Reins Tighten on Google: CCI Calls for Fair Playground

   

Background

App stores have become a medium for app developers to distribute their apps to the end users and this availability of app stores is dependent directly on the operating system (OS) installed on the device. Google’s Android OS is the one powering about 97% of the 600 million smartphones in the country. When the market dynamics of “licensable mobile operating system in India” is comprehended, it becomes evident that Google’s Android OS has made a profit indirectly from the network effects. Google’s Play Store became the primary distribution channel for app developers in the Android mobile ecosystem and this allows Google to capitalise on the apps brought to the market.

Google was found dominant in the “markets for licensable OS for smart mobile devices” and “market for app stores for Android smart mobile OS” and it abused its position whereby there was a mandatory and exclusive requirement by app developers to use “Google Play’s billing system” (GPBS) for receiving payments for apps sold through Google Play Store and for in-app purchases. Non-compliance would result in barring the app developers from being listed on the Play Store and thus losing potential customers comprised in the vast pool of android users.

There were also exclusionary practices whereby Google Pay has been integrated with intent flow methodology whereas other UPI apps can be used through collect flow methodology, whereby the former is a better technology, thus barring effective competition when such exclusionary practices are followed.

The Competition Commission of India (CCI) imposed a penalty of Rs 936.44 crores on Google for abusing its dominant position with respect to its Play Store policies apart from issuing several other measures of cease and desist which included directions like an allowance to use third-party billing system, no “anti-steering provisions” on app developers, non-restriction of end users on accessing and using the features offered by the apps, providing a transparent policy on data collected on its platform, etc.

In this piece, the final order passed by CCI is examined whereby how relevant markets were delineated, how dominance was established, how abuse of dominance came to the forefront, Google’s replies and CCI’s stance on them and analysis on that basis to provide a way forward in such instances.

Delineation of relevant market and assessment of Dominance

A. The market for licensable OS for smart mobile devices in India

The Director General (DG) based its investigation on analysing substitutability on the:

1. Basic feature phones OS and smart mobile OS for which:

   (i) It was analysed that OS for a smart mobile device has features of a basic feature phone as well as that of computers.

   (ii) Greater functionalities for smart mobile devices supporting graphical processing, cloud capabilities, etc., were not available for feature phones.

   (iii) The significant differences point that feature phone OS is different from smartphone OS and is not substitutable.

2. Smart mobile OS and desktop/computer OS in which the Commission noted that:

   (i) Due to differences in technology, intended usage and characteristics, no substitutability could be found between a smart mobile OS and a desktop OS.

3. Licensable smart mobile OS and non-licensable smart mobile OS in which it was held that:

   (i) All licensable smart mobile device OS constitute one relevant market and non-licensable OS are different to that of the licensable OS market since OEMs cannot switch to a non-licensable OS like iOS as it is not granted by the OS owner.

   (ii) This iOS can only be used in Apple mobile devices and is not substitutable with the licensable OS.

   India was termed as the relevant geographic market.

Assessment of dominance

(a) Market share: There were high market shares of more than 95% consistently for a long period. Thus, the market is “heavily concentrated¹ in favour of Google’s Android due to its dominant, persistent, and increasing share in the domestic market”.

(b) Control of Google over Android OS: Google is the sponsor of the Android platform which enforces rules which include compatibility provisions, contracts, and trademark licences. Further, Android is the trademark of Google LLC. Thus, OEMs are highly dependent on Google to ensure the compatibility of their mobile devices with Android’s latest versions, for IPRs and Google holds a significant and unparalleled influence in the development of Android’s OS as well as its updates.

(c) Switching costs: There would be significant switching costs for users while changing an OS. This makes Google a monopolist in the “delineated relevant market for licensable OS for smart mobile in India”.

(d) Entry barriers in the market: It is noted that when a new OS is developed, investment on a large scale is required in terms of physical, financial, and human capital. There are restrictions imposed by Google in the form of agreements with OEMs [“Mobile Application Distribution Agreement (MADA) and Anti-Fragmentation Agreement (AFA)/Android Compatibility Commitment (ACC)”]. Thus, it makes it difficult for Android developers to find OEMs who would install their OS. Thus, foreclosure of entry of new entrants works as an entry barrier and the free availability of AOSP is overridden by these agreements.

(e) Indirect market effect: This exhibition i.e. the “benefit to users of an operating system increases with the volume and quality of native apps they can access on that operating system”,² and the benefit to developers with the increase in the number of accessible users acts like a barrier to new entry.

Thus, when market dynamics in licensable mobile operating system in India is scrutinised, it becomes evident that Android OS and Google enjoys a dominant position in this market.

