The Open App Markets Act Does the Opposite of What It Says

Written by The Frontier Post

Mark Jamison

Rumor has it that the House Judiciary Committee will soon mark up H.R. 7030, the so-called Open App Markets Act. According to the legislation’s text, its purpose is to “promote competition and reduce gatekeeper power in the app economy, increase choice, improve quality, and reduce costs for consumers.”

This purpose is off target. If enacted, the bill would hinder competition, reduce choice and quality, and raise costs for consumers.

via Reuters

Several features of the legislation would create these effects. One is its requirement that any app store that becomes highly popular with customers must do things that make it less valuable. For example, the legislation would require Apple to permit the installation of “third-party apps or app stores through means other than its app store,” a process called “sideloading.” The legislation doesn’t explicitly single out Apple, but it applies this requirement only to app stores provided by companies that also run the phone’s operating system—and Android already allows sideloading.

But why make iPhones more like Android phones? If this provision of the bill was good for customers, they would all flock to Android phones. According to Statcounter, many customers do: Android phones make up about 42 percent of the mobile phones in the US. But more customers flock to Apple, which provides a little less than 58 percent of US mobile phones.

This split in the market results from customers having different preferences. According to product reviewers at Tom’s Guide and ComputerWorld, Apple customers like Apple’s continuity across products, iPhone apps, and how Apple controls updates, privacy, and security. (My AEI colleague Shane Tews has outlined several times the cybersecurity problems that this bill’s provisions would create.) Android customers prefer the openness of the Android system, the diversity of phone makers and prices, and other qualities of the Android ecosystem.

If the bill makes the iPhone more like Android phones, customers will lose benefits of competition: iPhone customers will lose phone qualities that they value, and there will be less feature competition between iPhones and Android phones.

The legislation would also require Alphabet and Apple to largely give up control of which apps are preinstalled or set as defaults and prohibit them from giving “unequal treatment of [rival] apps through unreasonably preferencing or ranking . . . in organic search results . . . based on . . . ownership interest.” Equal treatment must sound fair to people with little or no business experience, but the requirement would reduce choice and quality in practice.

Unequal product treatment is normal in retailing, and it benefits consumers. Large retail businesses often sell their own private-label products in competition with so-called national brands. Some customers, but not all, buy the private-label products because they view them as providing more value than national brands. The retailers benefit from private-label sales because the products are often more profitable for retailers than are national brands. Consumers also benefit in another way: The profitability of private-label sales drives retailers to improve customers’ shopping experiences.

This analogy applies to the tech world too. Alphabet works hard to make its Google Search product attractive because the company profits from increased usage. And as Apple and Alphabet compete for smartphone users, they use their app store profits to improve users’ experiences.

This dynamic of an app store provider using profits from its apps to drive app store and ecosystem value increases innovation in both platforms and apps. Supporters of regulations like the Open App Markets Act argue its controls would lead to more innovation. It is hard to know what is in someone else’s mind, but it appears that they are confusing more company names with more innovation.

Their argument tends to be that if the app stores treated all apps equally, they would provide fewer of their own apps, and then more rivals would provide apps, and that diversity in companies implies innovation. It might be true that constraining app stores would lead to there being more rivals (although the opposite could still happen), but that would not imply innovation.

Innovation is someone creating a new product or process that improves customers’ experiences, lowers costs, or both. Constraining app stores decreases the availability of valuable apps by definition. And constraining the profitability of Apple’s and Alphabet’s platforms discourages competition for new kinds of platforms that could replace these incumbents.

Perhaps the Open App Markets Act was written on “opposite day.” If so, perhaps the House Judiciary Committee can remedy that and write a bill that increases customers’ economic freedoms. But the prospects don’t look good.

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