Kelli Fairbrother and Christian Owens gave evidence.

Q 161 Good afternoon. We will now hear oral evidence, for the 13th panel, from Kelli Fairbrother, co-founder and CEO of xigxag, and Christian Owens, founder and executive chairman of Paddle. We will have until 2.30 pm. Could the witnesses please introduce themselves for the record?

Kelli Fairbrother:

I am Kelli Fairbrother. I am the co-founder and CEO of xigxag.

Christian Owens:

And I am Christian Owens. I am the founder and executive chairman of Paddle.

Thank you very much for coming to give evidence to us this afternoon. If you could say a few words about your businesses—what they actually do and what your services actually are—when answering, that would be helpful.Q

I know that both of your businesses are players in the digital market sector. It would be useful to understand, with some illustrative examples, how the current market dominance of a few large tech companies affects how you do your business, and how it has perhaps affected how you have been able to innovate and the costs of innovation. Perhaps we can hear from Ms Fairbrother first?

Kelli Fairbrother:

I lead an independent business based in Cornwall that is challenging the incumbents’ dominance of digital books, which we believe have not been innovated on in decades. Our aim is to create an exceptional digital book experience that keeps young people engaged in books, makes books more accessible to the one in five people who struggle with traditional reading, and saves the 320 million or so books that end up in landfill every year.

The challenge that we face as a fast-growing, innovative business is that Apple and Google use their dominant positions in the mobile device and mobile app ecosystem as a means of forcing themselves into transactions between us and our customers. They do that to us in two ways: they force us to distribute our apps through the app stores, then, because we are distributed through the app stores, they force us to use their in-app payment services when we want to enable our customers to buy in-app, which is clearly the most obvious way in which customers would expect to transact with us, as we are an app-led business. They also prevent us from using alternative providers such as Paddle, which is a great UK business that we would love to use.

The challenge that that creates is that, by forcing us to use their in-app payment systems, they charge us about five to 10 times more than we would pay in the free and fair online payments ecosystem—we would be paying about 3%, versus the 15% to 30% they charge—and they pay us our own revenue at least a month late. That is our own revenue—

Q “At least a month”? How long could that take?

Kelli Fairbrother:

For example, the revenue that I earned on 1 January this year I did not earn back from Apple until 9 March. By comparison, on average, online payments are paid to us in about seven days on a regular basis. The fees are effectively allocating all of the costs and generating excess profits from a minority of people who use the system to deliver digital content and services, which happen to compete with Apple and Google’s content services businesses. The behaviour you see in the market is the result of this behaviour. Companies either need to charge more for in-app purchase or they force customers on to a web experience to redeem their content in the app.

You heard earlier from Match explaining the difference between Uber and Match. It is the same. If I were selling physical books, I would not be subject to a 30% tax, even if I were selling them through the app, so that is interesting. As a very early-stage business, this hit to our margin and our cash flow is especially precarious. As you can imagine, it makes it difficult to access investment, especially in what is a very difficult fundraising environment at the moment.

The other thing we observe is that, as a non-subscription-based business, the app stores are not really fit for purpose for our needs. Up until about a month ago, we were allowed to choose—we have a catalogue of 50,000 titles—from approximately 90 price points, from 99p up to about 1,000. Our customers receive invoices that say, “Audiobook: £7.99”. They do not give them any more detail, which makes it difficult to know which books they have bought and which books they are trying to return. We do not control returns.

Q Sorry, could I ask a question on this? You are given 90 price points by Apple and you have to choose them. Then Apple effectively does the marketing. If they say what it is, you cannot say anything extra about the products.

Kelli Fairbrother:

In the receipts, yes, that is correct. I cannot merchandise—what we would call merchandise—or allocate the receipt to a particular title that the person bought to allow for the ability to reconcile transactions. It is not possible on Apple. Again, it is not fit for purpose. The way that the system works is that it is delivering you a receipt that says, “Audiobook: £7.99”. Those are the limitations of the system. Any discussion of it being a competitive product is quite misleading.

They offer us no control over our returns. Although there is some ability to control returns through the Apple system, it is difficult to understand exactly the process by which we are allowed to challenge returns. My co-founder is among the best in the world of digital media tech, a former director of production technology at ITV, and he is constantly frustrated by the limitations of the app store APIs. We get very little visibility into the transactions from Apple and Google. Our model for in-app payment where we sell these multiple thousands of different products is terribly supported by Apple and Google. We believe that it is either unintentionally—through neglect—unsupported, or intentionally, trying to force our customers to be on a subscription model.

