At the Heart of the European Commission’s Investigations of Apple Is a Basic Question: How Should Apple Make Money?

By Randy Picker, Pro Market

Last week, the European Commission launched two investigations into Apple regarding iOS. The first focuses on the App Store and whether Apple is distorting competition for music streaming and distribution of ebooks and audiobooks, while the second is focused on whether Apple is impermissibly limiting competition with Apple Pay. Both of these investigations are part of a broader look at digital marketplaces ongoing in Europe, the United States, and most of the world.

To understand how we reached this point, we should backtrack a little. On March 13, 2019, Daniel Ek, the founder and CEO of Spotify, announced in a blog post that Spotify had filed a complaint with the European Commission, as Spotify believed that Apple was using its control over iOS to compete unfairly with Spotify in the music streaming market. 

Streaming has revitalized the market for paid recorded music, which before then had been in a steep two-decade decline.

Spotify runs a freemium business model. You can listen for free, but if you do that, just like old-time over-the-air radio, you will pay by listening to ads. This is a standard two-sided business model, where a broadcaster—in this case, Spotify—assembles consumers to sell to advertisers. 

Advertisers, of course, don’t expect to reach those listeners for free, and they pay Spotify for that right, roughly €217 million in 2019. But if Spotify users get tired of the ads, unlike classic radio, they can chose to dump the ads by switching to Spotify premium. That goes for $9.99 per month, though there are a number of bundles and plans. 

Spotify’s 2019 revenues for premium were €1,638 million. That is where the real money is, and that makes converting a free customer into a paying one especially important for Spotify. At the end of 2019, according to the company’s reporting, Spotify had 153 million, ad-supported monthly active users (MAUs), as it puts it—I am one of those—and 124 million premium subscribers. Spotify competes with, among others, Amazon, YouTube, Pandora, Tencent, and, of course, Apple.

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