Gene Burrus and Tom Smith gave evidence

We move on to the next panel. Gene Burrus is coming in by Zoom. Tom Smith is in the room with us. Mr Burrus, please introduce yourself to the Committee briefly.

Gene Burrus:

My name is Gene Burrus and I am here on behalf of the Coalition for App Fairness, which is a coalition of mobile app developers numbering over 70 at this point, from the UK, the US, the EU and around the world. I have been a competition lawyer for 30 years and have worked for the last two decades in dominant digital platforms, with time at Microsoft, Spotify and now in private practice.

You sound dangerously overqualified. Mr Smith.

Tom Smith:

I am a competition lawyer and have been for 17 years. I most recently spent seven years as legal director at the CMA, including working on the digital markets taskforce that recommended these proposals. Two years ago, I went into private practice and launched the London office of a competition boutique firm called Geradin Partners. I advise a lot of companies on competition and digital regulation.

Thank you, gentlemen. Welcome to the Committee. I call Alex Davies-Jones.

Q Thank you, Mr Hollobone, and thank you to both our witnesses. Mr Burrus, can I come to you first, please? We have heard a lot in the evidence already submitted to the Committee about the 30% effective stealth tax that is put on apps that would like to use certain designated platforms. How will this Bill ensure that fairer digital markets, especially for smaller tech firms and apps, and innovation are enabled?

Gene Burrus:

If properly enforced, I think this Bill will break the distribution monopoly that currently exists with respect to mobile devices. Currently, app developers have no choice but to use the existing app stores of the dominant firms, Apple and Google, if they want to get their products to consumers. This Bill holds the promise that that monopoly will be broken, so that if the fees are too high in any given instance or for a particular developer, they will have other options and other ways to get their products to consumers. We think it is a great step forward. It is a problem that has been recognised around the world and various approaches have been tried to get at that problem. This gives the DMU the flexibility to both develop bespoke solutions to this problem, as well as the ability to future-proof what is going on, which will take us a great deal forward on avoiding that specific problem and, I think, the broader problems that come with the distribution monopoly that exists.

Q You mentioned, Mr Burrus, the need for the provisions to be properly enforced. I would like to bring you in here, Mr Smith. Can you outline how exactly you would like to see that happening? Does the Bill get that right?

Tom Smith:

From my point of view, the Bill is very well drafted indeed. It gets it exactly right; I think a lot of careful thought has gone into it. It is really a very modest approach. The CMA cannot do anything at all unless it can prove its case to a high standard, which can withstand the appeals in court, but the Bill gives the CMA the right amount of discretion. There is a list of categories, for example, in clause 20, which gives it enough discretion without giving it unbounded discretion to roam over the strategic market status firms’ wider groups, for example.

Q One of the points of concern that has been raised with the Committee is that the bigger, dominant firms have the ability to tie up firms in legal wranglings for a considerable amount of time, leading to a significant cost to smaller firms, some of whom are unable to meet them; it ties them up so long that they are unable to carry on. Do you see that as a concern with the current drafting of the Bill?

Tom Smith:

It is a concern with existing competition law, and that is why this Bill is needed. The Bill as currently drafted is exactly right. For example, the judicial review standard is the right one. It is the well-established standard for UK regulators. It is the standard used for the CMA’s market investigations, for example, which has the exact same legal test as the pro-competitive interventions under this Bill. It would be quite strange to have a different standard. By definition, one party may not like the outcome of a given decision, but everyone benefits if there is a prompt outcome, because everyone can get on with running their businesses rather than fighting in court.

The best example of fighting in court forever is the Google Shopping case in Brussels. That was started by a complaint from a UK company, Foundem, back in 2009. Unbelievably, it is still going through the courts now. Foundem has long since stopped operating, so whatever the outcome in the courts, it is not really going to benefit them. This Bill will enable the DMU to intervene before harm materialises, so that businesses do not go out of business so quickly.

Q Mr Burrus, one final question for you. One of the arguments that has been put to us is that costs to consumers might increase, as a result of the costs for apps on platforms having to be reduced. Do you see that argument? What do you have to say to that?

Gene Burrus:

I think the opposite is actually true. We will see immediate benefits in terms of costs to consumers, when the taxes that the dominant players are able to extract are eliminated. We will see immediate benefits in terms of innovations and features that can appear in apps that right now are being prohibited by the dominant platforms. Those things can appear immediately.

Longer term, too, the opportunity to truly unleash innovation on mobile devices is key. We are in a place in history much like we were in the late 1990s when one company owned access to the internet. As mobile devices have taken over as the way consumers access the internet, we are now in a similar position where two firms manage access to the internet. Just as intervention with Microsoft 25 years ago led to the explosion of firms just like Apple and Google that could reliably build their businesses on PC computers, we will see firms able to reliably build their businesses on mobile devices. The long-term unleashing of innovation will be key here.

