FRAND access to app stores

The Digital Markets Act requires gatekeepers to grant access on fair, reasonable and non-discriminatory (FRAND) terms. In this article, Jorge Padilla, Kadambari Prasad, and Andrew Tuffin [1] present a conceptual framework for assessing whether app store commissions are FRAND, and use it to disentangle the sources of value exchanged between app developers and the gatekeepers of app stores. They argue that truly FRAND prices must: first, reflect only the value of the services offered, not the value of access to the market itself; and second, reflect the benefit to the gatekeeper of providing an app store. Therefore, the FRAND price should be no higher than the gatekeepers’ costs, although it can be lower. This is because, fifteen years after app stores emerged and network effects “tipped the market”, any rationale that gatekeepers must leverage network effects to reward “first mover” innovation no longer holds. Further, the services now offered by app stores likely provide no incremental value beyond the quality of service that rivals in a competitive market, not insulated by network effects would now provide. Finally, the price may be lower than gatekeepers’ costs, even negative, to the extent that providing an app store enhances the value gatekeepers receive from their ecosystem of associated products and services.

Introduction

FRAND obligations arise in many sectors. They apply where negotiation alone cannot guarantee competitive prices, which may otherwise be unreasonably high – or, in some cases, too low. Classic examples are the licensing of standard-essential patents (SEPs) and access to telecoms infrastructure.[2]

FRAND has also become relevant in digital markets. It is a key feature of the DMA – and extends into other areas of antitrust regulation, as the recent decision by the ECJ on Android Auto demonstrates.[3] Although Article 6(12) of the DMA requires gatekeepers to grant access on FRAND terms, so far compliance assessments have been relatively formalistic in practice. That formalism, as our colleagues have argued, is understandable in this early stage of enforcement, [4] but it is not inherent to either the DMA or FRAND assessment. Substantive analysis of gatekeepers’ prices will become necessary as, ultimately, the DMA seeks to make markets contestable. That will require gatekeepers to charge prices that are FRAND in fact, and require them to be able to demonstrate that fact.

Currently, Article 6(12) debates focus on the app store commissions that gatekeepers can charge their business users: app developers. Gatekeepers have historically charged up to 30% and – even after the changes made to comply with the DMA – these rates remain high. Some of the literature on the other hand suggests these fees should be much lower and can even be negative.[5]

The divergence is driven by a number of challenges that come up when assessing FRAND prices for app stores, and digital markets more generally.

1. Challenge 1: Disentangling the sources of value for business users of the app store. App stores are in a position to set a single price that reflects two broad sources of value that their users receive, which must be disentangled:
   • the services that the particular app store itself contributes to the market – such as its search and billing services and security; and
   • the benefit of accessing the market itself – i.e., the benefit of there being any route to market at all.
   • Generally, FRAND prices should reflect the competitive cost and benefits of the first source of value, but should not reflect the value of access to the market itself. The first problem is that these two sources of value often get conflated when considering the benefits that users are, or should be, paying a reasonable price for. The second problem is that, in specific contexts, it can be beneficial for consumers if gatekeepers are permitted to leverage their status as gatekeepers at least for a limited period. This occurs where the prospect of charging monopoly rates is necessary to incentivise a “first mover” or “market maker” to innovate – otherwise, companies may not develop the new markets that they later become the gatekeepers to as quickly, or at all.
2. Challenge 2: Accounting for the value to gatekeepers of providing an app store. App stores are part of ecosystems of complementary products, such that it is not just the app store’s users who benefit; the app store provider also benefits from running and operating the platform. It benefits because the quality and range of app developers’ products enhances demand for its complementary products, earning it more revenue than it would earn if it did not run the app store itself. Crucially, the reasonable price that a gatekeeper can charge should reflect the net effect of that two-way exchange in value – essentially, because it already receives a payment in kind from app developers.
   • That can mean there are three potentially FRAND outcomes: (a) the app store operator charges business users – essentially, a financial top-up that is analogous to the net royalties negotiated for cross-licences; (b) the app store pays (or subsidises) business users; or (c) there is no charge at all. This last outcome does not mean that app store services are worthless. Rather, it means the value that app store operators provide to app developers is roughly commensurate to the value that app developers provide to them. This is not uncommon in two-sided digital markets. Services such as search engines appear to be given away for “free”, but they aren’t; they are two-way exchanges between parties with services of equivalent value.[6]
3. Challenge 3: The methods for determining FRAND prices. Even if we are clear what sources of value FRAND prices should reflect, it is still challenging to determine what the FRAND prices for those services are. Many of the traditional methods used in other sectors are difficult to apply in the context of app stores.
   • In this article, we provide a methodology for assessing whether app store prices are FRAND, although it may apply more generally to digital markets. We present a conceptual framework that, in principle, helps to (a) separately identify the value propositions an app store and an app developer provide; (b) specify how fair and reasonable commissions would reflect the relative costs and benefits of each service; and (c) consider how the benefit of provision to the provider would affect those commissions in situations where value is exchanged in both directions.[7]

In this article, we step through these three challenges to show that the FRAND price for gatekeepers’ app store services should reflect their costs – though it may, in fact, be lower. Prices should be no higher than cost because, 15 years after app stores emerged and network effects “tipped the market”, insulating gatekeepers from further competition (a) any rationale for rewarding that “first mover” innovation by leveraging the network effects no longer holds, and (b) the services now offered by app stores likely provide no incremental value beyond what would now be available from rivals in a competitive market – because a lack of competition does not only inflate prices, it diminishes the incentive to enhance service quality. The price may be lower than gatekeepers’ costs to the extent that they already benefit from providing app store services to app developers in the form of greater advertising revenue, extraction of usage data and other associated benefits of integration on all their ecosystems.

---

References