The ‘service fee’ spat

Google’s notices to Indian startups on Play Store fees have sparked a battle with regulators, highlighting broader market dominance concerns.

In a move that sent ripples through India’s startup ecosystem, Google recently sent notices to 10 domestic companies for alleged non-payment of its “service fee.” This fee applies to companies selling digital services through apps listed on the Play Store. This move triggered an uproar within the startup community over the past month, evolving into a larger conflict involving India’s Ministry of Electronics and Information Technology (Meity) and the Competition Commission of India (CCI).

Since the initiation of this dispute in March, Google has been compelled to reinstate the suspended apps, which include prominent names like Shaadi.com by People Interactive, Bharat Matrimony by Matrimony Group, and the audio streaming platform KukuFM, among others. Nonetheless, the issue remains unresolved as a Supreme Court hearing is presently underway, while the CCI is poised to issue two directives—one concerning Google’s compliance with a prior CCI order, and another initiating a fresh investigation into its Play Store service fee structure.

With these developments, the stage is now set for a showdown to determine whether Google will secure any rulings safeguarding its business interests. In contrast, the startups, buoyed by the intervention of Union Communications and Electronics & IT Minister Ashwini Vaishnaw in the controversy, feel more assured about their position amidst the ongoing turmoil.

Regulators have argued that Google bundles and prioritises its services, not allowing competing app marketplaces to list fairly on the Android platform.

But first, some context

This is hardly the first time that Google’s Play Store policies and activities have come under regulatory scrutiny around the world. Since 2021, regulators in the European Union have flagged what it has deemed to be anti-competitive practices by Google. The regulators have argued that Google protects its interests by bundling and prioritising its services, not allowing competing app marketplaces to list fairly on the Android platform, and also charging service fees that are heavy and discriminatory.

Google’s service fee is levied on apps that sell “non-real world” services on the Play Store. For instance, companies like Uber, which provides ride-hailing services and Amazon which provides e-commerce services for purchasable products qualify as real-world services, are exempt from sharing revenue with Google as they provide real-world services. On the contrary, dating and audio streaming services are categorised as digital services and are thus subject to service fees under Google’s policies. Regulators have raised concerns about this categorisation, questioning Google’s rationale behind not considering it arbitrary and potentially detrimental to smaller businesses.

The service fees vary from 11% to up to 30% of an app’s annual revenue, depending on the earnings; up to 15% for the initial USD 1 million earned, and up to 30% thereafter. Google offers a 4% discount for apps employing a third-party payment system to accept subscriptions for its services from users. This entails that companies must remit to Google either 11%, 15%, 26%, or 30% of their earnings from digital services and subscriptions—a charge that numerous regulators worldwide have criticised as an abuse of Google’s dominant

market position.

This criticism holds merit. According to StatCounter data from December of the previous year, Google’s Android commanded a 71% market share of all mobile operating systems and nearly 38% of the world’s operating systems. An estimate by the International Telecommunications Union, as published by the World Economic Forum in April last year, placed the total number of mobile devices globally at nearly 8.6 billion—granting Google significant market leverage over small ventures seeking to establish themselves in the smartphone ecosystem in India and globally.

It is this that led to the contention between the domestic startups and Google in India, as well.

Where things stand in India: a timeline

After a blanket suspension and notice served by the company, Google reverted to relisting some of the over 200 suspended apps on the Play Store the very next day. However, it only allowed these apps to be present on its Play Store, and not accept payments through the apps. Instead, it asked the apps to use the ‘consumption model’—wherein the apps could ask a user to visit their webpage on a browser and use it to buy a digital service or subscription.

“App developers appear to have insignificant bargaining power vis-à-vis Google and are forced to accept terms that deter legitimate competition.” Competition Commission of India

Anupam Mittal, Founder and Chief Executive Officer of People Interactive, said in a statement that the move would disrupt all startups and destroy the user experience—and would thus be detrimental to all businesses. Murugavel Janakiraman, Chief Executive Officer of Bharat Matrimony, underlined the same.

