Stores of value: regulators lean on app vendors

This episode delves into the growing regulatory scrutiny on app stores, particularly those operated by Apple and Google, focusing on the implications for developers and consumers.

1. App stores generate high revenue with margins significantly larger than other business areas for companies like Apple and Google.
2. Governments globally are pushing to regulate app stores to curb the market control of major tech companies.
3. The Digital Markets Act in the EU exemplifies efforts to introduce competition to the app store market.
4. There is skepticism about whether new app stores can significantly challenge the established market leaders.
5. The regulatory and market changes could reshape the future landscape of digital marketplaces and consumer choices.

1. The Financial Dynamics of App Stores

An exploration of how app stores generate revenue and the significant profit margins they maintain. Focuses on the regulatory interest this draws. Guy Scriven: "Apple and Alphabet don’t tell us how much they make from this, but that’s kind of estimate from last year."

2. Regulatory Interventions

Discusses the specific regulatory measures being considered or implemented to manage the dominance of major app vendors. Guy Scriven: "The biggest example of this going on at the moment is in the EU and it's the Digital Markets act."

3. Market Impact and Future Outlook

Considers the potential impacts of increased competition in the app store market and the realistic outcomes of such regulatory interventions. Guy Scriven: "This wave of new app stores which are being launched now aren't ever really going to take a big share of the market."

• Review and adjust privacy settings on apps regularly to enhance data security.
• Support or advocate for digital policies that promote competition and consumer rights.
• Stay informed about the changing landscape of digital markets to make better consumer choices.
• Consider the security implications of downloading apps from emerging app stores.
• Engage with platforms and tools that prioritize user security and data protection.

Apple and Alphabet operate what is in effect a smartphone-app duopoly. Governments want to curb their power, but it is not clear whether more competition would change things. We ask why India’s election is so eye-wateringly expensive; the country’s size is not the only answer (08:59). And new approaches in the old fight against swarms of locusts (14:07).

People

• Guy Scriven, Jason Palmer, Ora Ogumbi

Companies

• Apple, Alphabet, Microsoft, Spotify, Epic Games

Books

• None

Guest Name(s):

• Guy Scriven

Content Warnings:

• None

Speaker A
Heres the truth about AI is only as powerful as the platform its built into. ServiceNow puts AI to work for people. Across your business, removing friction and frustration for your employees, supercharging productivity for your developers, providing intelligent tools for your service agents to make customers happier, all built into a single platform you can use right now. Thats why the world works. With Servicenow.

Speaker B
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Speaker C
The Economist.

Ora Ogumbi
Hello and welcome to the intelligence from the Economist. I'm Ora Ogumbi and this is my last week hosting the intelligence, and not. Just a little saddened by that news. I'm Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world.

Indias election is well underway. Yes. Still, it takes a long time for almost a billion people to vote. Its also proving very expensive. And there are some pretty old books out there that show how long the desert locust has been an agricultural past.

Speaker C
We look at how swarms are changing alongside the climate, and how new and old technology can keep them from plaguing farmers.

First up though, if your day is anything like mine, from the moment you wake up, your day is relentlessly punctuated by smartphone apps. Checking the weather forecast, checking the 381 bus forecast, reading the news, messaging colleagues getting messages from colleagues. Snapping a picture of a particularly charming pup, sharing it with a dog loving friend or wife, reading a saved article, getting directions to dinner, paying for dinner, hailing a cab, streaming a movie, whatever that is. There is to borrow some old iPhone ad copy. There's an app for that.

And the app stores where you find them all. They are a huge money spinner for the likes of Apple and Google, which is why they're also increasingly of interest to regulators. App stores make loads of money for Apple and for Alphabet, which is the corporate parent of Google. Guy Scriven is the Economist's us technology editor. And all this money's drawn the attention of governments across the world.

Guy Scriven
And those governments are now trying to meddle with the app economy. They're trying to limit access to certain apps, and they're also trying to loosen the stranglehold that Apple and Google have over the app store market. When you say Apple and Alphabet make tons of money, let's put some numbers to it. The way most apps make money is either by charging users who buy digital goods in the app, so that might be a weapon for an avatar in a video game or something like that. And the other way they make money is by subscriptions.

So when you buy a digital good in an app, Apple and Alphabet take about 30% of that sale. And when you buy a subscription, usually they take about 15% of that sale. And those two types of commissions in an average year earn Apple and Alphabet a combined total of about $40 billion. Apple and Alphabet don't tell us how much they make from this, but that's kind of estimate from last year. This total may not sound like much compared to around 700 billion, which is the overall revenue that Alphabet and Apple made last year.

