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Josh Hawley had some questions about how Apple got the money to buy back $58 billion worth of stock last year.
“I want to focus on one major source of that revenue,” the Republican senator told Apple’s attorney. “It’s not innovation, it’s not research and development. It’s the monopoly rent you get from your app store.”
I suspect that unlike me, you had better things to do last Wednesday than the Senate Antitrust Subcommittee hearing on Apple’s and Google’s mobile app stores. But if you did tune in, and you’re not an economist, you might have been baffled by that exchange. What is a monopoly rent – a term that was mentioned over and over during the hearing – and why is it bad? What does it have to do with app stores?
In economics, the term rent refers to money a company earns in excess of what it would get in an efficient, competitive market. In other words, it is money that is not made by actually creating value. When companies lobby the government to give them a tax break or special regulatory favor, they are often accused of “seeking rent.” It is a pejorative term and its precise boundaries are up for debate; it can be difficult to draw the line between fair profits and unreasonable rents. But the premise is that companies should try to get rich by improving their products and services, not by playing the system.
Rents are a central concern of antitrust law. One of the most fundamental reasons why monopolies are bad is that when a company takes over a market, it can raise prices without worrying about being undercut by competitors. Thus, a “monopoly rate” is the money a monopolist earns not because it offers the best product or service, but only because it has the power to charge more. And that is exactly what the subcommittee accused Apple and Google of. Every company forces app developers to use their payment systems for digital purchases in apps downloaded through their stores. And each takes up to 30 percent off those purchases. This state of affairs costs companies like Spotify, which testified at the hearing, a huge amount of money, because Google and Apple control the entire mobile operating system market: any customer who logs in on their phone, instead of on their desktop, has to go through the app store toll gate. (Technically, Google allows apps to be sideloaded without using the app store, but in practice few people bother to do so.) The commission is also at the center of civil antitrust cases involving video game companies. developer Epic against both companies. And according to the senators who held Apple and Google accountable, it leads app developers to pass those higher costs on to consumers.
At the hearing, representatives from Google and Apple argued that most developers end up not paying the 30 percent rate. But they also stressed that the commission, which the largest, most revenue-generating apps must pay, is competitive and industry standard. The problem is that they are the entire American industry. And no one on the antitrust subcommittee, from either side, seemed convinced that the tens of billions in annual revenue the companies earn through the committee is anywhere near what they would earn if they didn’t have such control over the app market. As subcommittee chair Amy Klobuchar put it towards the end of the hearing, she summarized the positions of her Democratic and Republican colleagues: “I just think something is pretty messed up.”
The in-app payment commission isn’t the only app store-related allegation being leveled against Apple and Google. Among other things, they are also accused of using their access to competitors’ data to inform their own proprietary apps and then favoring that offering. (In a spirited moment, Senator Richard Blumenthal asked whether the companies maintain a firewall between the teams handling data from the app store and the teams responsible for product design. The answer was no.) But the committee looms large mainly because it perhaps the purest distillation of monopoly revenue from all Big Tech antitrust investigations. This helps explain why the subcommittee was unusually, almost eerily informed – the usual grandiose and weird off-topic partisan rants were essentially absent. The term “monopoly rent” may be jargon, but the concept it describes is intuitive. Don’t underestimate the power of a simple argument. The alleged rental collection days from Google and Apple could be numbered.
This story originally appeared on wired.com.