B. The market for app stores for Android OS in India

App stores are beneficial to users in the circumstance that they have enough developers for them and vice versa. Google Play Store is Google’s app marketplace for Android devices. Delineation has been done based on:

(a) Substitutability of app stores for non-licensable OS and app store for Android OS, in which when apps are developed for one OS, they cannot be run on another OS because of differences in APIs and so on and hence, there is no substitutability.

(b) Substitutability of side loading of an app with downloading an app on Android OS app stores in which side loading does not become a viable substitute for app downloading as compared to app stores.

(c) Substitutability between web apps and apps downloadable from app stores for Android OS wherein, web apps are no alternative to app store apps which are better in performance and user experience.

(d) Substitutability of pre-installed apps with apps downloaded from app stores in which pre-installation cannot be generalised as OEMs pre-install only popular apps, which is not a viable option for smaller developers. Thus, it is not substitutable.

(e) Substitutability between different app stores for Android OS for which other android app stores are individually substitutable with Google Play Store in a limited manner.

These app stores are of the same relevant market as an OEM can choose to pre-install its private app store along with Google Play Store on these android devices. India is the relevant geographic market.

Assessment of dominance

(a) Market share: Commission concludes that Google Play Store is pre-installed on 100% of Android OS devices and others like Samsung are preinstalled only on those devices sold by that brand name. Data says that this app store has the largest quantity of apps due to network effects, quantity, and popularity of apps.

(b) Barriers to entry: Google enjoys a strong “network effect” of a large user base and developers of apps which makes its position stronger. This results in entry barriers for new entrants.

Also based on sideloading being a cumbersome process, it is thus concluded that Google Play Store has a dominant position in this market.

C. The market for apps facilitating payments through UPI in India

Substitutability has been examined between cash payment and digital payment, UPI and other methods for delineation which are not interchangeable, UPI has emerged with exponential growth and has been delineated as the market referred to above.

Analysis of alleged abuse of dominant position by Google

Making GPBS exclusive and mandatory for app developers for payment processing for apps and in-app purchases as well as charging 15-30% commission violative of Section 4(2) of the Act

It is observed by the Commission that Google Play’s payment policy is an essence of its mandatory “developer programme policies” and “developer distribution agreement” which has to be concurred to by all developers who wish to list their app on the Play Store without keeping scope for negotiations or changes. It specifically provides that “developers charging for apps and downloads from Google Play must use Google Play’s billing system….”³ Thus, no alternative payment system can be perused. Thus, if the developers do not use Play Store’s system of billing and in-app billing, they cannot list their apps here and would lose out on potential customers who use Android-based smart devices, which is a dominant enterprise.

The Commission rightly concludes thereby that it affects the ability of the app developers in offering innovative solutions and remains subordinate to the offers provided by these gatekeepers.⁴ Thus, limiting technical development in the market for in-app payment processing services is also in violation of Section 4(2)(b)(ii) of the Act.⁵

In a very interesting answer to the contention made by Google that it does not violate Section 4(2)(b) of the Act as there was no substantiated evidence to prove that competition is distorted as these are mere speculative theories in absence of evidence, the Commission replies that in the scheme of this Act, the Commission is also obligated to “prevent” such practices which have an adverse effect on competition. This can be seen from the long title⁶ of the Act which says that “An Act to provide, keeping in view of the economic development of the country, for the establishment of a Commission to prevent practices having an adverse effect on competition….”

On discriminatory practices and high prices levied

It is admitted by ShareChat that Google imposes discriminatory practices, as well as YouTube, can use a “third-party billing system”, bypassing GPBS while the rivals are continuously forced to use GPBS and pay a service fee of 15-30%. Thus, a violation of Section 4(2)(a)(i) of the Act is made out. Further, this is an exorbitant fee as compared to other payment service providers which charge a fee ranging from 0-3% and varies on the mode of payment used. Google does not even provide any additional service to charge such an additional fee, and this it is able to do because of the inadvertent dependence of app developers on the Play Store. This violates Section 4(2)(a)(ii) of the Act.

On vast access to data

It is noted that Google has access to the vast volume of data of the app users including personal as well as data relating to financial transactions. The financial data pertaining to developer users are in complete control of Google, which affects their ability to improve services and compete in an effective manner. Google can also distort competition in downstream markets by setting rules in this regard. The data is not even shared with the app developers in a transparent manner. Google can also in this way use the data for other verticals like creating profiles for consumers and monetisation through search advertising services.

Google on this, submitted that in the transaction concerning Google Play, users will not consent to private payment data being shared with third parties, to which the Commission rightly pointed out that these app developers are not third parties as the users already decide to transact with the app developer while transacting with the Play Store. If Google has such privacy concerns, it can be protected by adequate measures like contractual stipulations rather than blanket denials for access to the data of its users.

On the settlement period followed by Google

The Commission found that Google receives its payments in a stricter and shorter deadline (within 2-3 days of transaction) from the aggregators while not following such a timeline when making payments to app developers which are released in a gap of 15-46 days from transaction day. Thus, this is pointed out to be an unjust enrichment on Google which is unfair.

