Apple Threatens North Dakota, Suffers Crushing Loss in Arizona: "A Lot of It is Just Fear"

Facebook, Apple, Google do not obey the law. Lawmakers know it.

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Welcome to BIG, a newsletter about the politics of monopoly and finance. If you’d like to sign up, you can do so here. Or just read on…

Two weeks ago, Apple and Google managed to defeat a major bill in North Dakota to force competition in app stores. This week, the Arizona House of Representatives defied the tech giants and passed the very same bill. I’m writing about why this series of battles, and what is a very clear defeat for big tech, matters.

Plus, a Gore-Tex monopoly, how Google bought and ruined Waze, a roll-up of hiking media and tools, and the surprising new attack on big tech power and Chinese dominance from Wall Street regulator nominee Rohit Chopra.

And now some house-keeping. My organization is putting on an amazing web event on Thursday (tomorrow) at 2pm ET on how the production and deployment of nuclear weapons has been monopolized. It’s called Monopolization and America’s Nuclear Triad: What Could Go Wrong? You can RSVP here. Additionally, cybersecurity writer Bruce Schneier quoted this newsletter on Solar Winds in his New York Times piece on the economic roots of cybersecurity vulnerabilities. I’m a huge Schneier fan, and I’m blushing.

And now…

Small States and Big Tech Fight Over $64 Billion

There’s a new front in the battle over big tech power: the states. We’re used to countries taking on big tech power, through Congressional investigations, antitrust cases from the Federal government, or Facebook and foreign countries like Australia fighting who has to pay for news. But now, state legislators, who were the key anti-monopolists of the 19th century, are starting to flex their muscles once again.

Just today, the Arizona House of Representatives passed a bill, 31-29, barring the use of app store monopolies to take large fees from app makers. This vote was a significant victory for anti-monopolists, but a bizarre one. Democrats were the main stumbling block, state legislators were scared, and the battle actually started in North Dakota. Moreover, the fight is not over, as the bill will be debated in the Arizona Senate and the Governor’s office, and it will also go to other states as legislators elsewhere are emboldened.

So what exactly happened? And what does it mean?

Steve Jobs Built the App Store to Monopolize

App stores are markets, places you use to get access to a whole set of independent applications. Since Apple’s creation of its app store in 2008, businesses have built an entire ecosystem of mobile programs, a truly wonderful set of tools, games, and storytelling mechanisms to foster commerce and culture. To give you a sense of the significance of this revenue stream, Apple made $64 billion of gross revenue from its app store last year. This is big business.

The problem with app stores is that the two main ones are under the tight control of the two firms, Apple and Google, that make the core software to run smartphones. You can only buy apps for your iPhone through Apple’s app store, because Apple bars rivals from setting up app stores on the iPhone. Moreover, you have to use Apple’s payment system to buy apps, because Apple also bars rival payment networks from its app store. Google has slightly less control for phones that run its mobile operating system, Android, though essentially the same setup.

Together, Google and Apple have 99% of the smartphone market. Because it’s basically impossible to sell mobile apps without going through their app stores, both can charge high prices - 30% of the take - for developers who want to sell apps on phones they control. For a sense of perspective, a credit card charges 2-3% to a merchant for access to a payment network, and this price is ten times that for a comparable feature.

More importantly, control over app stores, and in particular, the feature of the app store that lets you pay for something, is a critical moat for these firms to maintain their market power. Documents revealed in a court case on ebooks proved Steve Jobs explicitly designed Apple’s payment system policies to discourage people from switching from the iPhone.

Most credible researchers who have looked at app stores recognize that these firms have a lot of power and control over developers. The House Antitrust Subcommittee noted that Apple, for instance, “has a dominant position in the mobile app store market and monopoly power over distribution of software applications on iOS devices.” The problem has even gone to the Supreme Court where app consumers sued in a case called Apple vs Pepper.

The Debate Starts in North Dakota

App makers have been angry and terrified over Apple and Google and their control over app stores for years, and the anger finally boiled over last year when major video game developer Epic Games and Apple got into fierce litigation over access to the Apple app store. Epic argued Apple runs a monopoly over apps and payments, and uses it it in ways that violate the Sherman Antitrust Act. Other smaller firms, Basecamp and BlueMail, also began tussling with Apple over the phone giant blocking their email applications over a similar issue.

As it turns out, there are app makers all over the country, and state legislatures can actually pass laws and regulate their own markets. In North Dakota, a representative from the Coalition for App Fairness, a trade association started by Basecamp and Epic, suggested to state Senator Kyle Davison that he introduce a bill on app store monopolies. He and David Clemens - both Republicans - did so, putting forward a proposal to prohibit app store monopolies in North Dakota.