But what's important about app stores is that the margins on them are massive. So recent court documents have revealed that in Apple's app Store, the operating margin is about 80%, and for Alphabet, it's about 65% or so. This is much larger than Apple and Alphabet's business overall. And that's why they matter. Well, and that has drawn the attention of governments, as you say, who want to meddle in some way.

Speaker C
Is what you're saying there, that they want a piece of that piece? No, it's not exactly that they want the money. Governments are trying to do two things, really. On the one hand, they are trying to dictate which kind of apps get put in app stores. For instance, lots of governments request that Google and Apple remove unsavory apps like pornography apps.

Guy Scriven
And limiting what apps can be in the App Store is a way to censor the Internet as well. So in April, the chinese government told Apple to remove a bunch of messaging apps from its app store. In China, that includes WhatsApp and Telegram. And another reason governments might want apps to be removed from the app store is geopolitics. So this is the case for TikTok, where there are worries about the chinese government getting hands on consumer data and the spread of disinformation as well.

Speaker C
So, okay, governments want a hand in that for selfish governmental reasons that dont have to do with the money. But you said there was a second reason. That surely does have to do with the money. Yes, that's right. Apple and Alphabet's operating systems power most smartphones across the world.

Guy Scriven
So Google and Apple run a duopoly in terms of app stores for most of the world, excluding China. There isn't really another game in town. And regulators want to break up this duopoly and inject more competition into the App store marketplace. The biggest example of this going on at the moment is in the EU and it's the Digital Markets act. And those rules basically force Google and Apple to allow more than one app store on smartphones in the EU.

So this is something that Google have previously done. But Apple have not. And it's not just the EU that's doing this. There's similar legislation is being looked into in Japan and Britain. Lots of developers are on the side of regulators here because they think more competition will lower the those commission fees that I mentioned earlier.

So Spotify has been a big part in the EU pushing for this regulation. It recently won a case in the EU against Apple about the way Apple's software favors its own music streaming service. And Epic Games is the other big developer to mention here because it's already tried to sue the two companies in America. In December, it won the case against Google and it's pursuing legal action against these two companies in Britain and Australia as well. So it sounds like the stranglehold is being broken here.

Speaker C
Are you seeing the effects of that, how this is going to play out when there are other options? There's a whole bunch of activity starting to take place in this area. Microsoft said that it planned to launch its own app store in July. We are going to be launching our mobile store experience. We're going to start actually by bringing our own first party portfolio to that.

Guy Scriven
So you're going to see games like Candy Crush show up in that experience. Games like Minecraft, Epic also plan to make their own app store. And there are smaller niche app stores emerging as well. Altstore is one of them, which became available for iPhone users in Europe recently. In theory, the sky's the limit here.

You could have kid friendly app stores where all the software is vetted, or you could have particular app stores for niche interests. But in reality, it might not actually play out that way. Well, why wouldn't it, though? At the moment, Apple and Google do actually provide some rather useful services for users. One of the big things Apple and Google do is that they scan new apps for malicious software or scams, and that gives users basically a lot of confidence when they're shopping on apps.

The users seem to like this. If you look at survey data for what users care about when they buy new smartphones, whether they can access lots of different app stores tends to be right at the bottom of the list. Most tellingly, there is also a kind of revealed preference here for smartphone users, in that you have always been able to access different types of app stores on Android phones. And no serious contender to Google Play Store, which is Alphabet's big app store, have really emerged. For instance, in 2011, Amazon launched a rival app store, but that didn't really go anywhere.

So I think in my view, this wave of new app stores which are being launched now aren't ever really going to take a big share of the market. They're probably going to remain more or less niche products for quite a while, and I suspect that that app store duopoly is probably going to last. Thanks very much for your time, guy. Thank you so much, Jason.

Speaker A
Here's the truth about AI. AI is only as powerful as the platform it's built into. ServiceNow puts AI to work for people. Across your business, removing friction and frustration for your employees. Supercharging productivity for your developers, providing intelligent tools for your service agents to make customers happier, all built into a single platform you can use right now.

That's why the world works with ServiceNow. Visit servicenow.com aifle.

Here'S the truth about AI. AI is only as powerful as the platform it's built into. ServiceNow puts AI to work for people. Across your business, removing friction and frustration for your employees, supercharging productivity for your developers, providing intelligent tools for your service agents to make customers happier, all built into a single platform you can use right now. That's why the world works with Servicenow.