Brilliant, thank you.

[Rushanara Ali in the Chair]

Q Mr Burrus, some concerns have been raised with us that the subscription traps requirements in the Bill might be too onerous for some people who work on a subscription basis to comply with. Do you think those are valid concerns?

Gene Burrus:

I am not sure that those concerns are really valid. There is a consultation process in place. I agree with the prior witness that it is important for third-party input to be part of that process with the DMU, so it can fully understand what it is implementing and the ways in which it is doing that. We have seen problems emerge in the past in competition law cases with respect to trying to craft orders without sufficient input from industry, and those have fallen on the rocks as being ineffective or unwise. We saw that, for instance, when the European Commission attempted to settle cases with Google long ago. They would reach a settlement, then finally market test that settlement that they thought was great, and industry would pan it. I think that is why, with sufficient third-party input into the process with the DMU, those concerns can be addressed

Q Thank you. On the innovation point, do you see anything in the Bill that would inhibit companies designated as SMS or make them think twice about innovating in any particular space?

Gene Burrus:

Quite the opposite. I think it will drive their innovation as well. Right now they are in a position where they are not often faced with competitive constraints with respect to innovating on things such as the privacy and security of their app stores and features that they need to put out. Or, when they self-reference their own products, sometimes that means that they do not have to make the best product; they just have to make the product that they can ensure users will get whether they want it or not.

The Bill will not only unleash innovation for third parties, but force the SMS firms to innovate more in order to keep up. I think history proves that is true. I will go back again to that point in time 25 years ago. Even with all the constraints that were put on Microsoft, nothing has prevented it from innovating. In fact, Microsoft is still a great innovative company today.

Q Sure. That is very useful, thank you. Mr Smith, I do not need to ask you any questions. I think you were very clear on the appeal standard; I was very comfortable with your answer.

Tom Smith:

May I add something quickly on the JR-plus proposal? I think it is strange to come up with a whole new appeal standard when we have perfectly good ones already. Also, the JR-plus standard came in, as far as I understand it, to comply with an EU telecoms directive. It is strange in this period in our country’s history to start putting that standard in place again. The direction of travel is in fact the opposite—to go from merits to JR—and another place in the Bill actually does that. It is the same for Ofcom; that went from merits to JR in the Digital Economy Act. I really do not see the JR-plus standard working.

Also, it is all very well putting a deadline on an appeal, but you need to explain how you will complete the process in that time. It will not work if you just put a deadline on it, then expect everyone to do 18 months’ work in six months. I think you need to explain how on earth that would work, because I do not see it working.

Very useful. Thank you.

Q Mr Burrus, could I just put to you something that I suspect some of the platforms might say? They have spent billions and billions and billions developing their platforms. Is it not reasonable that they make charges for app users to access those platforms? What they are doing is just recouping their costs, so making a reasonable profit from your members who get access to these fantastic platforms.

Gene Burrus:

I think that ignores and rewrites the history of how these platforms got to be as powerful as they are today. If you go back in time to 2008, for example, when there was intense competition among mobile platforms to be your phone, right? There were dozens of firms that you barely know exist any more, like Blackberry, like Nokia, like Microsoft. There were lots of firms competing in that space. And the game then was actually to be as attractive as possible to developers, to the point where those platforms were paying developers to be on their platform, because they were going to recoup that investment through the sale—in Apple’s case—of very expensive mobile devices. And that is where they have recouped—handsomely recouped. It is probably the best business in human history, actually. It is only after they gained a degree of market power that they then began to use that power to try to flip the game and try to extract. Once they had developers in a place where they could not leave, that is when they attempted to go and extract those rents from developers.

I think that argument is a false argument. Apple has recouped its investment in these markets through the sale of very expensive hardware, and Google has recouped its investment in Android through billions and billions of dollars in ad revenue that it has continued to generate. The recoupment argument is a false one, I think.

Q Thank you very much. I just want to pick up on one of the points that you make in your written submission to us, where you talk about a timeline for imposing an initial set of conduct requirements. I think you talk about a relatively short period—a three-month period. Would you just like to expand on that, because I think that is quite an interesting proposal?

Gene Burrus:

Yes. I think the reason we are at this place today in the UK and why the European Union has come to a place in seeking to ex ante regulate these markets, and why even the US is considering it, although unfortunately quite slowly, is because of the speed that these markets move and the reality we have experienced in the past that often the competition cases against these dominant digital firms end up being an archaeological dig for the dead bodies and bones of the companies that did not survive long enough to see the outcome of the cases.

