On Apple’s monopoly power to destroy HEY

This statement was delivered to the democratic side of the House Antitrust Subcommittee upon invitation on July 17, 2020 in the committee’s preparation for the forthcoming July 27, 2020 showdown with the Big Tech CEOs.

Two years ago, we got the audacious idea to take on Google, Microsoft, and Verizon to provide a new, fresh alternative to their email services. It’s been about 16 years since people were last excited about getting a new email address – Gmail was introduced in 2004 – and frankly, it shows. These legacy services have been virtually devoid of innovation for over a decade.

And why wouldn’t they be! They’ve already captured the market. Between Gmail, owned by Google, Hotmail/Outlook, owned by Microsoft, and AOL Mail/Yahoo Mail, owned by Verizon, you have about 85% of the US email market captured by three players. And out of that, Gmail alone is about 55 percentage points.

But! Despite this near-total capture by big tech, the underlying protocol of email is still just barely free and open. You don’t have to ask anyone’s permission to make a new email service. (Or so we thought.)

Fast forward millions of dollars in investment to June 15, 2020, which was the day we opened the doors to our new email service, and were met by every entrepreneur’s dream: amazing reviews and customers tripping over themselves to signup and pay for our product.

But the celebration didn’t last long. That same day, we also received a rejection letter from Apple’s App Store, saying that the HEY application they had just approved a few days earlier, was actually not in compliance with their rules after all, and unless we started using their payment processing system, along with the 30% cut of revenue it would entail, they’d kick us out of the store.

The first reaction was simply disbelief. We’ve been in Apple’s App Store with our Basecamp application, which also sells service subscriptions on the web, and simply has an iOS application that allows someone to access that subscription, since around 2012. This was not our first time at the rodeo!

We had studied Apple’s written rules, the precedents they’ve set, and were well-aware of all their unwritten rules too. Gmail, for example, also sells subscription email services and has the #1 Productivity app in the App Store. But they do not pay Apple 30% of revenues nor offer in-app payment. So we thought this was simply a mistake, and tried to appeal through all the backchannels.

None of that worked. Apple doubled down the very next day on us either paying them 30% or face eviction from the App Store. So here we are, on day two of a massively successful product launch, which was supposed to be about fighting THE OTHER big tech monopolist in our orbit, Google, and we’re suddenly in a battle for our very existence over Apple’s threat to kick us out of the App Store.

After exhausting all our modes of appeal, I went bananas on twitter in a thread that went viral, and which prompted dozens of dozens of other developers to reach out to me in private with similar tales, the press to take a keen interest, and customers to be outraged at Apple’s shakedown tactics.

So let’s pause for a moment here in this story. Why is what Apple’s doing a problem? Couldn’t we just take our service somewhere else?

In a word, no. Apple is unlike any other platform when it comes to the North American market for premium services like HEY. As of today, 90% of everyone who pays for our service uses at least one Apple device. 3/4 of all paying customers have the iOS HEY app that Apple was threatening to evict installed on their phone.

Apple isn’t just a dominant player in this market, they are the market. Without access to the iPhone, we’re dead. And even customers who’d ALREADY signed up for our new service told us as much: Unless we could guarantee that our app would be available and be updated, they just couldn’t commit to becoming or staying customers.

So those are the stakes: Apple controls who can and cannot compete in virtually all sectors of the digital economy through the monopoly power they wield capriciously with the App Store. It is simply not possible to even get the chance to take on the likes of Google, Microsoft, and Verizon with a new email service without begging Apple for permission to do so.

We were sitting on a rocket ship of a successful new service, eager to hire more people (we counted that we’d need to hire 12 more people to deal with the new business!), but were at the same time essentially paralyzed from making any investments, because what if Apple wouldn’t give us the permission to exist?

