Apple Inc. (AAPL) faces the prospect of having to eliminate various anticompetitive practices employed by its App Store in North Dakota, should a bill introduced recently in that state's senate become law. Any "digital application distribution platform" with more than $10 million in annual revenue would be subject to this legislation, the other leading platform being the Google Play Store from Alphabet Inc. (GOOG, GOOGL).

  • The North Dakota Senate is considering a bill targeting big app stores with over $10 million in annual revenues.
  • The Apple App Store and the Google Play Store are the main targets.
  • The bill would prohibit big app stores from demanding exclusivity as a requirement for selling through them.
  • If the bill passes, other states, and perhaps the U.S. Congress, may be encouraged to adopt similar legislation.

The Bill in Brief

The sponsor of the bill, State Senator Kyle Davison (Republican, Fargo), told a press conference that the standard 30% commission on sales charged to app developers by the Apple App Store and the Google Play Store has the effect of "raising prices and limiting choices for consumers." The bill is a model of brevity and clarity, stating that any "digital application distribution platform" that exceeds $10 million in annual revenue may not do any of these three things:

  1. "Require a developer to use a digital application distribution platform or digital transaction platform as the exclusive mode of distributing a digital product."
  2. "Require a developer to use an in-application payment system as the exclusive mode of accepting payment from a user to download a software application or purchase a digital or physical product through a software application."
  3. "Retaliate against a developer for choosing to use an alternative application store or in-application payment system."

Privately held Epic Games, Inc. already is locked in a legal battle against Apple and Google on just these matters, citing "anti-competitive restraints and monopolistic practices." Its popular game Fortnite was ejected from both the Apple App Store and the Google Play Store after Epic Games introduced its own payment processing tool to avoid the 30% commission charged by Apple and Google on in-app purchases. 

Apple's Response

In a hearing held by the Industry, Business and Labor Committee of the North Dakota Senate, Erik Neuenschwander, the chief privacy engineer at Apple, claimed that the bill "threatens to destroy iPhone as you know it" and that it would "undermine the privacy, security, safety, and performance that's built into iPhone by design." He added, "Simply put, we work hard to keep bad apps out of the App Store; [the bill] could require us to let them in."

A Small Developer's Testimony

David Heinemeier Hansson, chief technology officer (CTO) and co-founder of Basecamp, which he calls "a small internet company from Chicago that sells project-management software and email services," testified before the same committee, reading from prepared remarks. Key passages include:

"[F]ees upwards of 30% of revenue, applied selectively, and in many cases capriciously, put an enormous economic burden on many small software businesses ... [That,] paired with the constant uncertainty as to whether the next software update will be rejected, or held for ransom, can put entire businesses in jeopardy."

"[S]mall software developers from all over the country ... are tired of being bullied and shaken down by a handful of big tech monopolists out of Seattle and Silicon Valley."

"[W]hen it comes to the app store duopoly, no single change will have a greater impact than giving small software makers like us a choice when it comes to in-app payment systems, and protection from retaliation, if we refuse the onerous deal the monopolists are offering."

"It's simply obscene that a small software company that makes $1,000,000 dollars in revenue has to send a $300,000 check to Cupertino or Mountain View, rather than invest in growing their business, while Facebook [Inc. (FB)] makes billions off those same app stores without paying any cut of their revenues whatsoever."

Significance for Investors

The North Dakota bill only would affect the operations of app stores within that state. However, to comply with it, Apple and Google would be forced to implement substantial changes to their app store platforms that may affect their distribution of software nationally.

Moreover, passage of this bill may encourage other states, and perhaps the United States Congress, to adopt similar legislation that will crimp the profits of these platforms and possibly impose yet more compliance costs, especially if the legal requirements vary significantly by state.

In its 2021 notice of annual meeting and proxy statement, Apple indirectly acknowledged for the first time ever that potential antitrust action is becoming a growing risk for the company. Back in November 2020, Apple announced that it was cutting App Store commissions in half, to 15%, for smaller app developers who book less than $1 million in annual revenues from the App Store. This move clearly was intended to reduce some of the antitrust scrutiny and political heat directed against it.