Pay up or get out: Apple's options for South Korea's App Store law

National Assembly of the Republic of South Korea

South Korea's decision to end Apple and Google's ability to control payments in their App Stores does come with some unspecified wriggle room. There are to be details and practicalities that the country's government says will be worked out during the execution of the law.

This is not a case, however, where the practice means anything less than the theory. Apple and Google have lost their exclusivity, and once broken in South Korea, it may get broken everywhere — unless these companies take certain steps.

The barrier to breaking up App Stores has always been a mixture of business, politics, and technology. Once enacted, the South Korean decision will demonstrate political will that other countries will follow.

And once enacted, the decision will force Apple and Google to demonstrate that it's technically possible to run multiple payment systems for everything. Currently developers can offer subscriptions outside of the App Store, but can't tell users that it can pay for them elsewhere from within the app.

There is still the issue over whether South Korea's decision breaks international trade agreements. If it does, much is going to depend on the White House's reaction to the vote to pass this law.

An issue likely to cause international tensions is that arguably the new law is really a political move intended to protect Samsung. In case you've been living under a rock for a decade, Samsung is South Korea's pride and joy — and as it pertains to this market, it is chiefly a hardware vendor and so untouched by this law.

Regardless of US political pressures, however, Apple and Google do have certain countermeasures that they are likely considering as we speak.

Accept the future

For all that it makes via the App Store, Apple's major source of income has been through hardware. It's transitioning to more of a services company, but either way, some loss of App Store income won't destroy the firm.

So Apple could just accept South Korea's decision. It could introduce alternative methods of payment and it could accept that it's going to lose its 15% or 30% cut in some cases as at least some developers switch to their own systems in every territory.

Some developers will stay with Apple. Others will switch and then find that the costs of running such a payment system are high enough that they turn back to Apple.

But the biggest players, like Epic Games, will run their own payment systems. They'll also expect to get the same promotion that they have before, and now the App Store becomes a cost for Apple instead of a revenue stream.

The new law doesn't mean there will have to be alternative app stores, but it does mean Apple can't automatically take its cut from app sales. So whatever Apple may think of losing potential revenue, it isn't going to like having to shoulder more of the costs for running the App Store.

During the Epic Games trial, Tim Cook said that breaking up the App Store would raise difficulties for users who then had to pay multiple vendors. "It would be a huge convenience issue," he said, "but also the fraud issues would go up."

True or not, in making that point, Cook also showed that Apple is hardly going to let its app earnings go easily. "[We] would have to come up with an alternative way of collecting our commission," he stated.

It's not as if Apple can just drop apps because they aren't paying, either. South Korea has included clauses that prevent Apple or Google removing apps from their stores as a retaliatory measure, or adding unwarranted delays to approving apps.

If Apple does retaliate against developers by doing either, it is the same as if Apple were to ignore the South Korean law. The country would fine Apple up to 3% of the revenue it earns in that territory.

Cost of doing business

It's not clear how much Apple makes in South Korea. It's also not yet clear when the government would impose the highest fine, or what would trigger any lower rates.

There's also the issue of when it would impose the fines. We don't yet know about grace periods, we don't know whether it would be done by fining Apple its last 12 months of earnings at the point a fine was set, for instance.

We also don't know what would happen if Apple, or Google, broke the law repeatedly. It appears that the government would impose a blanket fine, but it isn't clear.

Assuming that South Korea does decide, at any point, to fine Apple 3% of its revenues earned in the country, we can't actually know how much that is. The government can presumably figure it out from tax reporting that companies are required to do, but really only Apple knows exactly what it earns where.

If you know what you earn somewhere, then obviously you know what 3% of that earning is. And so you also know whether it's worth just paying the fine.

Apple, and Google, could therefore decide to ignore the South Korean law and just accept they're going to hand over the fine amount every year.

It might be worth it financially, just from a straight balance-sheet calculation over what it costs to run their businesses in South Korea. But it could also be much more worth it for the signal that sends to every other country, including the US.

You can't say the optics are very good, not if a business effectively decides that it is above the law. But these two companies could do it.

And what that will tell every other country is that at best, they should legislate to make higher fines.

Pull out

Apple and Google do have another weapon. They could simply cease operating in South Korea, or anywhere else that enforces this kind of law.

Apple makes a big deal of loving countries like Singapore, but it doesn't sell anywhere for the fun of it. Apple sells worldwide because it can make money worldwide.

If it can't make money in South Korea, there is nothing whatsoever to stop Apple pulling out completely.

It's not as if it hasn't waved that particular fist before. In July 2021, Apple's attorneys threatened to abandon the UK if local courts ordered "unacceptable" patent fees.

The UK is an unusual case as Brexit has made it more difficult and costly to run any international business there. South Korea had no such politically-created issues, except now it does.

Many other countries are currently in the process of antitrust investigations, or litigation, that could equally end up making Apple reconsider its operations. France is due to hear a case on September 17, 2021, about abusive contract terms in the App Store, for instance.

Then in the US, President Biden signed an Executive Order specifically to encourage greater competition for small businesses entering markets dominated by Big Tech firms.

Plus the US House Judiciary Committee has unveiled sweeping antitrust legislation that also takes aim at Big Tech firms like Apple and Google.

Worldwide implications of South Korea's decision

More than resisting breaking up what it sees as profoundly important for users' privacy, Apple could fight South Korea solely to protect itself everywhere else.

It's not as if Apple can pull out of America, but if countries think they're going to lose the company over this, they may think twice. If they believe they will also lose Google, they will think much more than twice because of how central Google's services are to so many businesses.

There's no question that Apple pulling out of countries would look bad. But Facebook recently threatened to withdraw certain services in Australia, and got what it wanted.

All of the current anti-Big Tech legislation around the world is really about establishing that technology firms are not above the law. We can't have Apple being unanswerable to authorities, but if it's financially more viable for Apple to pay fines or leave countries, it certainly can do so.