On denial of market access

The Commission is of the view that by the imposition of GPBS, a compulsion has been enforced which forecloses the opportunity for other service providers for processing payments to serve the app developers, also discouraging developers from developing their in-app payment processor.

Google contends that using Google Pay billing (GPB) is not the denial of market access to payment processors as in-app purchases and paid apps on Google Play comprise a very small proportion of the value of transactions and the total number on these surfaces. It contends that about 97% of developers pay a nominal fee of USD 25 to access Google Play and the service fee is applicable to only 3% of app developers and not 97% of free apps, to which services are paid.

To this, the Commission notes that this becomes unfair and discriminatory, only 3% pay 30% while 97% pay USD 25. The only difference which arises is that this 3% does not have to require GPBS for functioning, while the 3% is required to do so. The Commission alleges a cross-subsidisation effect here.

However, here the Commission asks if this 3% of the apps should bear 100% cost of the play store.⁷ It is pertinent to observe that this 3% is not paying up for the 100% cost and others also pay a fee of 10-15% which depends on various parameters. Further, one of the important advantages provided to these 97% is that they do not have to require GPBS which acts to their advantage, wherein they can create their own apps or even use those third-party payment options which may provide a huge advantage to them, as this is a rare occurrence, not available with the majority 97% who have to rely on GPBS.

Also, there was no sufficient finding on the monetisation model to arrive at a finding for Google, but Google was directed in a general stance to ensure that its responsibilities are taken care of. This seems like a very vague direction, based on any merits.

Exclusion of other UPI apps as payment options on Play Store is discriminatory as per Section 4(2) of the Act

It is noted that intent flow technology is far better and user friendly than collect flow technology and its success rate is higher. Now this Play Store uses intent glow technology for its own app and collects flow technology for other apps, whereby Google Pay also has a clear advantage in which it has the largest market share for UPI payment on Play Store.

Google here contends that its decision was in line with National Payments Corporation of India (NPCI) requirements for which, it had no reason to believe that one payment mechanism was inferior to the other. To this, the Commission noted that NPCI through prescribed certain guidelines for such integration, but it does not apply to Google that such guidelines restricted it from offering intent flow technology to the other apps.

However, it also does not put a duty upon Google to provide such technology to other apps as although it has a larger share of UPI payment in the Play Store, it is not particularly dominant in that sector and thus such duties cannot be affixed on it. It is just the competitive edge which is secured by Google in this sector. In this way, the Commission holds that Google has discriminated between developers of similar apps for similar transactions.

The Commission also holds that such platforms with gatekeeper power engage in “self-preferencing” in order to leverage their position into other vertically related markets like that of UPI enabled digital payment apps. Thus, the acts are in violation of Sections 4(2)(a)(ii), (c) and (e) of the Act.

Now in a very erroneous observation by the Commission, it notes that “Given the interoperability offered by UPI ecosystem, generally the user does not multi-home and uses only one UPI app. Once the user starts using Google Pay UPI app for the Play Store, the natural tendency for the user is to stick to the same app for other payments also.”⁸

This is because users may subscribe to multiple platforms in order to interact with different users or gain the benefit of differential pricing⁹. For instance, if suppose Paytm comes with a scheme of 30% cashback for using it with Reliance Trends, then the users are more likely to shift towards that payment option. Further, a reduction in barriers to making payments, like switching costs leads to an increase in multihoming “in the knowledge¹⁰ that they can transfer funds between them instantly at little or no cost”.

Pre-installation and Google’s prominence through GPay violation of Section 4(2) of the Act

The Commission observes that Google enters into an agreement for revenue sharing with the OEMs for pre-installing the GPay app on devices and offers incentives like a “placement bonus agreement” for availing premium placement of GPay by pre-installing it on qualified device. Now, the Commission notes that “setting Google Pay UPI app as the default payment application can outweigh, or even nullify, the benefits of having multiple payment applications pre-installed”.¹¹ It also views this as a potential for abuse of competition on its merits.

Now, as per the DG report, other UPI apps like Paytm, Phone Pe, etc. also conclude agreements with OEMs for such pre-installation of their UPI apps which are done on mobile phones. It is also found that they too provide such financial incentives to OEMs for doing so. Thus, it did not find any evidence to conclude abuse of dominance here. Therefore, this observation of the Commission seems to be without any leg and needs a further explanation for substantiating such a claim.

International instances whereby Google is under scrutiny for abusing dominance through its Play Store policies

In July 2018, the European Commission fined Google¹² €4.34 billion for being in breach of EU Antitrust laws. It has established its dominant position there since 2011 by imposing illegal restrictions on Android manufacturers and mobile network operators. Google is basically dominant in the market worldwide for such app stores like Play Store which accounts for more than 90% of apps which are downloaded on Android devices.

