(Bloomberg) -- South Korea became the first country to force Apple and Google to open up their app stores to other payment systems, setting a potentially radical precedent for their lucrative operations everywhere from India to the U.S.
The National Assembly passed a bill Tuesday that will ban app store operators from forcing developers to use their online payment systems and instead allow users to pay through a variety of methods. The bill will become law as soon as it’s signed by President Moon Jae-in, possibly as early as next month.
The Telecommunications Business Act says users must be given a free choice of app payment providers and opens the door for companies like Fortnite maker Epic Games Inc. to transact directly with customers, bypassing the platform owner’s charges. Epic has taken the iOS and Android owners to court in various jurisdictions arguing their fees are unfair.
Apple Inc (NASDAQ:AAPL). and Alphabet (NASDAQ:GOOGL) Inc.’s Google, the effective duopoly controlling most of the world’s smartphones, face a raft of legislative measures in the U.S. rebuking their “gatekeeper control” and urging a curb on their power to dictate terms on app marketplaces. Both charge a fee of as much as 30% on purchases made through their stores and exclude alternative payment handlers, arguing this protects users from fraud and privacy invasion.
“This could presage similar actions elsewhere,” said Omdia analyst Guillermo Escofet, who specializes in digital consumer platforms. “The overriding political mood has become hostile to the enormous amount of power concentrated in the hands of the tech giants.”
Korean lawmakers are making their move ahead of plans by Google to introduce its 30% commission fee in October, reversing a years-long exemption for the country. The company’s announcement last year that it would make its payment system mandatory for non-gaming apps is widely seen as the trigger for the new legislation -- dubbed locally the anti-Google law.
The controversy over commissions goes to the heart of how Apple and Google sustain a dominance that’s endured since the start of the global smartphone era over a decade ago. Apple settled a wide-ranging class-action lawsuit with U.S. app makers Thursday, but without agreeing to major changes to its policies.
The revenue streams in question are central to profit growth for both Apple and Google. The iPhone maker’s App Store feeds broader efforts to grow income from services and subscriptions, producing around $20 billion annually, according to Sensor Tower. Google’s Android is booming in user numbers as India’s population gets online with the help of mobile devices, and app fees are a key way the company monetizes its otherwise free software.
Google said its payment model helps keep device costs low for consumers and enables platforms and developers to succeed financially.
“Google Play provides far more than payment processing, and our service fee helps keep Android free, giving developers the tools and global platform to access billions of consumers around the world,” a Google spokesperson said. “We’ll reflect on how to comply with this law while maintaining a model that supports a high-quality operating system and app store, and we will share more in the coming weeks.”
Apple emphasized that the ruling will erode safety protections for users, leading to a decline in trust in App Store purchases and ultimately fewer earning opportunities for developers in Korea.
“The Telecommunications Business Act will put users who purchase digital goods from other sources at risk of fraud, undermine their privacy protections, make it difficult to manage their purchases, and features like “Ask to Buy” and Parental Controls will become less effective,” an Apple spokesperson said.
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The ramifications extend beyond just the $142 billion world of apps. The confrontation strikes at the fundamental role played not only by Apple and Google but also Amazon.com Inc (NASDAQ:AMZN). and Facebook Inc (NASDAQ:FB). as the new gatekeepers of the digital economy. Over a decade, all four companies have built up vast online marketplaces on which their rivals do business.
Korea remains one of the few arenas where local players such as Naver Corp. and Kakao Corp. hold sway, though they’re under threat: YouTube this year became the nation’s top video service, for instance, edging out Naver.
Lawmakers now echo their U.S. counterparts in saying the absence of competition exposes consumers and developers to the whims of the duo. In India, startup founders have been especially vocal about getting shut out.
“The mood has changed over the past couple of years,” said Kim Dohyeon, business professor at Kookmin University and director at Korea’s Startup Alliance. “The in-app billing system creates a big barrier to entry for startups that are not generating profits.”
(Updates with comment from Apple)
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