Google and Apple hit by South Korean law giving app developers more payment options

By Michelle Toh and Jake Kwon, CNN Business

Google and Apple will have to allow app developers to use alternative payment systems under legislation just passed by South Korea that could set the stage for similar action in other countries.

The amended Telecommunications Business Act was approved by the country’s National Assembly on Tuesday, with the backing of President Moon Jae-in’s party. It will become law once President Moon signs it.

Under the new law, developers will be able to select which payment systems to use to process in-app purchases, meaning they may be able to bypass hefty charges imposed by the two longtime leaders.

Apple’s commissions, for example, go as high as 30% on some purchases made through the company’s platform — and developers say they have little choice but to comply, since Apple does not allow customers to download apps from any source other than the company’s official store.

The South Korean bill bans app store operators from “unfairly using their market position to force a certain manner of payment” upon businesses. Once enacted, violators could be fined up to 3% of their annual sales, in addition to up to 300 million Korean won ($257,000) in penalties.

The legislation has been dubbed the “anti-Google law” in the country, as politicians argue that the Silicon Valley behemoth has taken advantage of its longstanding dominance and undercut developers.

In July, South Korean lawmaker Jun Hye-sook urged parliament to move the bill along quickly, calling it “a law to prevent Google from lording [its position] over others,” and a move that would “protect IT developers from the platforms lording over them.”

Both companies have hit back, arguing that the law could hurt app developers and consumers in the long run.

In a statement Tuesday, a Google spokesperson said that the company would “reflect on how to comply with this law while maintaining a model that supports a high-quality operating system and app store.”

“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. It’s a model that keeps device costs low for consumers and enables both platforms and developers to succeed financially,” the representative added.

“And just as it costs developers money to build an app, it costs us money to build and maintain an operating system and app store.”

According to Apple, there are more than 482,000 registered app developers in South Korea, and they have earned more than 8.55 trillion Korean won ($7.3 billion) to date with the iPhone maker.

“We believe user trust in App Store purchases will decrease as a result of this proposal — leading to fewer opportunities for [them],” it said in a statement Monday, before the bill was passed. The company on Wednesday referred CNN Business to that statement.

According to the most recent government study available, Google and Apple made about $5.2 billion and almost $2 billion, respectively, in each of their app stores in South Korea in 2019.

South Korean Communications Commission Chairman Han Sang-hyuk, however, contends that new rules are needed as the platforms continue to exercise their “influence.”

“Those app market operators are gaining controlling power in the market. It is becoming necessary to regulate them,” he told lawmakers last week.

South Korea isn’t the only country in the region scrutinizing the two companies. On Monday, Australian Treasurer Josh Frydenberg called for new regulations on digital payments.

“Digital wallets such as Apple Pay and Google Pay are used to make contactless payments just like debit cards issued by a bank, but the parties are subject to different regulatory settings,” he wrote in an op-ed in The Australian Financial Review.

“If we do nothing to reform the framework, it will be Silicon Valley that determines the future of a critical piece of our economic infrastructure.”

Mounting pressure

Last week, Apple announced concessions to developers in the United States, saying it would relax some restrictions on how iPhone app makers could communicate with customers outside its App Store.

On Thursday, the company said that “developers can use communications, such as email, to share information about payment methods outside of their iOS app,” as long as users consent to receiving those emails and have the right to opt out.

The move gives developers more leeway to collect payments from their customers without having to pay Apple’s commission on in-app purchases. It came as part of a proposed settlement in a class action lawsuit brought in 2019.

Apple and Google’s app store fees have increasingly come under scrutiny as lawmakers and regulators have zeroed in on their dominance over the iOS and Android operating systems.

Earlier this month, a bipartisan US Senate bill also took aim at both players by seeking to ban restrictions on app developers.

Currently, the iPhone maker’s commissions are at the center of several legal disputes, including a separate lawsuit by one of Apple’s biggest developers — Epic Games.

Apple has taken steps to reach out to developers, announcing last November that it would slash the fees it charged them from 30% to 15% if the developer made less than $1 million in the prior year.

— Gawon Bae, Yoonjung Seo, Rishi Iyengar, Brian Fung and Lauren Lau contributed to this report.

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