The individuals declined to say which states or how many have expressed interest, though some of the states are also involved in the antitrust probes into Google and Facebook.
Apple and the Justice Department declined to comment.
Apple’s troubles had previously been limited to the European Union, which in 2017 launched a tax probe that remains ongoing and more recently upped its scrutiny of Apple to include the two antitrust probes. In following the EU’s lead, U.S. antitrust cops are adding to CEO Tim Cook’s headaches, at a time when the coronavirus crisis has depressed Apple’s sales and forced many of its stores to close.
A U.S. antitrust investigation would pose a threat to the company’s second-biggest revenue chunk after the iPhone: the $46.2 billion services business, which includes App Store sales and subscription services like Apple Music and Apple TV+.
Reuters reported in February that the Justice Department had spoken to “a handful” of app developers including parental control app Mobicip, which filed a complaint with EU authorities last year. But the more recent discussions are the clearest sign to date that U.S. antitrust authorities may soon start gathering documents and other information needed for a full-fledged probe.
While Apple’s iOS smartphone operating system has historically been less dominant than Google’s Android, the trend is shifting. In September, Apple’s iOS accounted for about 47 percent of smartphones in the U.S., compared with 51 percent for Android, according to comScore. When tablets are included, Apple’s share jumps to 58 percent. For an antitrust suit, that growing dominance may be a key factor, said Gene Kimmelman, who worked in the DOJ’s Antitrust Division during the Obama administration.
“It’s one thing to structure your services in a restrictive way or use exclusive contracts when you’re small,” said Kimmelman, now a senior adviser at Public Knowledge. “But the bigger you become, the more dominant you become in a market, the more likely those types of restrictions — unless they are absolutely essential to benefit consumers — will be viewed skeptically as harmful to competition.”
Developers say Apple unfairly ties access to its App Store — the only way for them to reach customers who use iPhones and iPads — with its in-app payment system, which takes a 30 percent cut of most transactions. But the company has varying policies on which apps it requires to pay that 30 percent, which developers derogatorily call the “Apple tax.”
Companies that offer what the company considers physical goods and services — including e-commerce platforms like Amazon, delivery apps like GrubHub or Uber, and booking services like AirBnB — are exempt. Apple also absolves what it calls “reader apps” from using its in-app payments. That category includes apps for things like magazines, newspapers, music, video, VoIP providers and cloud storage.
Apple maintains that all other digital goods and services, including ones that compete with its own offerings, must use in-app purchase. The company also prohibits developers from telling customers they might pay less if they signed up directly.
Some companies like Amazon get around Apple’s restrictions by declining to sell digital goods like e-books through the app, and instead requires customers log onto the website on a desktop or mobile device for purchases. Other subscription-based services such as Spotify, Pandora or Netflix used to allow app sign-ups but only at a higher price that passed the 30 percent fee on to the customer. (Netflix and Spotify have since changed their policies and no longer allow new users to sign up via Apple’s apps.)
“In-app purchase is broken,” said Phillip Shoemaker, a former Apple executive who helped design and run the App Store from 2009 to 2016. “As Apple is entering into more and more of these areas and putting out of business more developers, they really have got to think differently.”
Consumers worldwide downloaded a record 204 billion apps on all platforms last year and spent roughly $120 billion, according to the app analytics firm App Annie. Globally, Apple’s iOS has a small share of the phone and tablet market, with 26 percent compared to the roughly 72 percent that run Google’s Android system. But the problem is more acute in the U.S., where the iPhone has grown in popularity over the past several years.
Microsoft President Brad Smith implicitly criticized Apple last week, saying the app stores of today are more dominant than the Windows maker was 20 years ago, when a Justice Department lawsuit accused it of being an illegal monopoly.
“I do believe the time has come … for a much more focused conversation about the nature of app stores,” Smith said during a POLITICO Live event. “They impose requirements that increasingly say there’s only one way to get onto our platform, and that is to go through the gate that we ourselves have created. In some cases, they create a very high price or toll.”
On Monday, Apple announced changes to its App Store intended to ease some concerns, including one that will allow developers to challenge the company’s guidelines for app approval in addition to reviews over individual apps. The company also said it won’t hold up updates that are simple bug fixes because of violations of the company App Store guidelines.