It’s worth noting here that we are already paying Apple for the privilege of having access to the App Store. All developers must pay $99/year for a developer license. Apple brags of having millions of developers, so they’re in essence already making hundreds of millions of dollars, just in licensing fees. Nobody is asking for a free ride here! If it costs Apple more than hundreds of millions of dollars to run the App Store, they can raise their prices. We’d gladly pay $199/year for a developer license.

But what Apple is asking for is a cut of revenues, at “highway robbery rates”, and it’s simply absurd. Imagine if the telcos demanded a cut of company revenues, since they provide the phone line that connects customers, in the heyday of their monopoly? Imagine if the railroads demanded a cut of company revenues from the goods shipped in the heyday of their monopoly?

Apple’s customers have already paid Apple upwards of $1400 to buy their iPhone. This is why Apple is a 1.67T company as of today! They are the most profitable technology company the world has ever seen. They already charge developers licensing fees that amount to hundreds of millions of dollars in order to reach these iPhone users. But now they also want to force the entire digital economy to hand over 30% of revenues? Absurd is one word you could use, illegal should be another.

Anyway, back to our tale of woe. After a two-week campaign, fighting on twitter, in the media, and seeing customers support our cause in the thousands, Apple backed off. But only by an inch. We escaped the 30% cut, but they forced us to come up with a new free, temporary email service, such that the app would “do something” when you download it. That solution came from a new, unwritten rule that Phil Schiller, the Apple VP responsible for the App Store, made up on the fly in interview with the press.

Never mind the fact that there are scores of apps that follow the path we had originally taken, where you can’t use the app unless you login with an existing subscription bought elsewhere. Including Netflix, most banks, and one of Apple’s own apps. Someone compiled an inventory of examples at https://youdownloadtheappanditdoesntwork.com.

So Apple, who otherwise purports to being this champion of privacy, is telling a new privacy-focused, for-pay email service that we must offer a free tier to be allowed in the App Store. I’m sure this committee is well aware of how companies have been monetizing free services on the internet. It’s usually with invasive ads, sale of data, or other privacy-intrusive tactics.

A company like Facebook, that makes tens of billions of dollars every year from their iOS app, simply has to pay Apple the $99/year developer license. But our HEY service would have to pay Apple $300,000/year, if we made but a million dollars? It doesn’t take a degree in formal logic to spot the contradiction.

Apple should not be able to restrict software innovation in the US. They should not be allowed to tell a service like HEY whether we can run a paid service or have to offer a free tier. Even our story with HEY, despite that we won some relief in the court of public opinion, has become a cautionary tale. What other small software company is going to invest years of effort and millions of dollars in a new service, if Apple might kill them dead on their birthday. This is how you stifle entrepreneurship, depress innovation, and prevent the next generation of makers from ever having a chance to compete.

I’ve focused on Apple in this example, because that’s the surprise adversary we faced. But the story could just as well had been about Google, if our app had been of a different sort or in a different market. Google’s Play Store policies are essentially the same as Apple’s, although they’ve wielded them slightly less aggressively so far. But make no mistake, if Apple gets off scot-free, Google is surely coming for their 30% cut of the entire digital economy as well.

And this is really the essence of this investigation, isn’t it. In everything from software to advertising to books and beyond, the big four tech companies have captured insufferable monopolies that they’re using to distort and shakedown markets, prevent new companies from succeeding, and ensure they never actually have to compete on the merits of innovation.

It’s indeed insufferable. And congress must act.

Specifically for Apple, our plea is simple: Force Apple to give us the choice of payment processing, and the freedom to tell customers. If Apple faced competition for their 30% cut, it would not be 30% for very long. Customers would win by seeing lower prices, be able to purchase subscriptions directly from companies, and Apple’s competitors would not be unfairly disadvantaged.

This is the essence of the two EU investigations that, as irony would have it, were announced the very same week that Apple threatened to kill our new business. It won’t solve everything, but would go a very long way to restoring basic competition.

See also my past testimony in front of the House Antitrust Subcommittee, which was delivered before HEY had even launched, and addresses the same issues around the App Store.