Free Riding in Mobile Ecosystems
TL;DR
Background: The EU’s Digital Markets Act (DMA) and similar regulations around the world require designated “gatekeepers” to open their mobile operating systems to third-party app stores and sideloading. They also typically include requirements that developers be allowed to use alternative in-app payment systems and to “steer” users toward purchases outside the app store. Proponents argue these mandates serve to boost competition and lower prices at both the app-store and payment layers
But… Maintenance of and improvements to the integrated OS/store/payment stack are financed primarily through device sales and/or app-store commissions. Alternative app stores can therefore free ride on costly OS investments, such as security updates, APIs, developer tools, and user acquisition, without contributing toward those costs.
However… Mandating both alternative app stores and steering creates a free-riding chain that can undermine the viability of any app store, including new entrants. Rather than bringing about vibrant app-store competition, consumers may get weak alternative stores, opaque new fees, and diminished incentives to invest in OS and app-store quality.
KEY TAKEAWAYS
How App Stores Pay for Operating Systems
Mobile operating systems, default app stores, and integrated payment systems function as parts of a single business model, rather than separable bottlenecks. Apple and Google fund substantial portions of their OS development, security updates, APIs, and developer tools through commissions collected on app-store transactions.
This bundling creates value for all participants. Platforms invest in costly infrastructure because they can recoup those investments through transaction fees. Developers gain access to a secure distribution channel, payment processing, and a large user base without having to pay for the upfront costs. Consumers get a curated marketplace with fraud protection and a consistent user experience. The commission structure also enables cross-subsidies. Roughly 80% of apps on Apple’s App Store are free and generate no commission revenue, but they benefit from the same infrastructure as paid apps.
The integrated model is not without tradeoffs. Commissions of 15-30% strike some developers as excessive, particularly for digital goods with near-zero marginal cost. And because some portion of users may be reluctant to switch between iOS and Android, some claim these platforms face limited competitive pressure to lower fees. These concerns motivated the DMA.
Yet the arrangement has proven durable for reasons beyond consumer lock-in. Platforms profit when developers succeed, so they invest in tools and services that help developers build better apps. Developers benefit from platform investments in user acquisition and trust. Commissions represent the price of holding this arrangement together by funding shared infrastructure, aligning incentives, and enabling a model where most apps can be distributed for free.
The question is whether mandated unbundling improves on this outcome or simply shifts costs and creates new problems.
Alternative Payments as Free Riders on App Stores
The DMA disrupts this arrangement by mandating access at multiple points in the stack. Alternative app stores can now distribute applications that rely on iOS or Android APIs, benefit from OS-level security protections, and reach users acquired through the platform’s marketing—all without contributing to offset any of those costs. The platform bears the expense while rivals capture value.
Alternative payments and steering compound the problem. Developers can use the store’s discovery and curation infrastructure to acquire users, then route purchases through lower-cost payment channels. The store still bears the cost of matching users and developers but loses the revenue that justified that investment.
Apple’s response to the DMA illustrates how platforms adapt to these changing needs. The company introduced a “core technology fee” for apps distributed outside the App Store. It is an attempt to recoup OS costs from developers using alternative distribution methods.
Ignoring Tradeoffs
The DMA’s enforcers assume that app-store competition and payment-method competition can both be maximized simultaneously. This assumption overlooks the fact that both layers draw from the same revenue base.
Consider a hypothetical third-party app store launching on iOS. To compete with Apple’s App Store, this entrant must invest in curation, security review, customer support, and fraud prevention. It would fund these investments through some combination of listing fees, commissions, and advertising. If developers could steer users of Apple’s store to off-store payments (as the DMA requires), then the entrant ultimately faces the same free-rider problem as Apple. A coherent policy would need to decide which margin should bear the fixed costs of creating a trusted marketplace.
Follow-On Legislation Repeats the Same Mistakes
Despite mounting evidence of the DMA’s implementation difficulties, jurisdictions around the world continue to pursue similar mandates without addressing the free-rider problem.
Japan’s Act on Promotion of Competition for Specified Smartphone Software (June 2024) prohibits blocking third-party app stores and payment systems. The UK’s Digital Markets, Competition and Consumers Act 2024 empowers the Competition and Markets Authority to designate firms with “strategic market status” and impose conduct requirements, including potential sideloading mandates. Australia’s Treasury proposed a digital competition regime in December 2024, explicitly modeled on the DMA. South Korea, the first country to mandate alternative in-app payments (August 2021), offers a cautionary tale: four years later, regulators continue to investigate whether Apple and Google are genuinely complying or adding procedural friction.
In the United States, the Open App Markets Act was reintroduced in June 2025. The bill would prohibit covered app stores from requiring developers to use the platform’s payment system and from preventing developers from steering users to alternative payment options.
Each of these jurisdictions treats the app-store commission as pure rent extraction, rather than as compensation for platform investments.
For more on this issue, see “Vertical Interoperability in Mobile Ecosystems” by Giuseppe Colangelo and Alba Ribera Martínez; and the ICLE TL;DR on “Network Effects and Interoperability.”