Apple declined to comment on what sparked its decision to change its rule or the process for challenging guidelines.
Swedish music streaming service Spotify has long been among the most vocal in opposing Apple’s App Store policies. The company was the first to file an official complaint with Europe’s primary competition authority, the European Commission, in March 2019.
“Apple intentionally designed a system rigged in their favor,” Spotify’s Chief Legal Officer Horacio Gutierrez told reporters last week after the EU announced its probe into the App Store. “Apple’s behavior is not an accident — they designed these rules to hurt us and other rivals to their advantage. There is no doubt that Spotify would be a more successful company today were it not for Apple’s conduct.”
Match Group, which owns dating platforms like OkCupid, Match.com and Tinder, has also criticized Apple’s App Store policies. (Tinder, the world’s most popular dating app, ranks second highest in consumer spending, according to App Annie.)
“We’re acutely aware of their power over us,” said Vidhya Murugesan, a Match spokesperson. “The reality is, ‘digital services’ are the only category of apps that have to pay the App Store fees.”
While Apple may be known for its privacy, critics say the iPhone-maker’s rules offer an incentive for developers to use business models that are less privacy friendly, such as offer a free app that makes money off targeted advertising. For example, Facebook and its dating app Facebook Dating pay nothing to Apple. By comparison, Tinder, Bumble and Grindr offer subscriptions but have to pony up a portion to Apple.
Developers also allege that Apple interprets its rules about in-app purchases arbitrarily, as exemplified by a dispute last week between the company and the Hey email service. Hey, created by the founders of the project management software firm Basecamp, is a paid email service that includes features like reply-later reminders, the ability to ignore group threads and screening to help weed out marketing and spam.
After initially approving the Hey app for iOS, Apple two days later rejected an update with bug fixes because the service didn’t offer in-app purchase, Basecamp and Hey co-founder David Heinemeier Hansson said in an interview with POLITICO.
“Apple is ruling on a case-by-case basis and changing enforcement willy-nilly because they can,” said Hansson, who is also a vocal critic of Apple’s rival Google and testified before the House Judiciary Committee earlier this year. “When you have a gatekeeper role like this they can do whatever they want.”
Hey and Apple reached a detente: Apple agreed to approve the app with bug fixes, and Hey on Monday introduced a new version that allows users a 14-day free trial. By Tuesday, a week after debuting the service, Hansson said Hey had 50,000 sign-ups, and 80 percent of customers were using the service on Apple products.
“We just need to be able to get onto the iPhone. It’s the dominant platform for these types of services,” Hansson told CNBC.
Developers who have spoken to U.S. authorities have raised concerns about other aspects of Apple’s App Store beyond just the price. Because customers sign up through Apple, the iPhone-maker controls both the data and customer relationship, several companies told POLITICO on condition of anonymity so as not to publicly criticize a business partner. That can lead to customer confusion about who is in charge of processing cancellations and refunds.
Customer satisfaction surveys show that users who sign up and deal with a company directly rate their happiness much higher than those who subscribe through Apple, one company who has complained in the U.S. and EU said.
Apple, which has made a name for itself as the tech company most concerned about user privacy, has also resisted when apps have sought to add user privacy protections, such as offering multi-factor authentication or requiring additional identification for subscriptions, they said.
Shoemaker, who left Apple in 2016, said he is frequently approached by developers whose apps were improperly rejected from the App Store and estimated he has helped at least 30 in the past year. He has also spoken to a number of cryptocurrency and cannabis companies — businesses that have had difficulty gaining access to the App Store — about creating a union to bargain with Apple.
“We need a critical mass to talk to get Apple to talk to us as equals,” said Shoemaker, now the executive director of Identity.com, a nonprofit focused on digital identity verification.
For Hansson, who wrote his first app for Apple’s App Store in 2012, the company’s attitude toward developers is ironic considering the value they have provided to the iPhone-maker.
“Apple has a monopoly in mobile operating systems because independent software developers built for the platform,” Hansson said. “We dug the moat for Apple’s gleaming castle. And now they want us to pay for the shovel.”