It is also the case that continuing to flout the law is extremely profitable for these dominant digital platforms; there almost is not an ex post fine that is large enough to deter them from engaging in the conduct going forward. The ability to find a way to quickly impose the codes of conduct means that, first, it is of benefit to the companies that are actually being harmed today and, secondly, tit will bring certainty to the market in a way that allows firms to reliably make investments based on those codes of conduct, instead of where we are today, where there are probably lots of firms that are declining even to start on mobile devices today because they know that they might not be able to recoup their investment, even though they have great innovative ideas for products that they know people would love. They also know that, absent action, it is likely that all of their investments might eventually just flow to the dominant players.

Q Thank you. I have one question for you, Mr Smith, if I may. We are taking action to legislate; the EU has taken action to legislate. Many other countries are not yet in that place. Are we not just going to drive innovation outside of the UK?

Tom Smith:

I think a lot of major economies are in the same place and moving forward in the same direction anyway. There are rulings against Google in India. There is app store legislation already in force in Korea. The Netherlands has a ruling against Apple’s app store. Australia is proposing a very similar regime to this one. There are lots of proposals, obviously, in America. Germany already has its regime in place and in force, as does the EU. There is a major benefit to all the major economies moving forward together because these are global issues.

As for deterring investment, I would say that monopolies do not stimulate innovation, competition does. That is the whole point of the Bill—to open up competition and get rid of artificial restrictions. When Apple bans alternative app stores on its devices, it is just holding the market to itself. If the DMU removes that ban, new app stores can come in and innovate. Maybe they will offer a better service than Apple; maybe they will not, and people can stick with Apple and Apple can make lots of money. That is great if it has a better product, but currently it is not being challenged.

Q Can you give us an example of the rent inflation you mentioned? For the app, how much would they have been paying five years ago and what are they being charged now, just to contextualise this?

Gene Burrus:

The problem bothering a great number of our members is the forcing of the use of an in-app payment system that comes along with a 30% tax on any apps that sell what are called “digital goods” from within their app. If it is a digital subscription for a gaming app, for a news app or for music streaming, that comes along with a 30% charge. Those digital platforms did not contribute anything to those products; they simply take it off the top.

Ten years ago, the game was the opposite. People were actually paying those developers to come on to the platforms. To some degree, it has been a bit of a bait and switch for these platforms. When they were facing competition, they had one business model and, once they achieved dominance, they altered their business model to try to extract those rents. Making the bet with that 30% is probably one of the best examples of that.

Q How quickly have we gone from zero to 30%?

Gene Burrus:

In 2008, it was zero, and the 30% probably came in about 2012. Once the markets settled down and it was clear that there were two phone platforms to be had, that is when Apple began to try to extract that.

Tom Smith:

We focus on the app store stuff, but there is potential at other SMS firms. There are a lot of allegations about Amazon’s fees going up over time for small sellers, for example, and them being pushed into buying Amazon’s logistics operations, which are said to be expensive. The DMU can go and investigate whether they are expensive and whether they should be freed up to competition more. The CMA published a very good market study report on Google’s advertising businesses. It was 2,000 pages long and detailed the excessive profits made. Google charges 30% to 40% more than Bing to reach the exact same eyeballs. Those prices are going up.

Q You are buying a service to reach the same number of eyeballs. The process does not have greater reach. You said that, to achieve the same outcome as a facilitating business, they charge 30% to 40% more. Why doesn’t everyone use Bing?

Tom Smith:

You may have seen yesterday that the European Commission is threatening to break up Google in the ad-tech business. The European Commission is formally alleging that Google is abusing its dominant position in ad tech. That is on the display side of the business. On the search side, Google has a 90%-plus market share in this country. It is a must-have product, and people are buying that product. There are lots of allegations about why it should be able to sustain such prices, but I do not want to make an unfounded allegation.

Q We have put subscription traps in the Bill. I will ask the same question I asked Mr Burrus earlier: do you see anything in the legislation that would make it difficult for companies that currently operate on a subscription basis to comply with what we have set out?

Tom Smith:

No, I do not think so. In fact, one of the problems with subscriptions that are operated through mobile devices is that Apple inserts itself and Google inserts itself in between the developer and the customer. If you are a British person who subscribes to an app and then something goes wrong or you want to cancel your subscription, quite naturally you might want to contact the developer, such as Tinder or whatever other developer—you are talking to Mr Buse later. At that point the developer has to say, “I’m terribly sorry; you might think you are dealing with us, but you have a contract with Apple,” and that is a major source of complaints. It is pretty confusing for consumers.

Q On the innovation point, there are concerns that if you are designated SMS you will have to go to the CMA or DMU to seek permission to enter a new marketplace or bring forward a new product. Is that something you see anywhere in the legislation?

Tom Smith:

No, it is nowhere in the legislation. The idea that the CMA wants to stop SMS firms innovating is not based in any evidence that I can see anywhere. There is a leveraging principle in clause 20, which is extremely narrowly written and I think should be made slightly wider, but that is the only thing that could touch a non-SMS activity.

Thank you.

I thank our witnesses for their evidence. If there are no further questions, we will move on to the next panel.