Their proposal did three things. First, Apple and Google would have to allow rival app stores. Second, these firms would have to allow for rival payment systems within their own app stores. Third, they would not be allowed to retaliate against firms that use rival app stores, The goal of the bill was to end Google’s and Apple’s ability to control smartphones.

The bill had local support from newspapers and business, with the local Chamber of Commerce, newspapers, and North Dakota technologists supporting it. One local app making told the Bismarck Tribune that Apple an Google control “so much about what consumers can get, what businesses can do, and it really puts these businesses in a tough position.” These firms, said another North Dakotan businessman, have "injected themselves into every aspect of the revenue-generating model of every business that runs on their app store, in any transaction, anywhere down the line."

Over the course of the next two weeks, Apple, along with various libertarian lobbying groups like Americans for Prosperity, responded by flooding the state legislature with lobbyists. Apple had six lobbyists in the state capitol talking with members for eight hours a day for two weeks. This kind of pressure doesn’t always work, but in this case, the Chair of the right legislative committee - state Senator Jerry Klein of the Industry, Business, and Labor Committee - agreed with Apple.

“The proponents claim there is a monopoly, but we learned that there are more than 20 other app stores on the internet,” Klein said in a debate over the bill. The bill got reported out of his committee with a thumbs down recommendation, and on the floor of the legislature, Klein, argued the bill was unconstitutional, immoral, and unethical. Klein’s most interesting argument, however, was that the fight was simply too big for the state. “The proponents are asking North Dakota to join their lawsuit,” he noted, “on our taxpayer’s dime.” North Dakota, he said, is “not the place to settle a business dispute over app store fees.”

Davison narrowed the bill just to the payment piece, meaning that Apple and Google would still be able to bar rival app stores, but would have to allow other payment networks, which would likely cut app store prices. It didn’t matter. The bill failed overwhelmingly, as bills usually do when the committee chair with jurisdiction opposes it.

I asked Senator Davison why this bill met such a hostile reception among state legislators despite local support, and he walked me through the thinking of a state legislator confronted with this kind of issue. It’s a new and big issue, he told me, and most policymakers have never confronted something like this before. Where does it really fit into one’s legislative priorities in the context of schools, transportation, Covid, and other local questions?

More than that, he said, “a lot of it is just fear.” Apple implied, though did not state, that it might have to pull its app store out of North Dakota if the bill passed, much as Facebook punished Australia. Moreover, even before you get to an implied threat like that, many legislators were intimidated into thinking that North Dakota simply isn’t big enough for the fight. “Apple has deeper pockets than the state of North Dakota,” Davison told me. The entire North Dakota budget is less than $8 billion a year, while Apple spends roughly a billion dollars a year just on legal costs. And the threats aren’t idle; in all likelihood, Davison told me “Apple would just ignore the law and proceed until they get sued.” If Apple did so, then state legislators feared they would have to spend taxpayer money trying to bring Apple to heel, money that would otherwise go to schools or roads.

Now, North Dakota would ultimately have won a showdown with big tech. If North Dakota passed the bill, just as in Australia, Apple and Google would ultimately be forced to comply. Big corporations have a lot of power, but when faced with policymakers who actually have legal authority, as well as other businesses on the other side, they will lose. Still, threats and fear are powerful, at least at first.

The Debate Moves to Arizona

And that brings me to the next stage of the fight, which is taking place in Arizona. There, the same app store bill, narrowed just to the payment piece, is sponsored by the relevant committee chair, Republican Regina Cobb. Last week, her bill passed out of committee and onto the floor of the legislature. Today it went onto the floor for a debate and a vote.

Oddly, the the anti-monopolists ran into an unexpected hurdle: progressive Democrats, who provided most of the opposition votes to the bill. I watched the hearings and debate over the bill last week and today, and it was surprising to hear a progressive Democrat named Cesar Chavez, who has both ‘immigrant’ and ‘AZLGBTQ’ in his twitter biography, lavish praise over libertarian lobbyists at the Goldwater Institute and the American Legislative Exchange Council (ALEC), both of which are pillars of the modern conservative movement. (ALEC, for instance, even lets corporations vote on its agenda.) Chavez cautioned against the use of the term monopoly, and said Arizona shouldn’t “get involved in disputes between private businesses,” repeating one of the main arguments from Apple.

Meanwhile, conservative Republican Regina Cobb, the bill’s sponsor, talked approvingly of the Democratic House Antitrust Subcommittee report on big tech platforms. And Republican after Republican got up to blast big tech monopoly power. It was a bizarre, as tech reporter Emily Birnbaum noted on Twitter.

