Why Apple, Google could remain unscathed by South Korea's in-app payments law

When Apple and Google’s stranglehold on in-app payment services was targeted by world-first legislation in South Korea, the underlying belief of many was that the new rules would bring about massive changes to the country’s mobile ecosystems.

The assumption was that by barring both tech giants from forcing developers to use their proprietary payment systems, the new regime would reduce the commissions paid by developers while slashing costs for consumers.

Even more notably, it was believed the new framework would put a significant dent on the earnings of the tech giants because they would no longer be able to take a cut of all in-app purchases.

Yet two months after the law came into effect, few of the stated goals of the legislation have been achieved.

Game companies, deemed to be the major beneficiaries of the new law, appear hesitant to take advantage of their new freedoms and seem to be walking on eggshells to avoid antagonizing the powerful app-store owners.

The lack of movement raises the prospect that the market shortcomings that lawmakers had wanted to address directly through the legislation have remained untouched. Apple and Google appear to still be calling the shots and local developers’ hands remain tied.

Anger rising

Ever since the revised Telecommunications Business Act came into force in September, there have been relentless attacks and threats of sanctions directed toward the tech giants, which are still mapping out new strategies for their app stores.

The Korea Communications Commission, or KCC, was the regulator in charge of overseeing the law’s implementation and it has prodded the tech companies to submit compliance plans. But when Google unveiled a new policy earlier this month, many developers were left bewildered.

The search giant said it would open Play Store to third-party, in-app payment systems. However, users taking that option would be hit with a service fee of between 6 percent and 26 percent — that is, just 4 percent less than they would pay to use Google Play’s payment system.

Apple is outright resisting making policy changes, although it recently accepted a concession to allow developers to add to their apps links to external sites where purchases can be made. This prompted the company to say its payment policy and guidelines were now “in line with the amendments to the law” because it was no longer mandating that developers use its payment system.

But policymakers and many content providers in Seoul have been scathing about Apple and Google’s proposed measures — or lack thereof. They say the changes fall short of the law’s mandate to allow alternative payment systems to be integrated directly within apps, thereby reducing the commissions paid by developers and slashing prices for users.

A link to external payment sites and high in-app commissions for those wanting to use them falls short of those legal requirements, observers say.

This has placed the ball back in the KCC’s court and the regulator appears ready to show its teeth, issuing warnings against the tech giants that could spark inquiries and pave the way for enforcement action to ensure that the companies faithfully adhere to the law’s requirements.

The KCC has also finished drafting the law's enforcement decree, which empowers it to file a criminal referral against the platforms and levy fines of up to 2 percent of related sales.

Wait and see

South Korean game companies — the biggest revenue generators for the Apple’s App Store and Google’s Play Store — are, for now, sticking to the sidelines of the mounting regulatory fight.

The developers are noncommittal and hesitant to speak out about third-party payment options, even though these could bring huge savings by allowing them to skirt Apple and Google’s 30 percent cut of their in-game sales. If anything, the game developers appear unwilling to go down that path.

“They are waiting to see what changes Apple and Google will bring,” the Korea Association of Game Industry, or K-Games, told MLex. “Given that game companies have been doing business with the platforms for a long time, it is pretty tough to step in and take action.”

According to the group, as of last month, none of the biggest game companies in South Korea, including Nexon, Netmarble and NCSoft, had taken steps to introduce alternative payment options in their apps, despite the fact that they pay the tech giants more than 1 trillion won (about $846 million) each year.

Disadvantages

Navigating their way around Apple and Google’s terms and conditions has never been easy for developers wanting to distribute games via the App Store and the Play Store.

Because the tech giants own the two major gateways to billions of users around the world, they can flex their significant market muscle and impose restraints on those violating the app store guidelines or those who have simply fallen out of favor.

A case in point is Apple’s termination of Epic Games’ account for introducing its own payment system inside the popular Fortnite game to bypass the app store’s fees.

According to industry observers, Apple and Google have, in the past, made life difficult for South Korean game developers by imposing occasional restrictions on their apps, such as delayed updates or, even, app deletion. Now developers are unwilling to poke the bear and fear the adoption of alternative billing systems could trigger a backlash.

That’s despite the wording of the new legislation and its enforcement decree, which prohibit app stores from imposing on developers using alternative payment systems unreasonable or discriminatory conditions or restraints, whether through commissions, exposure, search results, advertisement or other means.

“It’s possible that apps may lose the visibility they enjoyed on the stores’ main page if the developers start using other payment options,” a spokesperson for K-Games said. “There’s a lot of pressure there.”

He added that such retaliation may not occur in local app stores, but in stores overseas, where the South Korea legislation doesn’t apply.

Many game companies rely on being featured on the main page or high rankings on app store charts, such as trending or top sales charts, because it can determine the success of their products. This is especially true for those whose primary focus is mobile gaming.

So, even if the developers have to pay millions of dollars in commission, they’re unlikely to take risks that might result in antagonizing the app-store owners and their losing visibility.