Speaker B
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Ora Ogumbi
More than a month after polls opened, people in India are still voting. By the time they close on Saturday, June 1, nearly a billion will have taken part. Campaigning for all those votes costs a lot of money, and the world's biggest election may also turn out to be the world's most expensive. Spending on India's election is expected to reach around rs1.35 trillion. That's around $16 billion.

Vishnu Padmanabhan is an Asia correspondent for the Economist. That would be more than double what was spent in the previous election in 2019. And it's an even bigger amount than what was spent in the 2020 presidential election in America. Okay, wow. I mean, I guess campaigning for a billion votes is an expensive business.

Vishnu Padmanabhan
Yes, the more voters there are, the more expensive it becomes to reach all of them. But that only partly explains the increasing costs in elections, because over the last 20 years, election spending has increased by 165% after adjusting for inflation. But population growth at the same period was only 27%. So there are other factors at play here. One of them is that there's a huge number of candidates contesting indian elections.

So in 2019, an average of 15 candidates contested one seat. And preliminary data suggest that's a similar number for this election. And so lots of candidates means more aggressive campaigning. There's greater competition. There's also contagion effects where candidates see what one candidate is spending on, and then they also want to do the same thing or try to outdo the other candidates.

So that sort of pushes up the costs. And another factor is also the way the campaigns are being run. There are many more ways of reaching voters these days, so more money is spent on these methods. So, for example, a growing number of Indians are online, so that means more money is spent on digital marketing. So data from Google suggests that spending on its platform in the months leading up to this election was six times more than equivalent period in 2019.

Ora Ogumbi
And, Vishnu, is that all of it? Are the parties spending money on anything else? Yes. So data from 2019 suggests that around 60% of party spending on elections goes to sort of core campaign costs. So this includes advertising, but it also includes wages given to party workers, transport to rallies, and the logistics with organizing these rallies.

Vishnu Padmanabhan
But there's also a significant amount of spending. Around 25% goes to sweeteners for the voters. Ah, sweeteners for the voters. Sounds just like Nigeria. So basically, parties are essentially buying votes.

Ora Ogumbi
That doesn't sound very democratic or legal. No, it isn't, but it's very widespread across India. Voters are given gifts, so they can range from tvs to goats or just outright catch bribes. A survey in 2019 estimated that more than half the voters in four districts in southern India were paid between 1000 to rs2000 for their vote. Similarly, research in the north of the country found that more than 80% of political candidates said that because the peers were giving cash for votes, they also felt compelled to do the same.

Vishnu Padmanabhan
And so this has a couple of big impacts. So it means that running for election in India has a high entry cost because you need to be wealthy. So this may attract candidates who do not really represent the constituencies that well. And also, if candidates are spending so much on campaigning, once they're in office, they might feel they need to get a return on their investment. And so that encourages the incentive for corruption when in office.

Ora Ogumbi
And is anything being done to combat this spending flurry? Yes. The Election Commission of India, which organizes the election, tries to be very strict about this. So in the weeks before this election, it ceased assets worth rs47 million. So this included 36 million liters of alcohol, rs4 billion in cash.

Vishnu Padmanabhan
But while that's a big loot, it's still a small fraction of the total that is spent in elections. And the bigger problem is that while there are restrictions on what candidates can spend individually, there's no restrictions on what parties can spend, so it's very hard to enforce limits on spending. And similarly, on the campaign contribution side, there's been little transparency on who is donating to which parties. And ultimately the bigger problem is there's little reason for any government to introduce effective reform because the ruling party tends to benefit the most from the status quo. For example, in 2019, the BJP raised the biggest amount of money and they also spent the most money.

So that helped us dominate the elections and it likely to do so again this time round. Vishnu, thank you so much for coming on the show. Thanks for having me. Ore while were on the topic of India, did you know that for the month of May weve dropped the paywall on our weekend edition of the Intelligence? A recent favourite of mine was when our Asia correspondent Lia Mirani took us on a whistle stop tour of Mumbai or Bombay as he prefers.

Ora Ogumbi
Many who have listened already loved it, and I'm sure that you will too, find it wherever you listen to our podcast. And if you choose to stick around an economist podcast subscription is currently half price. Consider it my parting gift to you.

Speaker C
The desert locust is considered the world's most dangerous migratory past.

A little swarm of them can devour as much food in a day as 35,000 people do. The effect on crops can be devastating. One of the problems is just how fast locusts reproduce. In the right conditions, 1000 can become 20,000 in just three months. In a year, that number can rise to 160 million.

