Author Gilad Edelman
This post originally appeared on Business Latest
Josh Hawley had some questions about how Apple came up with the money to buy back $ 58 billion in stock over the past year.
“I just want to focus on one major source of that income,” the Republican senator said to Apple’s lawyer. “It’s not innovation, it’s not research and development. It’s the monopoly rents that you collect out of your app store.”
I suspect you, unlike me, had better things to do on Wednesday than watch the Senate antitrust subcommittee hearing on Apple’s and Google’s mobile app stores. But if you did tune in, and you’re not an economist, you might have been baffled by that exchange. What is a monopoly rent—a term that was mentioned over and over at the hearing—and why is it bad? What does it have to do with app stores?
In economics, the concept of rent refers to money that a business makes in excess of what it would get in an efficient, competitive market. In other words, it’s money that isn’t earned by actually creating value. When corporations lobby government to give them a tax break or a special regulatory favor, they are often accused of “rent seeking.” It’s a pejorative term, and the precise limits of it are up for debate; it can be hard to draw the line between fair profits and unreasonable rents. But the basic premise is that businesses should try to get rich by improving their products and services, not by gaming the system.
Rents are a central concern of antitrust law. One of the most basic reasons why monopolies are bad is that when a company takes over a market, it can raise prices without worrying about being undercut by competitors. A “monopoly rent” is thus the money that a monopolist earns not because it offers the best product or service, but merely because it has the power to charge more. Which is exactly what the subcommittee accused Apple and Google of doing. Each company forces app developers to use their payment systems for digital purchases made within apps downloaded through their stores. And each takes up to a 30 percent cut of those purchases. This state of affairs costs companies like Spotify, which testified at the hearing, a huge amount of money, because Google and Apple control the entire mobile operating system market: Any customer who signs up on their phone, rather than on desktop, has to go through the app store toll booth. (Technically Google allows apps to be “side loaded,” without using its app store, but in practice few people bother to do that.) The commission is also at the heart of the video game developer Epic’s civil antitrust lawsuits against both companies. And, according to the senators who took Apple and Google to task, it leads app developers to pass those higher costs on to consumers.
At the hearing, Google’s and Apple’s representatives argued that most developers don’t end up paying the 30 percent rate. But they also insisted that the commission, which the biggest, most revenue-generating apps do have to pay, are competitive and industry standard. The problem is, they are the whole US industry. And no one on the antitrust subcommittee, from either party, seemed persuaded that the tens of billions in annual revenue the companies make via the commission represent anything close to what they would make if they didn’t have such control over the app market. As subcommittee chair Amy Klobuchar put it toward the end of the hearing, summing up the views of her Democratic and Republican colleagues, “I just think there’s something pretty messed up about this.”