app itself. For instance, to buy extra “coins” in an app-based game, developers could include a link that bypasses the app store and redirects the player to their company’s own website.
Nearly identical provisions were introduced in Massachusetts (H.140) and Rhode Island (H.6055). New Jersey introduced legislation in 2020 with the same two prohibitions, except instead of app stores qualifying for the regulations at $10 million in revenue, they put the floor at one million app store downloads. None of the bills were passed out of their respective committees in the Northeast, though similar legislation outside the region received more support. The Arizona legislation passed the state house by a slim margin with only Republican support, but it was pulled from the Senate just before a vote.
Impacts of App Store Interference
With these bills, legislators interfere in the private contracts between app stores and the developers whose products populate them. That is an abject contradiction of free market principles, but more to the point, it also has long-term negative consequences for consumers, especially consumers who value simplicity and security on their smartphones over customizability. First, the bills’ requirement to allow side-loading introduces the potential for malicious software and viruses to be downloaded, impacting the functionality of the device and potentially exposing the consumer’s private information—such as finances and passwords—to hackers. The consumers who make up app stores’ target market are those prioritizing convenience and security with their devices. These consumers would almost certainly prefer going to one convenient, secure place to download apps, and not having to worry about accidentally downloading unofficial apps on websites that may contain viruses.
In addition to mandating the option of side-loading, the bills also prohibit requiring in-app payment processing, which would allow app developers to avoid the app store’s commission on downloads, subscriptions and in-app purchases. While many critics have pointed to the 30 percent commission on such purchases, it’s worth noting this commission reduces by half to 15 percent after the first year of subscription. Plus, in 2020, both Apple and Google Play reduced the commission to 15 percent from the outset if the developer earns less than $1 million in revenue annually. It is also important to point out the vast majority of apps are free. In the Apple App Store, 88.7 percent of apps are free to download; in Google Play, it’s even higher at 97 percent. Taken together, this means only a small fraction of app developers are paying any commission at all, and far fewer are paying a 30 percent commission.
Despite its small universe, the commission has critical uses. In addition to allowing app stores to provide security and maintenance to all its customers, there are particularly strong benefits for the small developers whom legislators are seeking to defend. There are high barriers to entry for small developers working to get their app in front of potential users—storage on a server, electricity and bandwidth, and marketing and distribution, to name a few. Rather than spending capital on these overhead costs only to distribute an inexpensive or even free app, small developers can instead transfer all those overhead costs to the app store. If the app is free, they don’t even pay a cent to the store. Every time a user downloads one of these free apps, the app store takes a loss on it, which they make up for with a commission on paid apps and subscription models. If legislators undermine this fundamental business model on which app stores are based, then we threaten to lose access to free apps as well—threatening not the large companies paying the commission, but rather the small developers who rely on it.
Although these proposed regulations are limited to a handful of states in the Northeast, their consequences would likely extend across the country, because adopting a patchwork of state-specific regulations for large national companies is essentially unworkable. In order to provide consistent services and avoid expensive legal consequences for any missteps, app stores may have to adopt the standards and practices of the most restrictive state. In effect, consumers in most states would likely experience burdensome regulations their own legislators did not enact, which is why these proposed policies may be unconstitutional and violate the interstate commerce clause.
App Store Regulation: A Lose-Lose for Companies and Consumers
Fundamentally, when two private companies enter a private contract, state legislators should not intervene, especially when the contract benefits consumers. While legislators claim to be weighing in on behalf of small developers, small developers do not pay app stores more than 15 percent in commission—if they pay anything at all—and they benefit most from the endorsement of admission into the app store. In reality, it is other large tech corporations who would benefit from the legislation, since their huge revenues mean they pay the larger commission, and they have the name recognition to be side-loaded. But surely legislators do not intend to side with some multi-million or billion-dollar corporations over others, particularly at the expense of what is best for consumers’ security and convenience. As 2022 legislative sessions kick off in the next few weeks, Northeast legislators should allow these debates to unfold in the market and in private contracts, not in state houses.
Image credit: Farknot Architect
