Apple Inc. has engaged in a flurry of deal making in hopes of quelling concerns about anticompetitive practices with its popular App Store, but the barrage of confusing — and in some cases miniscule — changes have a commonality: They keep the core of Apple’s nearly $70 billion cash cow intact.
in the past couple weeks has announced changes in the App Store as part of a settlement with a regulatory agencies in Japan and, separately, as part of a class action lawsuit settlement. The changes arrive as Apple’s App Store faces major scrutiny by regulators in the U.S. and worldwide, while waiting for a judge’s ruling in the landmark antitrust case filed against it by “Fortnite” maker Epic games Inc.
The core problem with the App Store is that it charges developers high commissions for in-app purchases, up to 30%, while not allowing them to offer alternatives that could avoid that charge. The practice has made the App Store an increasingly huge and important business for Apple, especially as the growth of the iPhone has slowed. For fiscal 2020, Apple’s services business, of which the App Store is the core revenue generator, reported annual sales of $54 billion with growth of 16.2%, while iPhone sales fell 3% on an annual basis.
Profit from Apple’s app fees are estimated to be stunning, according to one economist who testified during the Epic trial. He estimated the App Store has generated profit margins of 75% and 78%, respectively, in the last two years. Apple does not publicly disclose financial results of the App Store specifically.
While Apple has taken small nibbles off its App Store approach in recent settlement agreements — charging smaller developers a bit less, allowing a certain segment of apps to direct users elsewhere — the ecosystem is largely unchanged, especially when it comes to videogames.
“They are willing to concede around the edges and make sure they are cognizant of the broader background from a developer’s perspective, but at the same time, having a major line in the sand and not having concessions when it comes to gaming and the core App Store business.” said Wedbush Securities analyst Dan Ives. “A lot of the concessions we have seen are minimal revenue concessions.”
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The most important concession came late Wednesday, when Apple said it would allow developers such as Netflix Inc.
and Spotify Technology SA
to provide their customers a link to their websites within the app that will allow the users to pay for their services outside of the App Store, sidestepping fees. The fine print shows how limited this change is, however: It only applies to “reader” apps that provide subscription content such as news, books, music and video, as well as content that users have previously purchased elsewhere.
Spotify Chief Executive Daniel Ek tweeted on Thursday that Apple’s agreement may be a “step in the right direction,” but it does not solve the problem.
“Our goal is to restore competition once and for all, not one arbitrary, self-serving step at a time,” Ek said on Twitter.
Ek made that comment even as shares of Spotify jumped 6% on Thursday, as investors hoped to see the unprofitable music-streaming company get a little closer to black ink on the blotter. For an example that shows the uneven treatment that Ek decries, though, take a look at Match Group Inc.
It appears unlikely that Match’s apps, which offer subscriptions to dating services such as Tinder, will fit under the “reader” app carve-out, though an Apple spokesman declined to comment on any specific apps and Match Group officials did not respond to a request for comment. Yet it is one of the main faces of the movement against app stores after an executive testified at a U.S. Senate Judiciary Committee hearing on the anticompetitive nature of Apple’s App Store and Alphabet Inc.’s GOOG GOOGL Google Play store that Match pays half a billion dollars in fees to the two tech companies every year.
Likewise, videogames are not mentioned in any of the settlements, as Apple waits to hear what Judge Yvonne Gonzalez Rodgers has to say about its battle with Epic. That means the money will definitely continue to flow in, as videogames are believed to generate the most sales in the App Store.
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Both of these settlements offer very little change to the App Store and just add more confusion. Instead of just simply cutting their commission, Apple has new convoluted rules that are unlikely to lead to lower costs for most developers, who still have to jump through many hoops to get an app approved by the App Store and have little chance of convincing customers to jump through hoops of their own to avoid the app maker paying Apple’s fee.
“The changes were made to settle a developer lawsuit and, similar to other recent changes, the impact will be relatively immaterial,” said Amit Daryanani, an analyst with Evercore ISI, in a note to clients. “We do not think many customers will choose to follow instructions in the email and re-enter payment information, as they do not receive any benefit from helping the developer avoid Apple’s fees.”
The issue for Apple is that governments around the world are likely to see through this gambit and aim straight for the heart of the App Store’s revenue model. In South Korea, legislators passed a bill this week requiring both Apple and Google to allow alternate payment systems in apps, the first law of its kind in the world. A similarly targeted bill, called the Open App Markets Act, was introduced in the U.S. last month by three senators.
While Tim Cook and the rest of the executives at Apple likely hope that this shell game of small, confusing concessions will be enough to stave off lawmakers, particularly in their home country, it is unlikely that app stores will escape from the current scrutiny without more major changes.
“Over time, the fees are going to be pressured and the writing is on the wall,” said Ives of Wedbush Securities. “Apple will continue to make some olive branch moves, which puts them in good standing, given the pressure they are seeing…but I think they are going to aggressively defend their moat.”
The fallout from this push will have ripple effects all over tech, and could lead to big changes for consumers as well — Spotify, for instance, said it raised prices from $9.99 to $12.99 largely to cover its app store fees. Major changes, however, could eventually cut more deeply into one of Apple’s biggest cash cows and slowly dig away at the moat surrounding Apple’s castle.