So how can you crack down on these pesky pests? The desert locust is a pretty harmless grasshopper most of the time. Saqib Rahim writes about science and technology for the Economist. The concern arises if it's allowed to over reproduce, and then it can switch into a gregarious mode, which is extremely dangerous for places with poor food security, of which we have many in the Red Sea and Horn of Africa areas. But fortunately, the last time there was a major upsurge.

Saqib Rahim
It really focused minds on the need to get ahead of these invasions and get smarter about the way we prevent them. So how do the populations get out of control? Like you described, desert locusts are accustomed to pretty harsh conditions, right? They're native to the desert, the band of drylands that run from West Africa practically out to South Asia. Which means they're used to living without a lot of foliage and without a lot of water.

The problem is that human action is starting to make the environment more habitable to them. So take climate change. Climate change is bringing heavier storms to the desert, supplying more water than there used to be. This creates more vegetation in places where there normally was, new vegetation in places where there normally wasn't, and humans are also causing land use change, whether that's deforestation or desertification or over cultivation of land. That actually changes the soil and other aspects of the environment into those that favor the desert locusts.

What scientists told me is that if the environment is getting less and less hospitable for human beings, it's actually getting more and more hospitable for desert locusts. So it sounds like a problem that's only set to get worse. I mean, what's to be done? Well, there's a range of R and D initiatives, and we're seeing interesting new innovations that are in development. Whether this is the use of big data, whether this is the use of field drones, whether this is the use of innovative pesticides.

There are smart people trying to come up with new technologies and techniques that field officers can use to help us out there. You mentioned drones there. How are they changing things? So one of the drones that's in development is called D locust. It's shaped kind of like a stealth bomber.

These field officers will take it out to the field, and they'll launch it by a ground mounted rubber band, essentially. And this thing can fly just a really, really large loop. And it takes photos and takes video kind of along that route of suspicious vegetation, whatever it sees. In a way, a field officer on the ground could not really cover that much ground. When it comes back, it downloads that information to a tablet or something like that.

That allows the field officer to get a sense of what's out there and prioritize their route so that they can go to the places that they consider to be most concerning. And you've also mentioned pesticides. What role do they still play in all this? So if you're a government today and you're reacting to a huge invasion of desert locusts, it's a really scary moment. It's not surprising that a lot of governments go to the quickest, cheapest option available, which is a synthetic pesticide that functions basically like a nerve agent.

It knocks these bugs out of the air and kills them almost immediately. The problem is that these toxins get into the environment, right? They get into other animals, they get into waterways, and they might create problems down the road. And yes, that is why there is an alternative that some governments are using. That is a biopesticide.

It's derived from a fungus, and it's more expensive, and it works more slowly. But the benefit is it doesn't harm anybody else. One scientist was telling me that if you kill a desert locust with this biopesticide then a bird can eat that dead locust without any harm being transferred to the bird. So that is one of the areas in the field where there's a lot of sensitivity. You understand, on one hand government's desire to go to something that will act quickly and be effective, but at the same time there's this push to get them to do things that are less harmful to the environment.

I think theres also a case to be made that there needs to be R and D into pesticides to try to reduce the pain of this trade off. I suppose the other way to tackle it is to not wait until there are swarms, but to tackle them before the swarms happen. Is there any hope there? Its important not to over rely on technology to fix the problem. You know at its root, preventing desert locust invasions is a pretty low tech thing.

Its important to give field officers enough funding. In some of these cases, field officers dont have cars to go out in the field, so its nice to talk about drones and satellites, but the reality is a lot of these countries really could just use old fashioned capacity building to go out there and do their job. And another thing we could do is paymind the conflict. Part of the reason desert locust invasions happen is they occur in conflict zones where nobody's really paying attention. So another thing we could do is focus on the low tech diplomacy that prevents those conflicts and therefore prevents those nodes from happening.

Speaker C
Saqib, thanks very much for your time. Thank you Jason.

Ora Ogumbi
That's all for this episode of the intelligence. We'll see you back here tomorrow.

Speaker A
Here's the truth about AI is only as powerful as the platform it's built into. ServiceNow puts AI to work for people. Across your business, removing friction and frustration for your employees, supercharging productivity for your developers, providing intelligent tools for your service agents to make customers happier, all built into a single platform you can use right now. That's why the world works. With servicenow.

Speaker B
Visit servicenow.com aifle.