storefront monopoly could upend apponomics

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Imagine a shopping mall where the landlord is the only merchant selling wares. Customers may not notice, understand or even care. They might even like the apparent convenience. Product suppliers are less likely to appreciate the arrangement. They would expect to earn more money and make customers happier by trading under their own shingle

This scenario is playing out in Big Tech. On Monday, a California jury sided with the video game maker Epic Games in its dispute with Google.

Epic had sued Google arguing that it had improperly used dominance gained from the Android mobile device operating system to become a monopoly gatekeeper of smartphone apps. Notably, Epic pointed out that the arrangement allows Google to receive as much as 30 per cent of the payments for in-app purchases.

The market cap of Alphabet, Google’s parent, has swelled to nearly $2tn. Its median employee earns nearly $300,000 annually. The social and legal question is whether such wealth creation is a fair byproduct of innovation and useful network effects.

Among the damaging claims that Epic made, the Fortnite maker alleged that Google had cut special side deals with handset makers as well as certain publishers like Activision Blizzard. The purpose of these transactions was allegedly to return a portion of the economics Google was earning to quell any rebellions that could have upended its dominance.

Epic wanted to operate its own app “store” rather than rely on Google’s expensive premises. The rents this saved Epic could then be reinvested or returned to customers it said. According to testimony, Google’s Play Store earns annual profits of $12bn at an implied margin of 70 per cent.

In testimony to the court recently, Google’s chief executive Sundar Pichai said that Android had created a cheaper and credible alternative to the Apple ecosystem. 

The public trial was replete with documents and records supporting the narrative that Google has been attempting to maximise rents that can result from widening market power. Success with a mobile operating system does not obviously justify the creation of an exclusive consumer app interface.

Google plans to appeal. But the real problem may be that the company simply got greedy. If it had levied a toll on developers of less than 30 per cent, it might have avoided legal dust-ups.