Google had:

(i) Required pre-installation of Google search apps as a condition for licensing the play store.

(ii) Device manufacturers got their mobile apps and services as a bundle, whereby it included Google Play Store, Google search app and Chrome browser. The investigation revealed that this Play Store is a “must-have” app, whereby it is pre-installed on their devices.

(iii) Device manufacturers were prevented from accessing any alternative android version not approved by Google and the manufacturers had to commit that they will not develop or sell any device running on an Android fork, for them to be able to pre-install on their devices Google apps like Play Store.

Indonesian competition regulator, Indonesia Competition Commission (ICC) initiated an investigation¹³ on Google for unfair business competition and monopoly practices whereby Google’s policies required the use of “Google Pay billing” in some applications. And for this, Google charged the application with a service rate of 15-30% of the purchase. This GPB usage policy required that apps which were downloaded from the Google Play Store must use this as a method for the transaction and the provisions contained in the GPB had to be complied with by the app developers or content providers. No other payment method was allowed to be used by Google. It was also found that the Google Play Store is the largest app distribution platform in Indonesia having a market share of 93% which is not substitutable. Google applied sanctions on such apps that are subject to the obligation of using GPB which removed this app or disallow its update.

ICC found this sort of obligation to be burdensome for Indonesian developers as it extorted high tariffs and resulted in disruption of the user experience of the customer or the end users of the apps. It was also suspected by the Commission those conditional sales or tying-in two different models like the app developers purchasing the Google Play Store app in a bundle with the payment service of GPB, which was also held to be an uncooperative method with alternative payment systems. Thus, it concluded Google’s policy to be a form of unfair business competition in the digital app distribution market. It suspected Google of being included in monopolistic practices like abuse of dominance, tying and discriminatory practices. Thus, on the basis of the Board of Commissioner’s meeting on 14-9-2022, this research was given the form of proper investigation on the alleged violation of Law No. 5/1999.

Again, in South Korea, an antitrust investigation¹⁴ is launched into Google for its plans to enforcement of commission fees of 30% for “in-app purchases” which is made through its mobile app store while it updated its global policy to make all apps on Play Store to use its “proprietary billing system”. This is seen by the app developers as a violation of local fair trade and telecom laws. Here too, Google has a 63.4% market share over local app store sales. It enforced this billing system whereby it removed those apps on the Play Store if these apps direct the users to other external systems for payment. The National Assembly even passed a law to prevent Google’s in-app payment policy which is easily circumvented in this case.

Conclusive analysis and the way forward

Thus, this was the latest setback for Google where it was fined another $162 million for abuse of dominance and was given cease and desist order by the competition watchdog. This order essentially comes with a major relief for Indian startups and small companies those who objected to this Google policy of mandatory imposition of its own payment system on app developers. This order is meant to ensure healthy competition and cost reduction for app developers. Overall, it was successful in establishing abuse of dominance, even though the judgment was laden with certain anomalies like the one where it assumes that interoperability prevents multi-homing or despite concluding that Google was not dominant in the UPI payment sector, held it responsible for ensuring a level playing field.

This decision is noteworthy for two major reasons whereby firstly, a stronger crackdown by the competition watchdog on Google has been laid and secondly, it lays India’s first view which is authorised in-app payments by OS operators like Google.

However, experts raise concerns¹⁵ about the hefty penalties being charged in the wake of jeopardising the incentive for Google to innovate and lead to the distribution of free products which has led to a whole new era of digital ecosystems.

This judgment is seen to be among such practices being followed internationally as well where it licences its Android OS to smartphone players with such restrictive practices which are anti-competitive, where investigations have been ordered. India has also taken a tough stance on this matter to rightly punish Google for its anti-competitive acts.

In the wake of such instances, where Google has been fined twice for its anti-competitive conduct in the digital market, it becomes imperative for India to consider an ex-ante framework for the regulation of digital markets. This concept can be explained by a quote stating “shut the stable door before the horse has bolted” in terms of competition.

This should be considered in the wake of India being world’s third largest “startup ecosystem” with technology-based startup ecosystems diffusing across sectors, that we see the international counterpart which regulates digital markets through such ex-ante measures. For instance, Germany via the 10th Amendment of its competition law has put forth the concept of “undertakings of paramount significance” that are restricted to engage in certain specific abusive practices which belong to seven specified practices including, “self-preferencing, denial of interoperability or data portability, and the use of data to raise barriers to entry”, and in doing so they would attract Section 19(a) which allows an early intervention by the Federal Cartel Office. Also, the European Commission via its Digital Markets Act targets the “gatekeepers” or such tentacular and massive digital companies that have the power to influence the economy. The three requisites of qualifying as a gatekeeper include a vibrant economic position, strong intermediation position and durability (or is about to have) concerning the market.