Leaf&Core

Spotify is Suing Apple. Here’s Why They Have a Case

Danielle from Leaf and Core
Reading Time: 7 minutes.
Spotify illustration: a phone with headphones on and a large red circle with an 'X' on it, implying something will not work.

Illustration: Spotify

Spotify has filed an antitrust complaint over Apple’s take in subscriptions and their preferential treatment of Apple Music. Apple’s App Store guidelines state that every App Store developer has to pay Apple 30% for every purchase through the app and of the app itself. However, for subscriptions, that drops to 15% after the first year for a user.

Spotify says that, because they and other streaming services that compete with Apple Music need to pay Apple a portion of the subscription costs, they have to either artificially increase the price of their services—above the cost of Apple Music—or choose to eat the cost. Trying to combat this, Spotify moved to a model that blocked iOS users from subscribing in-app, forcing them to go to their website to subscribe. As it turns out, they lost a lot of money doing this.

No matter what Spotify does, it loses.

They’re playing in a rigged system, Spotify’s CEO Daniel Ek claims, and it hurts Spotify’s ability to compete on iOS. This is exactly the problem Elizabeth Warren spoke about when she said we need to break up Apple and other large tech companies to espouse competition. Spotify complains they can’t compete with Apple Music because Apple gives their own service an unfair advantage.

Are they right?

Spotify’s Complaint

Spotify’s iOS revenue began rapidly declining after they stopped taking subscription payments through Apple to avoid the 15-30% “Apple Tax.” Now it’s less than a third of what it was.

 

The above chart is the crux of Spotify’s point. Notice the sharp decline in revenue from iOS between 2016 and 2017. This is when Spotify stopped taking new subscriptions through iOS. They instead forced users to go through their website to get a subscription. This additional step was too much for many consumers, who decided to simply continue using the free version of Spotify, go to one of Spotify’s competitors, or, as Spotify points out, simply use Apple Music.

You can see in the first two bars of the chart that Spotify was giving a large chunk of their revenue to Apple. It’s natural that they’d want to try something else. Unfortunately, even after Apple’s gigantic cut, Spotify was still making more money before they abandoned the iOS upgrade plan.

Spotify says this is unfair, and makes competing and innovating to keep up with Apple difficult. Apple gets to keep all of their revenue from Apple Music, they don’t need to share 30% with anyone else. As a result, they’re better capable of investing in new technologies before other companies can. Spotify has to either part with a large sum of money to help a competitor, raise their prices 30% higher than normal—higher than Apple Music’s pricing—or they have to take their business elsewhere and see lower profits. How could the possibly fairly compete in such a situation?

Technological Blockades

Spotify also talks about how Apple unfairly does not allow them to compete on all of Apple’s hardware and platforms. You can’t ask Siri to play Spotify on your Apple Homepod, for example. If you say “Hey Siri, play Billie Eilish,” it won’t matter that you have Spotify Premium and can play all her tracks. If you don’t have her music on Apple Music or on your phone, you can’t play it. You’ll have to open the app, or maybe you could create a Siri Shortcut. Either way, Apple has made it more difficult to use a competitor’s service than their own, and that’s an unfair advantage they’ve given themselves.

Asking Siri to play a competing music service won’t give you what you want.

This is exactly what antitrust legislation was created for. Railroad companies grew too large. They began getting involved in other industries. When they got into lumber, for example, they were able to ship their wood at a discount. Competitors did not have this advantage. So, if you were trying to compete with a lumber yard owned by the railroad company, you were charged much higher for transportation.The railroad company would give itself an artificial advantage, stifling competition and, in the case of Apple, innovation.

Deals? No Thanks

Apple won’t allow Spotify to share promotions through the app. They instead need to rely on less effective email campaigns, which often end up in your junk email box. However, when Spotify offers a deal, like 3 months of premium for just 99¢, they have to communicate through email, instead of a push notification. Push notifications are annoying, but one that promises to save you $28? That’s a good deal! But because Apple owns the platform, they don’t allow this. However, you’ve likely seen notifications for Apple Music. Apple doesn’t have to play by their own rules.

Spotify v. Apple: in the EU

Spotify claims Apple prevents them from sending out email and push notifications to advertise features like this (which I received in an email).

Spotify’s case against Apple won’t be on Apple’s home turf, the United States. Instead, it’ll be in the European Union. The EU is far more friendly towards small companies, and frequently forces large companies to compete fairly. Microsoft in Europe, for example, has to let users know that they can choose their web browser and search engine. They are not forced to keep it default to Internet Explorer (now Edge) and Bing. They also can’t send notifications on your desktop telling you to switch back to their Edge Browser, as this would give them an unfair advantage.

The EU has also fined Google for forcing cellphone manufacturers to include Google Play services on their Android phones or pay exorbitant fees. The practice forces manufacturers to use versions of Android that benefit Google, instead of creating versions that offer less of Google’s data collection.

Basically put, in the EU, Spotify has a fair chance to have their complaint heard. The decision in Europe may not help Spotify in the U.S. immediately, but it could give the company grounds for an antitrust complaint here. It could also force Apple to consider changing their practices worldwide, to stop a wave of lawsuits. In the EU, Spotify has a chance to compete.

