R Street Opposes Illinois Bill to Regulate App Stores
Testimony from:
Wayne Brough, Director of Technology and Innovation, R Street Institute
In OPPOSITION to Bill HB 4599, “Freedom to Subscribe Directly Act,”
February 16, 2022
House Cybersecurity, Data Analytics & IT Committee
Chairperson Robinson, Vice-Chairperson Gonzalez, Republican Spokesperson Wheeler and members of the House Cybersecurity, Data Analytics & IT Committee:
My name is Wayne Brough, and I am the program director for technology and innovation at the R Street Institute, which is a nonprofit, nonpartisan, public policy research organization. Our mission is to engage in policy research and outreach to promote free markets and limited, effective government in many areas, including the technology and innovation sector. That is why HB 4599 is of special interest to us.
We are concerned that HB 4599 has the potential to fundamentally reshape the market for applications downloaded to smartphones and other devices in ways that will harm both consumers and app developers. More specifically, the bill states that any digital application distribution platform (an app store) with cumulative downloads of one million or more in Illinois cannot require app developers domiciled in Illinois to use in-app payment systems for downloads or the purchase of digital or physical products. [1]
This legislation challenges perhaps the most widely used business model for the distribution and purchase of apps, such as the Google Play Store or the Apple AppStore. These platforms provide consumers a wide range of choices while offering developers an effective and trusted platform for selling their products. In fact, they facilitated the transition from cell phones to smart phones, providing tremendous value to consumers who rely on these devices for everything from email and finding directions, to watching videos and staying in touch with friends and family through social media platforms.
All of this has been made possible through easy access to applications that are quickly downloaded to a smartphone. Apple pioneered this approach through the creation of its App Store, which launched in 2008 with 500 apps. [2] Since that time, the number of apps available for purchase or download has increased to 2.2 million apps in Apple’s AppStore and 3.5 million apps in Google’s Play Store. [3] A large part of this growth is due to the app stores’ new strategies for selling software, which eliminated the need to go to a brick-and-mortar store or scour the web for applications. Direct downloads from the store are convenient, safe and secure.
App stores now provide consumers access to applications that can help them with virtually every aspect of their day. And given the standards established by the app store platforms, consumers can download with confidence. All apps are vetted in an effort to eliminate malware and minimize any cybersecurity threats. Just as importantly, app stores have created a secure payment system to avoid fraud and protect consumers’ financial privacy.
At the same time, the App Store offers even the smallest developers a global reach. In fact, the AppStore has a customer base of 1.5 billion users, with 500 million visits weekly. [4] It provides storage for apps and the technology to deliver the app to consumers. Coupled with quality and security measures, the app stores create an expansive global market that makes it easy to reach new customers. In exchange for these benefits, the app stores collect a service fee of 30 percent of sales revenue (this drops to 15 percent for annual follow-on sales) as well as a service fee on microtransactions within an app. [5] It should be noted that these fees only apply to apps that are sold; the thousands and thousands of free apps do not pay these charges. Importantly, these fees are agreed upon voluntarily; they are part of the private contracts entered into by app developers who choose to use a particular distribution platform.
Platforms such as the AppStore or Google Play provide far more than just a payment system. There are a host of benefits that developers would otherwise need to supply on their own. None of these are costless, and developers, like any business, choose the strategies that provide the greatest return. Yet HB 4599 would disrupt this ecosystem by allowing alternative payment systems that would allow developers to sidestep the fee sharing established by contracts with the distribution platforms. These changes may generate adverse impacts for both consumers and software developers. For example, consumers may face higher prices as the distribution platforms attempt to recover the costs of the services provided by the platform. Likewise, revenues lost to alternative payment mechanisms would require higher prices to provide the same level of service to those remaining in the system. Alternatively, the bundle of services provided by the distribution platforms could be reduced, pushing costs back to developers to provide the services themselves. Either way, such alternatives introduce inefficiencies into a market that has worked remarkably well for distributing applications to billions of consumers across the globe.
This raises another concern about HB 4599. Namely, the internet is inherently global in scope. As such, state level regulations can be problematic. Imposing myriad state level regulations on a business model that operates at a much larger scale will increase compliance costs while providing few, if any, benefits for consumers. Should there be concerns over the economic characteristics of distribution platforms, they are more appropriately addressed at the federal level.
For these reasons, we oppose HB 4599, “Freedom to Subscribe Directly Act.”
Thank you for your time.
Wayne Brough
Director, Technology and Innovation
R Street Institute
[email protected]
[1] Bill HB 4599, “Freedom to Subscribe Directly Act,” https://www.ilga.gov/legislation/fulltext.asp?DocName=&SessionId=110&GA=102&DocTypeId=HB&DocNum=4599&GAID=16&LegID=138396&SpecSess=&Session=.
[2] Mansoor Iqbal, “App Download Data (2022),” Business of Apps, Jan. 11, 2022. https://www.businessofapps.com/data/app-statistics.
[3] L. Ceci, “Number of Apps Available in Leading App Stores 2021,” Statista, Jan. 27, 2022. https://www.statista.com/statistics/276623/number-of-apps-available-in-leading-app-stores.
[4] “Overview,” Apple Developer, last accessed Feb. 27, 20201. https://developer.apple.com/app-store/features.
[5] Ian Carlos Campbell and Julia Alexander, “A Guide to Platform Fees,” The Verge, Sept. 22, 2020. https://www.theverge.com/21445923/platform-fees-apps-games-business-marketplace-apple-google.
