Like a bad penny, bad app store legislation keeps showing up
It’s déjà vu all over again.
The Arizona House Commerce Committee is expected to consider an amendment calling for new regulations on app stores, the digital online platforms where consumers go to purchase the apps that fuel their smartphones. However, this effort should raise some eyebrows.
The bill, HB 2200, that one lawmaker intends to amend is entirely unrelated to app stores, and the new proposed language is identical to that of HB 2662. Last week, the House Judiciary Committee rejected HB 2662, which is very similar to HB 2005 that died in the Senate last year. While this bad penny keeps showing up, it’s high time that legislators put this misguided legislation behind them.
A closer look at the legislation suggests this is not about protecting consumers; rather, it is an attempt by large corporate app developers to rewrite the contracts they originally signed with app stores that distribute their products. Such tactics are not surprising, but it is important to understand that this behavior is more aptly described as rent-seeking, where firms impose legislative mandates on their rivals to achieve what they failed to achieve in the marketplace.
In 2008, Apple launched its AppStore, the first online distribution platform connecting app developers to consumers. The store provided Apple users 500 applications that could be downloaded to their iPhones or tablets. This proved to be popular with both app developers and consumers, leading Google and others to create their own app stores. Today, there are more than 2.2 million apps in Apple’s AppStore, while the Google Play Store has 3.5 million apps to choose from. App stores have grown because they provide trust, ease of use and a wide selection of apps available for downloads. Other app stores exist as well, such as the Samsung app store that comes loaded on the company’s phones, or the gaming platforms that also allow downloads.
Yet the legislation is carefully crafted to affect only the two largest app stores: Google’s Play Store and Apple’s AppStore. In fact, gaming platforms are specifically excluded by language exempting “special-purpose digital application distribution platforms” from the proposed mandates. In fact, the legislation is part of a broader campaign, introduced in several states with the support of large, billion dollar companies attempting to legislate new terms of service with the major app stores. This includes, among others, Spotify, Epic Games and the Match Group, who are supporting legislation that would eliminate existing prohibitions on the use of outside payment systems for app store purchases. In effect, this would allow them to enjoy the benefits of the app store while sidestepping the fees associated with participating in the app store.
These fees come in the form of a commission charged by the app store on downloads and in-app purchases. For large app developers this commission is 30 percent, while it is only 15 percent for smaller developers. This applies only to apps that are purchased; apps that are downloaded for free do not pay a commission, and the vast bulk of downloads are free apps. These commissions are not unique and are a common business practice. However, proponents of legislation similar to HB 2662 often call this a “tax,” which ignores how app stores function and the benefits they provide to developers and consumers alike.
App stores were created to fill a void in the distribution and marketing of software applications. Prior to their existence, app developers needed to provide their own distribution channels, through download options, brick and mortar sales, or other channels. For small app developers, this could entail significant costs. App stores, on the other hand, offer a turnkey solution for app distribution that can reach millions of customers. Developers pay a nominal fee to join the app store and then pay the commission on sales of their applications. In exchange, app stores provide the tools to build apps for the platform, such as software development kits, application programming interfaces and compilers, as well as building, maintaining and enhancing the platform itself. At the same time, app stores test for malware and functionality to ensure apps can run safely and securely on smartphones, tablets and other products.
This, in turn, creates value for consumers as well, most importantly by creating a trusted source with access to a wide variety of applications. Knowing that an app will run correctly without risk is important to consumers and the app store distribution platforms create a trusted ecosystem. The popularity of app stores can be seen in the number of completed downloads. In 2020, global downloads totaled more than 218 billion apps.
Despite this popularity and efficiency, large corporate billion-dollar app developers are seeking changes that would fundamentally disrupt the current app store ecosystem. Legislation, like the language that the Commerce Committee will consider, basically scraps original contracts with app stores, replacing them with more favorable contracts mandated by legislation. These changes would disrupt the app store market, create artificial distinctions between app stores, and reduce incentives for further investment and innovation in existing app stores. It is always concerning when governments seek to intervene in a market where prices are falling, output is expanding and innovation is increasing.
The proposed amendment to HB 2200, just like HB 2662, is a questionable policy in search of a market failure that has yet to be found. Understanding what it would do and who it would benefit suggests that this is a quarrel among rivals that should be left to the market to resolve. Let’s hope Arizona lawmakers finally derail this legislation once and for all.
Image credit: Mirko Vitali