Apple, Google & Korea – A right Battle Royale sideshow.

South Korea sets a painful precedent.

• South Korea’s legislation to force Apple and Google to open their app stores to third-party payment options sets a dangerous precedent for the rest of the world where the 30% obligatory revenue share model is coming under increasing pressure.
• On 31^st August 2021, the National Assembly passed the Telecommunications Business Act which categorically states that users must have a free choice of app payment providers.
• In South Korea, this bill is widely known as the “anti-Google law” and has come about as a result of the exemption that Google granted for Korea where it has been charging a 0% revenue share.
• However, that has now changed and Google announced some time ago that it would move South Korea into line with the rest of the world and charge a 30% revenue share from October 2021.
• Google justified this move by saying “Google Play provides far more than payment processing, and our service fee helps keep Android free, giving developers the tools and global platform to access billions of consumers around the world.”
• I find most of this to be non-sensical as Google earns vast returns on Android through its digital advertising and would continue to have very healthy margins on Android devices if the global revenue share was reduced to 0%.
• However, at the same time, Google is entitled to earn a return on the investments that it makes in Google Play and so I do not think that the revenue share should be reduced to 0%.
• Instead, the market should be allowed to decide the correct rate which is exactly what will happen in Korea now that competition for app payments will be allowed on smartphones.
• The problem from Google’s perspective is that competing payment processors will only be providing payment and not developer services meaning that they will be able to easily undercut Google’s revenue share.
• The answer to this is probably to split developer services fees from payment fees as they are currently all bound up together in the 30% revenue share and charge them separately.
• However, Google’s critics will immediately point out that Google already earns a huge return on the ecosystem it has built through its monetisation of the data traffic that it generates and that no fee should be charged.
• The bigger question mark is now Apple, because if it complies with this law, then its position in the rest of the world will be weakened by the precedent that it will set.
• If Apple believes that its brand is strong enough, it could choose to withdraw from the South Korean market for smartphones altogether and wait for consumer pressure to deliver it an exemption or an overturning of the law.
• In the grand scheme of things for Apple, South Korea is a small market as it does not have a very large population, and being Samsung’s home market, market share is low as loyalty to the local brand is very strong.
• Hence, if Apple was to lose all of its revenues there, it would not make a very large difference to the company overall and may very well be a risk worth taking.
• If it complies with the law, I am pretty sure that Epic will jump on this precedent when it appeals the part of the judge’s ruling that it does not like.
• This is why despite being a sideshow in the larger battle between developers and the app store providers, the outcome in South Korea is highly relevant.
• The pressure on the 30% revenue share model is continuing to build and the inevitable result is likely to be that it falls to a level where margins are healthy but not nearly as wide as they are now.
• This does not have much impact on the business of either Apple or Google as app store revenues are only a tiny fraction of the total and so, even if the revenue share went to zero globally, the impact on their profits and cash flow would be marginal.
• In the meantime, the outcome in the Epic vs Apple Battle Royale is likely to be somewhere in the middle which will not really please either side.
• It will, however, be a net win for Epic because anything less than the current status-quo results in Apple giving ground.
• For anything other than a complete victory, Apple is likely to appeal meaning that this will eventually end up at the supreme court where it will be finally decided.
• This will take some years but in the meantime, I suspect that Apple will be forced to let Epic back onto its platform while the situation is resolved.
• I do not expect Epic to win any compensation for the billions of dollars in revenues it has lost as a result of Fortnite being kicked off the iPhone as it is not hard to conclude that Epic knew this would happen but continued in this direction regardless.
• Although neither side will have gotten what it wants, I suspect that this outcome will please Epic far more than Apple simply because it represents an improvement from what it had before.
• This fight is far from over and the ruling will simply usher in round 2 of what has become one of the best spectator sports.