More on the EU’s Market Might

A couple of follow-up items regarding my column the other day, in which I idly speculated about whether the DMA might lead Apple (and/or perhaps Meta and Google) to pull back from the EU market.

First, a correction/clarification. Based on Six Colors’s transcript of Apple’s Q1 2024 analyst call back in January, I quoted Apple CFO Luca Maestri as saying, in response to a question asking whether investors should be concerned that DMA compliance will hinder services revenue, “Just to keep it in context, the changes apply to the EU market, which represents roughly 7% of our global absolute revenue.”

The word absolute was a transcription error, however.1 Listen to the published recording of the call, and it’s clear that what Maestri actually said was specifically in answer to the question: “Just to keep it in context, the changes apply to the EU market, which represents roughly 7% of our global App Store revenue.” (My thanks to Oliver Reichenstein for the timestamped pointer to the recording.)

That’s an important correction that, as ever, I’m happy to make, but it doesn’t really change my speculation. I wrote:

It’s unclear whether Maestri was saying that the EU accounts for 7 percent of Apple’s worldwide App Store revenue, or 7 percent of all revenue, but I suspect it doesn’t matter, and that both are around 7 percent. App Store revenue ought to be a good proxy for overall revenue — there’s no reason to think EU Apple users spend any less or any more in the App Store than users around the world.

It’s certainly possible that EU citizens account for significantly more (or even less) than 7 percent of Apple’s overall global revenue, but it strikes me as very unlikely that the EU’s share of Apple’s overall revenue is significantly different from its share of App Store revenue. I struggle to come up with any explanation for why the EU might account for only 7 percent of App Store revenue but significantly more (or less) of Apple’s overall revenue. Why would overall revenue from any region differ significantly from the App Store revenue from the same region, on a percentage basis? But it is an open question. (I hope an analyst asks Cook and Maestri about it directly on the next quarterly call in May.)

Second, I missed that the European Commission, alongside its announcement that it had opened non-compliance investigations against Google, Apple, and Meta under the Digital Markets Act, also separately published remarks from its two leaders, executive vice-president Margrethe Vestager and commissioner Thierry Breton.

From Vestager’s remarks, which were delivered in English:

The third one relates to the objective of the DMA to open closed ecosystems to enable competition at all levels. Under Article 6(3) of the DMA, gatekeepers have an obligation to enable easy uninstallation of apps and easy change of default settings. They must also display a choice screen. Apple’s compliance model does not seem to meet the objectives of this obligation. In particular, we are concerned that the current design of the web browser choice screen deprives end-users of the ability to make a fully informed decision. Example: they do not enhance user engagement with all available options. Apple also failed to make several apps un-installable (one of them would be Photos) and prevents end-users from changing their default status (for example Cloud), as required by the DMA.

I don’t know what she means by “depriv[ing] end-users of the ability to make a fully informed decision” or “they do not enhance user engagement with all available options”. I can only guess that she’s complaining that Apple’s current browser choice screen doesn’t actively encourage users to pick a browser other than Safari? But it doesn’t encourage users to choose Safari, either, and the choices are listed in randomized order each time. The iOS 17.4 choice screen just says what a default web browser is, and then offers a list of the most popular browsers in the user’s country.

As I wrote this week, there aren’t many un-installable apps on iOS. I might be missing some, but the list I came up with: Settings, Camera, Photos, App Store, Phone, Messages, and Safari. Vestager makes clear in her remarks what wasn’t clear in the EC’s announcement of the investigation: they have a problem with Photos. If they follow through with a demand that Photos be completely un-installable (not just hidable from the Home Screen, as it is now), this would constitute another way that the EC is standing in as the designer of how operating systems should work. Photos is not just an app on iOS; it’s the system-level interface to the camera roll. This is integrated throughout the entire iOS system, with per-app permission prompts to grant differing levels of access to your photos. Vestager is saying that to be compliant with the DMA, Apple needs to allow third-party apps to serve as the system-level image library and camera roll. That is a monumental demand, and I honestly don’t even know how such a demand could be squared with system-wide permissions for photo access. This is product design, not mere regulation. Why stop there? Why not mandate that Springboard — the Home Screen — be a replaceable component? Or the entire OS itself? Why are iPhone users required to use iOS? Why are iOS users required to buy iPhones?

Then we get to Breton’s remarks, the first half of which were delivered in his native French. Here are two translations of his French remarks, from the iOS Translate app and from Google Translate. To my reading, there are no significant semantic differences between the two translations. Here’s the bulk of it, amalgamating the best from both translations:

And I will tell you a simple but important thing: in 18 days, the DMA has moved the lines of the digital giants more than in the last 10 years.

It’s not me who says it, but developers and users who finally see concrete changes and openness to give everyone the opportunity to gain market share, for example for browsers.

In 18 days, therefore, already very concrete results. Why?

Because it is an internal market regulation. This is where the revolution operates.

You know how much I fought for the DMA to be a so-called “domestic market” regulation, ex ante therefore. Because it is the best way to promote our continent, Europe, which is an open continent, but according to our conditions.

And a market of 450 million customers is simply unthinkable for anyone not to be there.

Where the digital giants could pay fines of several billion dollars without batting an eye — by the way, when they had to pay them, after long years of procedures, which was not systematic, far from it... — today none of them can afford not to be in our market.

