South Korea law upends app store practices

The South Korean parliament passed a landmark bill this week that changes the way app store payments work.

The bill prohibits app store platform providers such as Apple and Google from requiring that users make in-app purchases through their proprietary payment systems, and instead allows app developers to direct users to alternate payment platforms. The law, which still needs to be signed by President Moon Jae-in to take effect, upends the controversial commission fee structure Apple and Google use, charging app developers as much as 30% for in-app purchases made via their payment systems.

South Korea is the first country to pass legislation that targets in-app payment policies of platform providers. Other countries are currently mulling how to address developers' concerns with how app stores are operated -- lawsuits have been filed against Google and Apple in the U.S., European Union and India over their payment policies. Additionally, in the U.S., antitrust bills moving through Congress aim to break up companies like Google, Apple and Amazon and address concerns that tech giants operate as gatekeepers to the internet through practices like the in-app purchase commission fees.

Marshall Van Alstyne, professor of information systems at Boston University's Questrom School of Business, said the South Korean legislation will be a "great experiment." He added that if it works, he expects other countries to follow suit.

Allowing alternative payment systems will give developers a chance to keep more of the revenue while platforms can still pay for their infrastructure.

"Allowing alternative payment systems will give developers a chance to keep more of the revenue while platforms can still pay for their infrastructure," Van Alstyne said. "Overall, it's a win for developers. A few roll-your-own payment systems likely will increase fraud rates for consumers, but they might also benefit if prices fall now that margins are better."

Thomas Jungbauer, associate professor of strategy and business economics at Cornell University, agreed that other countries will be paying attention to this new law.

"Others will not immediately follow, but watch how this pans out -- in particular, in terms of fraud and Apple's and Google's reactions," he said.

Apple is already making changes to its app store business practices. The company announced Wednesday that it is updating its App Store to allow media apps that provide previously purchased content like audio, music and video as well as newspapers and digital magazines, to include an in-app link to their websites. That way users can set up and manage their accounts and make purchases outside the App Store. The change will go into effect in early 2022.