I will have to move on.

Christian Owens:

I started Paddle about 11 years ago to help small software companies and developers to sell their products internationally. Today, we do that for around 5,000 businesses, a number of which are based in the UK. We provide payment services. We help those businesses to take payments all around the world and to pay local taxes and be compliant with the various regulations of wherever it is they sell.

For the last 10 years we have had constant inbound from our customers—who we support by processing payments and paying their taxes for them online for the web or desktop-based version of their products—saying, “Why can’t I use Paddle for my iOS or Android app?” We have tried on numerous occasions to figure out a solution to that, but we are simply prevented, on the basis of the terms and conditions of the app stores, from allowing those developers to process transactions via any mechanism that is not controlled by Apple and Google. For us, we are explicitly prevented from competing. I have no problem if Apple or Google build a better solution than us—that should win. Today, we are not even allowed to try.

Q I just have just a couple of follow-up questions, because I think I got most of what I need from that. On the merchandise area, you say you cannot get out the receipts. Presumably, you have another mechanism, because you have got to ascribe some of it to the authors, or do you author all the books yourself? How do you process who has bought what on that side of things, rather than the back office bit?

Kelli Fairbrother:

We are monitoring, on our own side, the transactions to be able to control entitlements, because we actually have to control the rights of the books for individuals who have purchased them. The risk for us is that a lack of ability to reconcile at the level of an individual transaction actually puts us at a degree of risk, in terms of our ability to manage the 100% accuracy of what we have delivered. The other interesting thing that happens, on the returns side, is that a customer could read the entire book and go to Google and get a return. I am only getting informed of that after the fact; I cannot really challenge the fact that the return was probably invalid. That is another example.

Q I know you saw the other panel. You have come out and put your head above the parapet, as it were, whereas a lot of companies would not. Why is that? How is your relationship with the app stores? You have a wider relationship with the app stores—do you see the positive side as well?

Kelli Fairbrother:

I think the internet is global, and there are plenty of options out there. We are not convinced that we are not sending our own customers to Apple and Google, as an example. Customers are finding us, and they are being forced into particular ways to buy. Yes, there might be some benefit, but I am not convinced that the global internet would not provide me that same benefit and do it in a more competitive way.

Q Briefly, Christian, you talk about Apple or Google having a different, better system that you could then access. What do you think you would need to do to have the assurance that that system was safe and secure for what you are offering?

Christian Owens:

We have been doing this for 11 years, exclusively for digital products and for software companies; we have worked with thousands around the world and sell billions of pounds worth of digital and software products a year. This is something that we are very familiar with. Really, one of the main reasons that companies come to Paddle is so they can do that in a compliant manner. With the nature of digital commerce being so international, and dealing with various regulations and things like this around the world, coming to a trusted third party that is able to navigate all of those things for you—but, in our instance, do so in a way that is economically viable for these businesses—is what we have been doing for the last 10 years.

We have a tried and tested solution that has been working, and that many millions of consumers have used over the last 10 years. It is just that we are prevented from selling in this single medium.

Q So you would be okay if they set standards for you to reach to have access?

Christian Owens:

Absolutely.

Q One final question: do you think the Bill, as is, gives you the speed and depth of remediation that you need to level that playing field?

Kelli Fairbrother:

We think the Bill is a great first start. We think that it will give the digital markets unit the powers to move quickly. We would love to see timelines around the conduct requirements built in. We think this is a great opportunity for the UK to take a leading role in creating a free and fair ecosystem in the mobile space.

Christian Owens:

I have nothing to add.

Minister Hollinrake?

I have no further questions.

Do you see Google and Apple acting in collusion and taking similar moves, or are they different moves? Do you see examples where they are putting similar blocks against businessesQ ?

Kelli Fairbrother:

Yes. It is interesting, because there are differences between the two ecosystems. Whereas I do get transaction-level data from Google, for example, I do not get it from Apple. Apple moved first to lower the price points from 30% to 15%, and Google took at least another six or 12 months after Apple moved to create that small business tier. Generally, they seem to be both on this path of using their dominant market positions to extract as much value from me. The question I would love to hear Google answer when they come in later is that these are our customers; my customers are also your customers. I just do not really understand why, if you can see that there is actual consumer harm happening, you are not working yourselves to address it.

Q Christian, do you see them acting—do you think they are in collusion?