This is the reality of the balance of power of the world in which we operate.

So does everyone play the game perfectly the first time? We are entitled to doubt it of course and we are here to doubt by definition in a way I would say.

At the very least, to check.

And that’s what we’re doing today.

Breton’s remarks in French were, in some ways, far zestier than his subsequent remarks in English. Breton lays bare the EC’s belief that they hold all the cards — that it is “unthinkable” for any of the designated gatekeepers not to conduct business in the EU, and that “none of them can afford not to be in our market.”

Perhaps he’s right, and I’m all wet for even speculating that one or more of the gatekeepers will pull one or more of their products from the EU market as a result of the DMA’s onerous demands and the threat of huge fees. But I, for one, consider it very thinkable. (Especially for Meta, as you’ll see next.)

From Breton’s remarks delivered in English:

First, today we are opening a case against Meta. We suspect that Meta is breaching the DMA rules on data combination [Article 5(2) DMA].

You all heard about Meta’s “Subscription for No Ads” model. With this new model, users have to pay if they want to use Facebook and Instagram without targeted advertising. And this has forced millions of users across Europe into a binary choice: “pay or consent”. And if you consent, Meta can use your data, generated for example on Messenger, to target ads on Instagram.

But the DMA is very clear: gatekeepers must obtain users’ consent to use their personal data across different services. And this consent must be free! We have serious doubts that this consent is really free when you are confronted with a binary choice. With the DMA, users who do not consent should be provided with a less personalised alternative of the service, for example financed thanks to contextual advertising. But they do not have to pay.

The EC’s problem here is that when faced with the clear choice between using Meta’s platforms free of charge with targeted advertising, or paying a monthly fee, the overwhelming majority of people choose to use the service free of charge with targeted ads. Just because typical people overwhelmingly prefer free services with targeted ads doesn’t mean that a paid subscription isn’t a fair alternative. Here’s Margrethe Vestager herself, back in 2018, in an interview with Jorge Valero of Euractiv:

My concern is more about whether we get the right choices. I would like to have a Facebook in which I pay a fee each month, but I would have no tracking and advertising and the full benefits of privacy. It is a provoking thought after all the Facebook scandal. This market is not being explored.

A provoking thought indeed, but apparently this was only worth exploring until they found out that EU citizens would overwhelmingly consent to free services with targeted ads. Privacy fundamentalists can’t seem to accept that most people don’t share their fervor that consensual targeted advertising is inherently wrong. Most people see it as a good deal.

The obvious solution would be for the European Commission to pass a law banning targeted advertising. But I suspect they haven’t done that, and won’t, because so many publishers in the EU use targeted advertising (along with “pay or OK” subscription offerings). They don’t want to eliminate all targeted advertising, just Meta’s (and Google’s), but that’s hard to put into written law while claiming not to be targeting specific American companies.

It’s certainly possible that Meta can devise ways to serve non-personalized contextual ads that generate sufficient revenue per user.2 But if they can’t, the rubber hits the road on Breton’s belief that none of the designated gatekeepers “can afford not to be in our market”. Why exactly would Meta choose to remain in the EU if they’re forced to offer their services for pennies on the dollar (or in this case, cents on the euro)? Out of the goodness of Mark Zuckerberg’s heart?

Consider too that if Meta goes along with this interpretation by the EC of the DMA’s requirements, and offers a vastly-less-lucrative free-of-charge option to use Instagram and Facebook without targeted ads in the European Union, there’s nothing to stop regulators and legislators around the world from demanding the same. Conceding to this might mean not just generating only a fraction of Meta’s current revenue in the EU, but generating only a fraction of its current revenue worldwide.

Breton — after casting a stink eye at Google for presenting its own hotel, flight, and shopping recommendations in web search results, and at Amazon for promoting its own Amazon-branded products (a shocking practice for a retailer — good luck ever finding Kirkland products at Costco, Up & Up at Target, or, say, Ol’ Roy dog food at Walmart, right?) — concludes with a threat:

Should we have indications of ineffective compliance or possible circumvention of the DMA, we will not hesitate to make use of the DMA’s full enforcement toolbox, including innovative tools that did not exist in antitrust enforcement such as the retention orders. And if our investigations conclude that there is lack of full compliance with the DMA, gatekeepers will face heavy fines.

We have a duty: ensuring full compliance with the DMA. And we will do all we can to create an online space that is fair and competitive to the benefit of all consumers and businesses operating in our Single Market.

Turns out, though, that actual users don’t agree that removing longstanding features from Google search results is somehow for their benefit. I’m guessing they’d see even less benefit if entire popular services and products were removed from the EU market.

  1. Jason Snell uses OpenAI’s amazing Whisper to generate the first draft of these transcripts, but he does proofread them. But neither he nor I thought “absolute” sounded weird in that context. Snell, of course, has now corrected the transcript. ↩︎

  2. One obvious solution would be to show more ads — a lot more ads — to make up for the difference in revenue. So if contextual ads generate, say, one-tenth the revenue of targeted ads, Meta could show 10 times as many ads to users who opt out of targeting. I don’t think 10× is an outlandish multiplier there — given how remarkably profitable Meta’s advertising business is, it might even need to be higher than that. But showing that many ads would be such a bad experience that I suspect it would land Meta right back where they are today with the paid subscription option, with the EC declaring it non-compliant because users don’t want it. ↩︎︎