In November 2018, the United States Supreme Court heard oral argument in Apple, Inc. v. Robert Pepper et al. concerning whether a putative class of iPhone users can sue Apple for alleged monopolization of the market for iPhone applications (“apps”). Specifically, the iPhone users allege that Apple’s rules, including a requirement that app producers distribute apps only through the App Store and Apple’s 30% fee collected from App developers for each app sale, are anticompetitive. The issue at this stage of the proceeding is whether iPhone users have standing to sue Apple under the Illinois Brick and Hanover Shoe doctrines that prohibit recovery by indirect purchasers. Both these precedents analyzed more conventional manufacturer/distributor markets, i.e., where there was a “manufacturer” that sold through a “distributor,” who in turn sold to “consumers.” The underlying assumption was that direct purchasers, the distributors, were in a position to sue the manufacturer, so also allowing indirect purchasers, the consumers, to sue would lead to potential duplicative recoveries or the need to make complex pass-through determinations in order to avoid duplicative recoveries. However, the fact situation in the present case does not fit neatly into the Illinois Brick and Hanover Shoe framework and suggests that a different framework of analysis may be necessary.
Apple (supported by the United States Department of Justice (DOJ) in an amicus brief) claims that iPhone users do not purchase apps directly from Apple, but rather purchase from app developers, who set the price of apps in the App Store and distribute the product to consumers. In this description, Apple acts only as an “agent” for developers by providing distribution services under rules set by Apple, but developers determine prices in the App Store and are labeled the true “distributors” that make the direct sale to purchasers. By contrast, iPhone users, (and the predecessor Appeals Court decision) contend that Apple is best viewed as the true “distributor” of apps through the App Store, and app developers are more akin to “manufacturers” that sell their apps through a distribution system that Apple has set up. In effect, the opposing views of the parties come down to arguments about who (Apple or app developers) should be considered the true “distributor” and therefore direct seller.
Neither of these descriptions fully captures the nature of the relationships among Apple, app developers, and consumers. A better way to conceptualize the relationship is as a two-sided market. Two-sided markets are characterized by situations where the firm in question, acting as an intermediary, must appeal to users on two or more “sides” that gain value through interacting together, and where users on one side won’t be attracted unless there is sufficient participation by users on the other side. Apple needs app developers to formulate the best and most reliable apps for its phones and needs to give app developers the proper incentive to develop those apps by providing a sufficient user market. In a parallel manner, Apple needs to cultivate iPhone users by making sure that the best and most reliable apps are available on iPhones at a reasonable price. Apple brings app developers and iPhone users together through the App Store “exchange,” which unites the two-sided market.
Two-sided markets complicate any simple Illinois Brick test, since it is less clear who is a direct versus indirect purchaser and which parties are in the best position to sue if there is an antitrust violation. That is because all parties are linked together by the nature of the network effects that underlie the two sides. In that situation, one likely needs to look at specific aspects of the two-sided set up to determine the outcome of the Illinois Brick test. One important aspect in this case is likely to be the exact nature of the business relationship between Apple and app developers. Apple sells its exchange services to app developers in return for a percentage commission and a requirement of exclusivity. Each app developer then determines the app price to be charged to consumers in the App Store, and this price may or may not pass through some or all of any Apple commission. (There is no Apple commission, and therefore no passthrough, if the app is offered for free, as it often is.) This means that on one side of the two-sided exchange, Apple and the app developers are effectively setting up a joint manufacturing/distribution business that divides the rents in connection with app development and distribution, under “rules” set by Apple. It shouldn’t matter whether this business arrangement allows Apple or app developers to set the price of apps, or whether Apple or app developers are nominally designated as the “distributor.” In either case, one side of the two-sided exchange is an agreed-upon business relationship between Apple and developers to sell apps to iPhone users.
Given this relationship, app developers likely do not have an incentive to sue Apple for damages, and, in fact, none had done so during multiple years of litigation, according to argument before the Supreme Court. One exception is Spotify’s recent complaint in the European Union, which accuses Apple of abusing its dominant position by charging a 30% fee on App Store purchases of Spotify’s premium version. However, Spotify is a competitor of Apple Music and claims to pass on Apple’s fee to consumers. Therefore, iPhone users, whether or not they would formally be deemed “direct” purchasers in a conventional Illinois Brick setting, are likely in a position to claim damages without the risk of duplicative recovery by app developers.
Many existing and emerging e-commerce and network industries use two-sided models of distribution similar to Apple. This suggests that the Supreme Court decision in Apple v. Pepper will have important ramifications for private enforcement of the antitrust laws, and specifically for the interpretation of Illinois Brick, beyond the present case. Of course, whether or not the Supreme Court finds that iPhone consumers should have standing to sue says nothing about the underlying antitrust claims at issue. For an antitrust claim to prevail, plaintiffs would have to show that Apple had market power in a relevant market (where there are presumably other two-sided smart phone “platforms” that have their own sets of app rules) and that the rules Apple set for app developers harmed competition.