Apple’s Response

Apple didn’t take Spotify’s complaints lightly. In fact, Apple comes off surprisingly aggressive, yet tiptoes around the primary issue that Spotify brought up.

Apple pointed out that they have not treated Spotify any different than anyone else selling digital products through the iOS/App Store payment system. Everyone who collects money through their app for digital goods has to cough up 30% of what they collect from the customer. Furthermore, Apple pointed out that Spotify “neglected” to mention that, after the first year of a subscription, that rate drops to 15%. 15% is certainly not as dramatic as 30%, and would represent a fair price for the promotion the App Store provides.

Spotify’s own charts suggest they needed Apple’s promotion. Spotify was more profitable when they were selling subscriptions through the App Store, even back when Apple took a whopping 30% cut of all subscriptions. However, we’re intentionally ignoring all possible external factors here. Perhaps Spotify’s business is doing worse because their users have switched to other platforms, like Apple Music, Pandora, Google Music, Amazon Music, iHeartRadio, Bandcamp, SoundCloud, Napster, or any of the other online music services. There’s a lot of them, and they’ve sprung up in the past few years.

Let’s not forget that Apple created the actual hardware and software that puts Spotify’s app in the App Store, pushes out updates, and handles their payments. Spotify is using a service that Apple provides. They should have to pay for that, Apple argues. Apple even points out that, since most of Spotify’s users are using a free account, they’re not even getting money from every Spotify user.

Spotify, Amazon, Google, and Pandora are on Apple’s Naughty List

Spotify, Amazon, Google, and Pandora are currently suing for the right to pay artists less in royalties. Over the next five years, the U.S. Copyright Royalty Board decreed that songwriters will eventually receive 44% more than the currently do. This will increase the costs of streaming services, but will send money to the artists who make the content we love. A small increase for these billion dollar companies will make a huge difference to the struggling artists working multiple jobs to let us experience their art.

Apple, notably, is not on that list. That’s because they believe in paying artists more for their work. Apple called out Spotify for turning on artists in their letter. People care deeply for their music and the people who work hard to create it. They won’t be swayed by a company that clearly wants to cheat creators out of the profits they deserve. By fighting against the artists, Spotify has lost ground in the court of public opinion, and EU may take consider Spotify’s greedy actions. Part of Apple’s argument is that Spotify wants the benefits of a free app while still charging users. They’re simply being greedy, Apple argues, and Spotify’s attacks on the artists who give them music to stream supports that argument.

What Apple Neglected to Mention

Apple, like Spotify, isn’t telling the whole truth. Apple neglected to mention Apple Music in their rebuttal at all. That’s a big deal because Spotify’s issue wasn’t with the fact that Apple charges them a fee, it was that the fee, along with Apple’s other policies, make competing with Apple Music difficult. That’s a good basis of an antitrust complaint, and Apple hasn’t addressed it at all. The fact that Apple has ignored this is not good for their case.

Apple’s HomePod has one critical flaw. No, it’s not how useless Siri is (although, that’s a pretty big flaw), it’s that it only works with Apple Music. In fact, Siri on the iPhone seems to only work with Apple Music as well. You could likely make Siri shortcuts into your favorite streaming apps, but it’s clear, Apple plays favorites. That’s classic monopolistic behavior, the very thing antitrust legislation was made to prevent. Apple didn’t mention Apple Music or their HomePod because Spotify’s right. Apple is acting like a monopoly, using their size to bully smaller companies. The truth is, they’re making it very difficult to compete with their services on their platform.

Apple is dead on with the points they addressed. They deserve to be paid for keeping apps on the App Store, maintaining them, and ensuring there is an easy to use distribution network for developers’ apps. However, they intentionally left out the main part of Spotify’s argument because they truly seem to have no defense for it.

What Will Happen?

It seems clear. Like Microsoft and Google, Apple will take a hit from the EU. It will likely come in the form of a fine for damages as well as enforcement of new rules. Apple may have to work with companies to incorporate them into the HomePod and Siri. The EU might even ask Apple to change their App Store policies for companies that compete within the same space as them. Apple might not be able to collect 30% from music streaming services as long as Apple’s App Store is a part of Apple.

If the company was broken up by antitrust legislation in the U.S., however, the App Store branch of Apple could treat the Apple Music branch the same as Spotify. They could charge the now separate company 15-30% for subscriptions. In this way, Elizabeth Warren’s plan would actually benefit shareholders of Apple, but would likely hurt Apple as a hardware manufacturer, as they rely on their services.

Many companies have found themselves on the wrong side of an antitrust lawsuit in the EU. Apple seems likely to join the ranks of Microsoft and Google in due time. Figuring out whether or not this makes the App Store a more welcoming place for companies that compete with Apple’s products will take time. Depending on the EU’s ruling, Apple could have to change how they do business on the App Store when it comes to third party apps that compete with their own.

Who knows? Maybe we’ll finally be able to set third party apps as default apps in the future.

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