Christian Owens:

I would not want to say that that is definitely happening. I think it is rather coincidental that within six to eight weeks of any price change happening in one ecosystem, it tends to happen in the other, as mentioned with the small business tier of 15%, with the subscription tier after one year also reducing to 15%. It does seem that way.

Q You have been very brave, Kelli, in coming and talking about your experiences, because there will be some companies that say, “I don’t dare say that, because these guys have got so much power over me.” There are other issues where women sometimes do not speak out when they say that people have got power over them, so you are obviously being very brave. Do you think there is enough protection for people’s confidentiality in this Bill that others will feel that they can talk about what is happening?

Kelli Fairbrother:

I am afraid that I am not a lawyer on the depth of confidentiality. From our side, we would love to see a little bit more transparency in the consultation process, so if there is action being taken by the DMU, we would love to make sure that we are being consulted if it affects our area. I am not sure I have a strong opinion on the confidentiality piece itself.

Q Christian, do you have any further—?

Christian Owens:

No, not any specific details on this.

Q On a slightly different area, there were some concerns raised by some Members in the debate on the Bill about the Government changing the appeals process to one based on judicial review, as opposed to a merits-based review. How important, in your view, is that, and what would you want to see if the Bill progresses through Parliament?

Kelli Fairbrother:

It is absolutely critical that judicial review is the standard that is used, because I think we have seen time and time again, in markets all around the world, that when Governments act, Apple and Google do their best to try to get around the work that is being done. They lawyer up—they have millions to spend on appeals slowing things down—and there really is a sense of urgency. This is existential for a lot of small app developers, so we would really urge that the Bill passes, it is not watered down and it passes without delay and without dilution, I think we would say.

Christian Owens:

I agree.

I have just downloaded your appQ , so you have got another customer there.

He is such a charmer.

I was interested in what you said about the cost of transactions. You suggested 3%. Where does that figure come from?

Kelli Fairbrother:

Because of the constraints that Apple and Google put on us, we built a website, and on our website we use Stripe integration. The Stripe fees come out at about 3% to 4%, and it pays us every seven days. Again, this is where you can see competition; in the online payments ecosystem, there is healthy competition. Then you compare that with the app store monopolies and the control that it exerts over payments. The terms and conditions say that I am not allowed to use a prohibited payment method—for example, Christian is a prohibited payment method. That is not a free and fair ecosystem.

Q Christian, do you want to add to that? You are in that space. Is 3% or 4% the sort of—

Christian Owens:

We take the action that Apple and Google are taking, in terms of processing a transaction. We do this for thousands of companies outside the realms of the app store. The average price that a business will pay us will be somewhere in the region of 5%, and we are able to provide all the same services. We do payment processing. We are able to pay local sales taxes. We are able to deal with fraud. We review, with a human, every product that we sell before we sell it to ensure consumer safety. We are able to do all that in a profitable way by charging 5% on transactions.

Q Sorry to flip between you, but Kelli, are your prices higher as a result of what you are having to pay? If there is freedom to choose who processes, will we see prices come down?

Kelli Fairbrother:

For our site, because of the 15%, we tend to break even on most of our transactions—on a transactional basis. So for us, there actually is not a great deal of room, because we also pay the content providers. The challenge that we have at the moment is that we are trying to raise investment and look as investible as possible. The reason why we built the website is that we were given a really difficult decision: should we force people into a web-based experience, to try to regain the margin that we have lost, or should we raise our prices? For us, it may not be that you will see this immediately delivered back to the customer. For us, the position is that we are going to continue to deliver an exceptional experience to the customer and we are going to be able to afford to do that. That is the crux of it for us.

Q This will be the final question from me. If we look at the Bill overall, is there anything that it does not tackle that you think it should?

Christian Owens:

In its current form—as it is now—this is a very good Bill, and I really encourage it to go through without being watered down any further. It is great as it stands; it is a great start. I think that it is going to allow small businesses in this country to be more competitive and not be giving away a third of their revenue, effectively, to Apple and Google.

Kelli Fairbrother:

I agree.

Q This is a question that I forgot to ask Kelli earlier about payment. You said something about Apple paying you over a period of time. Is it not automated? Is there any reason why it cannot be? Late payments are always an issue for small businesses. You were talking about Stripe, which pays on a regular basis. Is this not on a regular basis as well?

Kelli Fairbrother:

It is regular in the sense that the company takes a month of data and then pays me a month and some days later. So it happens every month, but it is happening every month on a timeline that is, again, at least five times as long as what I would be getting—using Stripe as an example.

I thank our witnesses for giving evidence today. We will move on to the next panel. Thank you very much.