Emily Birnbaum @birnbaum_e

The politics of this fight are so unexpected – I would really think the Democrats were Republicans if I didn't have their party affiliations in front of me.

Leah AntiTrustButVer1fy Nylen @leah_nylen

Rep. Kelli Butler (D): "This bill talks a lot about pretending there is consumer protection. There is no consumer protection in this bill. It is simply forcing Apple to change its business model.”

I tend to lean towards being a progressive Democrat, and my organization, as well as a host of progressive groups nationally and in-state, sent a letter to the Arizona legislature in support of the bill. And yet Democrats were still skittish, probably for the same reason as North Dakota legislators.

Proponents of the bill argued going after monopoly power over app stores would bring a significant influx of business to Arizona, and would reduce inequality and right-size the market so it is fair. As the co-founder of Basecamp put it, if the bill passed, “it would be mind-blowing” and “change the entire ecosystem of Big Tech,” serving as the “first major piece of legislation anywhere in the world that's directly addressing this monopoly power and providing the relief, not just slapping them with a fine."

There are big lobbying resources pouring into the state, as well as a host of pre-existing relationships between giant multi-nationals and libertarian lobbying groups. But the same questions are probably in the minds of these legislators as were in the minds of those in North Dakota. Is this really a good priority for the state? Do they really want to pick a fight with these giant multi-nationals? Is this really an issue they want to have to learn about? Do they want to spend money fighting a $2 trillion firm?

And yet, enough of them did believe in taking a stand. Just a few hours ago, the bill narrowly passed the Arizona House, 31-29, on a party-line basis. All but one Republicans voted for it and all but one Democrat voted against it. It’s too soon to declare app store monopolies over. The bill isn’t law, it has to pass both houses and be signed by the Governor first (and Apple has hired the former chief of staff to the Governor to lobby against it). it will now head to the state Senate, and potentially the Governor.

Still, it was a surprising defeat for big tech, and it will resonate across the nation. The same kind of bill is being floated in state legislatures all over the United States. In Minnesota, Republican state Sen. Mark Koran and Democratic state Rep. Zack Stephenson have introduced a version of it. And four or five other state legislatures are considering it.

(Incidentally, if you want to make your voice heard, find out who your local state rep is and call their office and ask them to introduce this kind of bill. State reps don’t hear from constituents that often, so your voice will matter).

My guess is that this bill will become law somewhere, with enforcement conflicts to follow. Apple and Google will kick and scream, but as with Facebook and Australia, they will eventually fold. In a democracy, the rule of law does matter. We just haven’t applied to the powerful in so long that sometimes we forget.

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I’m going to change up how I write news blurbs. I used to put these snippets into the newsletter, but that made them hard to find and comment on. I am publishing them separately in individual blog posts, so that we can read them, link to them, and comment on them separately.

Here you go:

• The Gore-Tex Monopoly: “They Can Make or Break You”: Yes there’s a Gore-Tex monopoly, or at least was one.

• The Monopoly That Makes It Harder for Soldiers to Move: The Pentagon just consolidated 900 moving company contracts into one, and of course they picked a firm - the American Roll-On Roll-Off Carrier Group- caught for price-fixing abroad. This piece speaks to a procurement practice Bill Clinton introduced called ‘contract bundling’ that helped monopolize government contracting. Thanks Bill!

• How Google Ruined Waze and Consolidated Mapping: The founder of Waze discusses how Google destroyed his firm after buying it.

• Outside Media Rolls Up Hiking Media and a Hiking GPS Tool: If you love the outdoors, pay attention to this monopoly.

• Anti-Monopolist Rohit Chopra Discusses Taking on Big Tech at his Nominating Hearing to run a Wall Street Regulatory Agency: Chopra is the most aggressive anti-monopolist in the regulatory community, and he’s potentially up for a very big job.

Thanks for reading. Send me tips, stories I’ve missed, or comment by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.

cheers,

Matt Stoller

P.S. I got an interesting comment from a reader.

According to the GI doctor who did my wife's colonoscopy yesterday there's a nationwide shortage of the bowel prep drink 'Golytely' and they don't know why it's not readily available anymore. They're prescribing Mirolax and Gatorade as a poor substitute for the much preferable standby of Golytely. I thought of you and your articles on monopolies, manufactured shortages, and price gouging. Could that be what's going on here?

My favorite part of writing this letter, hands down, is your feedback and observations on weird monopolies and problems in commerce. So add comments to this post, or send me emails.