Following this debacle, Vaishnaw held meetings with both Google and the aggrieved startup founders. He later stated that the ministry would examine the entire incident and appeal, but urged Google to reinstate the apps to full effect urgently. Google relisted all suspended apps on 5 March with the ability to accept in-app payments but stated that it would start invoicing apps for their services effective immediately. However, it did offer a longer gestation period for the startups ferrying these apps to pay up the service fee, failing which Google would “enforce its policies.”

Such a policy, as things stand, would remain fair in Indian law as the Supreme Court, on a 9 February verdict in an appeal by a group of startups against Google, refused to issue a stay on the latter’s right to conduct business and enforce its business model as deemed fit.

While the matters remain under scrutiny by the Ministry of Electronics and Information Technology (MeitY) and the Supreme Court, the CCI on 15 March, ordered to commence a probe against Google for its pricing practices. In its 21-page order that was seen by Voice&Data, the Competition Commission stated that Google’s pricing practices could be deemed unfair and stifling of healthy market competition.

While Uber and Amazon are exempt from revenue sharing, dating and audio streaming services are subject to service fees under Google’s policies.

“In the present matter, app developers appear to have insignificant bargaining power vis-à-vis Google and are forced to accept terms that deter legitimate competition and increase their costs of operation. The app developer has no choice but to agree to the terms and conditions unilaterally decided by Google, otherwise, they will not be able to access a vast pool of potential Android users in India,” the CCI order said.

A 60-day probe is now underway on whether Google’s service fee pricing is unfair and the CCI is expected to announce its judgement by mid-May. The context for this probe lay in Google’s submission to the CCI that its cost of offering the Play Store service amounted to around 6% of the revenue that apps on its platform earned. CCI, on this note, said that since Google’s admission pegged its cost at 6% of what the overall app ecosystem earned from the platform, a fee of up to 30% would seem to be a steep leverage that the Big Tech firm charges on account of it being a dominant platform—one that most modern-day businesses simply cannot do without. Android, after all, is the world’s most popular mobile operating system and has over 90% market share in India, too.

Where does this leave each party?

While it is too early to issue a verdict, Google’s defence of its service fee will hinge upon its ability to prove that its levying of service fee between 11-30% is legitimate, and is not an abuse of market power.

In the latest December quarter (Q4CY23), Google earned USD 10.79 billion (Rs 89,988 crore) worldwide from subscriptions, platforms, and devices. The latter vertical includes Play Store, which forms the majority part of this earnings. While India continues to remain a minuscule contributor (around 2%) of its global net revenue and the same or less should reflect in its Play Store revenue too, the issue here is not just about Google seeing a drop in earnings.

India, today, is a major consumer market by its sheer size, as well as its increasing importance as one of the world’s largest democracies and economies. As a result, any order issued in India that adversely affects Google’s business model could lend precedent to the latter’s overall businesses globally—and thus force it to relook at its entire operating strategy. It is because of this that Google will likely hope that its defence holds in Indian courts and the scrutiny.

A 60-day probe is now underway on whether Google’s service fee pricing is unfair and the CCI is expected to announce its judgement by mid-May.

For the startups, Google enforcing invoicing while relisting the apps could come as a detriment—most have claimed that they spend nearly 50% of what they earn in ads across Google’s Search and Play Store platforms, to remain discoverable. The levying of up to 30% in further fees can potentially, as per the startups’ arguments, see Google take home up to 80% of their revenue earned through apps listed on Android—the primary medium of usage today for most smartphone users. This could have a considerable impact on the startups, as a result.

However, most legal and policy experts maintain that Google will get at least some leeway to enforce its business policies as it deems fit. As a result, the largest tech battle in India is far from over; in fact, it has likely only gotten started.

By Vernika Awal

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