Foreign apps gain after privacy regulations raise consumer comfort

Research by W. P. Carey professors reveals that after Europe’s General Data Protection Regulation was enacted, foreign apps gained market share over native ones, driven by increased customer confidence.

Do tough data privacy laws hamper the international trade of digital products like smartphone apps? There’s certainly been heated debate on the question. Given that apps track all kinds of data — browser behavior, purchasing history, social media activity, fitness statistics, and more — it seems reasonable to assume that hard-hitting regulations in one state or region could clobber cross-border trade.

GDPR boosts foreign apps

Still, research conducted by two W. P. Carey School professors found that foreign apps performed better than native apps after Europe’s General Data Protection Regulation (GDPR) was enacted in May 2018. These regulations outline individuals' fundamental rights in the digital age, the rules for processing the data, and penalties for non-compliance. The European Council claims the GDPR is the world's strongest data privacy and security law.

What made foreign apps win market share compared to native ones after the GDPR was in place? The research suggests that the new rules delivered something often cited for economic impact: the power of consumer confidence.

Invasion with privacy

Raghu Santanam, senior associate dean for Executive Education, Corporate Partnerships, and Lifelong Learning, McCord Chair in Business, and professor of information systems, collaborated with departmental colleague Associate Professor Michael Shi, Ziru Li — an assistant professor of global digital transformation and data analytics with the Thunderbird School of Global Management at ASU — and a researcher from Korea to uncover this finding using data from Apple’s App Store.

To see how the GDPR impacted the app market internationally, the team defined exporter countries as those where an app’s publisher is headquartered and importer countries as those where the app is downloaded and used. This allowed the scholars to see the market performance of apps covering 27,745 exporter-importer country pairs over 26 months from 2017 to 2019.

First, the team calculated the percentage of foreign versus native apps among the top 30 apps in each EU country. On average, there were 9.42 EU apps before the GDPR and 7.74 after, meaning EU-based apps’ market share shrunk during this period. Non-EU apps numbered 18.52 before the GDPR and 20.47 after, nearly a two-app increase in the top 30 lists.

That means companies in and outside the EU stepped up to meet a regulation with 11 chapters and 261 pages. "If you want to offer your apps in European countries, there is compliance cost," says Shi. "If you are with a larger company, you will need to designate a chief data officer to make sure administrative processes are also compliant, and if there's any violation of the regulation, the fine can be very severe." Non-compliance could cost up to 20 million euros or 4% of an app’s global revenue from the preceding fiscal year — whichever is higher.

The cost and effort involved in meeting the GDPR factor into two of the three reasons the researchers examined to understand why foreign apps gained ground after the regulations were in place. "We investigated the underlying economic mechanisms driving this effect," Shi explains. "We approached this question from the supply side — the app developers’ angle — and the demand side, meaning from the app consumers' angle."

On the supply side, the researchers theorized that the cost and effort of compliance could have impacted app quality for the European developers because their primary user base was in the EU, so they’d focus more on compliance than foreign app developers. To examine this, the team looked at the update frequency around May 2018 of both EU- and non-EU-based apps. They found statistically insignificant differences. They also found that the performance of the apps on the top 30 list around this timeframe didn’t change, so they determined that decreased quality was not a reason for some EU-based apps to lose top-30 ranking in the long run.

The team also looked to see if the number of EU-based apps dropped overall, which could happen if the cost of compliance was so high it knocked smaller app developers out of the market. One way they evaluated this was to see if the average age of EU apps on the top charts increased because new EU apps were deterred from entering the market. The team also looked at publisher size of the top apps because compliance costs would be more difficult to manage for smaller companies, so that could result in only larger publishers making that top list more often than the smaller publishers.

It turns out that there were no significant changes in the age and publisher size of EU top apps right after the GDPR was active. Over time, new EU apps versus old ones increased their numbers on the top 30 lists, indicating more top app turnover. The researchers interpreted this as a willingness among app users to try new products. At the same time, the number of EU-based apps dropped while the number of foreign apps grew. Both of these conditions, the research team posits, result from increased consumer trust.

Consumer trust triumphs

"After the passing of the regulation, the EU consumers may have become more confident about the privacy and data protection in all the apps in the market," Shi says. "It was not just EU apps but also foreign apps that had to comply with the GDPR if they were in the EU market."

Shi mentioned that before the GDPR’s enactment, there may have been a home bias among consumers that kept them more loyal to native EU apps. Once everyone had to follow the same standard, people became more willing to try foreign apps and new local entries to the market. In a recent paper, the research team provided substantive evidence showing that the strict regulations in the GDPR fostered consumer confidence, reduced home bias, and lessened cultural barriers in global digital trade.

A safer global digital economy

That, in turn, gives consumers even more product and service options, something Shi points out is a benefit of digitization itself. "Digitization is more convenient from a consumer perspective, and from a supplier perspective, it is more cost-effective," he says, adding that the flow of goods contributes to a "more vibrant and global digital economy." Making that economy safer and more private for consumers appears to be a positive move for digital markets.