[INTERVIEW] Google's in-app payment rules to limit consumer choice

Recent Kakao-Google conflict shows even Korea's most popular app is so dependent on Google

By Kim Yoo-chul

Despite its decision to accept the use of third-party payment services of smartphone apps in major markets, Google's in-app payment rules are still at the center of controversy in South Korea, as the country's top telecom regulator has been looking to see if the rules violate the nation's new laws that went into effect last year.

The issue erupted when Google made it mandatory recently for app developers to use only its billing system. But in South Korea, the turf of KakaoTalk and Naver, the intent of that legislative amendment was and remains that application developers should be able to bypass Google's, Apple's and other app store operators' fees on in-app payments.

A leading patent expert claimed Google's in-app payment rules will reduce consumer choice in South Korea.

"South Korea has multiple reasons to take action here. The app tax is ultimately paid by consumers and ― by making app development much less profitable than it could be ― reduces customer choice," Florian Mueller, an intellectual property expert who is also founder of the popular FOSS Patents blog, said in a recent interview.

"But the abuse of platform monopolies also affects three industries in which South Korean companies are major players ― smartphones, apps (particularly games, that category generates most in-app purchasing revenues) and connected vehicles, which are like phones on wheels."

Florian Mueller

The South Korean legislature last year made the determination that app developers had to be protected from "abusive rules" imposed by Google and Apple. Mueller said Google has to comply if the company wants to continue to do business, here. "If Google can't offer its own app store in South Korea, users will download all of their apps from the device makers' stores such as Samsung's Galaxy Store, which is the way it already works in China for other reasons," he responded.

Google's in-app payment rules don't allow apps to include external payment links even in South Korea. Google blocked updates by KakaoTalk messaging app recently for breaking its rules. Kakao's disagreement with Google was not whether KakaoPay could be used because, under Google's rules, it can be, but only if payments are processed within the app and Google collects its 26 percent.

Kakao had wanted to bypass Google's "app tax regime" altogether, by sending users to its payment service outside the app, letting users pay there and paying Google nothing. The reason for Google's refusal was Kakao's external payment methods via its official website.

After getting blocked by Google, Kakao said its special emoji purchases dropped by a third because of Google's rule change. The Korea Communications Commission (KCC) started a fact-checking investigation into the country's three mobile app stores.

Regarding Google's blocking of the updates, Mueller said Kakao made a "smart strategic move."

"Kakao submitted updates to Google that were certain to be rejected, thereby giving the KCC a case of abuse and actual injury to investigate," he said.

From Google's standpoint, if payments are done outside the app, Google loses control and can't ensure that all transactions are reported, losing out on its 26 percent cut.

Google previously collected 15 percent of sales from developers as a commission, but will lower it to 11 percent even when external payment systems are used. App developers that have been paying 30 percent will see it reduced to 26 percent.

According to Mueller, who previously advised Microsoft and Oracle, everyone in the app industry knew that Google had not done enough to bring its app store rules into compliance with Korea's amended Telecommunications Business Act (TBA).

"The whole idea behind the app store part of the new TBA was to give app developers the choice between?either?using Google and Apple's in-app payment systems that come with 30 percent tax?or?bypassing those systems in order to save the 30 percent, or at least most of it," he said. "But Google and Apple don't want anyone to avoid the?30 percent app tax,?so they make it economically unattractive to use other payment methods."

S. Korea positioned to say Google violates law

The economic damage to Kakao from not being able to update its app on Google Play Store would have been unsustainable in the long run.

"After a short period, Kakao seemingly caved to Google and complied with those unfair rules. But that actually even strengthens the KCC's case. It also shows that even South Korea's most popular app is so dependent on Google that it has to obey the tyrant. And now the ball is in the KCC's corner," Mueller said, adding that alternative payment systems will only succeed if developers avoid all or most of that app commission fee, and if they pass on some of those savings to users to motivate them to register for the alternative payment methods.

The country's top telecom regulator is positioned to say that Google is out of compliance with South Korea's TBA because the Kakao case illustrated that Google is unrepentant and recalcitrant. "At a legalistic level, Google will foreseeably argue that the TBA's language doesn't specifically require Google to allow apps like KakaoTalk to completely circumvent the 30 percent app tax," he said. "In the end, this will have to be resolved in court. That case may take years of litigation to be resolved, but it's worth pursuing."

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When asked about the global push for taxing digital businesses, he said he was expecting the United States may introduce an app tax system.

"South Korea became the first country in the world to tackle Google and Apple's app tax through legislation. South Korea's decisive action gave additional courage to lawmakers in two much larger markets: the U.S. and the EU," he responded.

"The plan to pass new laws on app stores was already being discussed in those places. But it takes a strong political determination to actually make it happen, especially when two of the world's richest companies (Google and Apple) pay lobbyists to make the spurious argument that allowing other payment systems compromises the security of mobile phones. In the U.S., it's difficult, but may still happen this year."

He cited Apple and Google's dominance in mobile application stores, which he refers to as "Goopple," as a threat to the healthiness of the digital platform economy.

"Google and Apple have won a 'winner takes all' game, and now Apple controls a billion people's access to the internet and Google's Android operating system is used by several billion people worldwide. Capitalism alone is not the answer because of network effects: no one can establish a third mobile operating system for which there would be enough apps that end users would consider using it," he said.

Within that context, he believes the 30 percent commission on apps is a "serious issue," as it is more about a censorship system. "Even governments are faced with take-it-or-leave-it situations. The United Kingdom couldn't provide some COVID tracking functionality enabling users to check in at a restaurant or bar by voluntarily scanning a QR code because Apple and Google didn't allow that functionality."

Additionally, he claimed Google and Apple are being engaged in "self-preferencing," meaning their in-house offerings get advantages. "Apple doesn't allow anyone else's apps to use the near-field communication (NFC) chip in the iPhone for payment services that could effectively compete with Apple Pay. And Apple has recently taken its abusive conduct to the next level by essentially destroying the entire advertising business on iOS under a privacy pretext. A U.S. venture capital investor even raised the question of whether Apple's destructive advertising policy even contributes to a potential recession, at a level with inflation."

The Digital Markets Act is now effective in the EU and talks are underway in the United States on a bill asking Google and Apple to open up their distribution services. Apple is refusing to do so because of consumer safety concerns. Plus, other unknown conflicts with authorities remain unresolved.