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Apple and Epic Games have gone to war, with the two companies fighting over the policies of Apple’s App Store. Epic, to protest Apple’s 30% fee for all digital transactions on its iOS platform, tried to get around it with a direct payment option in Fortnite, leading Apple to ban gaming altogether. But Apple Fortnite the fight is not limited to a particular policy for the App Store; it’s a battle that could decide the future of one of the key elements of Apple’s current and future business.
The 30% “Apple Tax” is the beating heart of Apple’s service business, which she highlighted as growth as iPhone business begins to slow. This revenue line has become a staple of Apple’s business, as brilliant executives have been able to point out in earnings reports for recent quarters. Calling the revenue line “services” allows Apple to obscure where the money actually comes from – and on stage, Apple executives tend to talk about high-profile products like Apple Music, Apple TV. Plus, Apple News Plus, or Apple Arcade. But the money for those services is eclipsed by Apple’s reduction in money flowing through its App Store and its power to force major players like Adobe, Spotify and even Epic to pay the toll. So when Apple stops Fortnite, it’s not just about fighting for an application or a policy. It protects one of the main sources of income in the years to come – one that it could lose permanently if Epic were to win.
The App Store might have started small, but today that makes Apple an incredible amount of money. In 2019 alone, Apple’s percentage of digital content sold through the App Store was roughly $ 18.3 billion, or nearly 40% of Apple’s total service revenue. (To reach that number, Apple claims that $ 61 billion worth of digital content was sold through the App Store in 2019, which took an estimated reduction of $ 18.3 billion, from the $ 46.3 billion dollars reported by Apple in service revenue on its quarterly earnings collected for 2019.)
A considerable amount of that $ 18.3 billion comes from in-app purchases of free games like Fortnite, Candy Crush, and Pokémon Go along with subscription apps like Tinder, Disney Plus, Twitch, and YouTube. To date, SensorTower notes that of the 200 most profitable iPhone apps, only one (Minecraft) costs money initially. And Apple needs these payments to flow through the App Store specifically to be able to collect these purchases and subscriptions.
It might sound like an odd undertaking for a company that built its name on charging hardware customers for quality, but Apple hasn’t always been so reliant on App Store revenue. Back when Apple first announced the App Store in 2008, it announced that developers got 70% of what they sold, and Apple could keep 30% for “maintenance,” like Former Apple CEO Steve Jobs mentioned it on stage. Jobs would continue to assert at the time that “we don’t expect it to be a big profit generator.”
The original model of the App Store was to leverage paid apps, while free apps would serve as a hotspot to entice customers to spend more money. The best example of this plan came when Apple first added support for in-app purchases in June 2009. At the time, it was limited to paid apps looking to add additional content and with limits on subscription models. “Free apps stay free,” boasted Scott Forstall, then Apple’s director of mobile software, during the announcement.
This policy lasted only five months until Apple opened the floodgates and allowed free apps to add optional purchases, which dominate the App Store and Play Store charts – and gross net amount – since.
But as business models changed and the amount of money that tracked apps grew, Apple began to tighten its grip. In 2011, Apple changed the rules of the App Store to prohibit developers from selling subscriptions or in-app purchases unless they are sold through Apple’s system (and subject to the 30% tax of Apple).
Some companies, like Netflix and Hulu, have complied with the change. Others, like Spotify, charged a premium on iOS to account for the additional fees and encouraged customers to subscribe directly elsewhere. And others, like Amazon, have dug their heels, refused to pay Apple’s fees, and removed the ability to purchase content in their apps entirely. (As of this writing, Amazon’s Kindle iOS app still doesn’t have the option to purchase books directly, although Amazon has managed to secure a special deal with Apple for its Prime Video app.)
As the app market continued to change and developers struggled to monetize, Apple tried to push for subscription costs for apps (ranging from huge apps like Microsoft Office and the Creative Cloud suite to from Adobe to popular apps like Fantastical to individual teams like Carrot. Time). It’s the same logic that drives Apple’s pursuit of subscriptions: Forcing users to constantly pay for services means increased revenue. Apple even went so far as to lower its 30% reduction to 15% after a year for developers ready to commit to subscriptions. (After all, 15% of recurring fees billed for years is much better than 30% of an upfront cost once.)
These policies have done wonders for Apple: today almost all of the platform’s most profitable applications are either a subscription or a service; and although Apple claims the App Store paid developers $ 120 billion in 2019, it failed to mention that it also earned the company roughly $ 51 billion over the life of the store. “Maintenance”, indeed.
The net result of all these years of growth is that the App Store has become too much of Apple’s identity to give up now. Apple may think it’s a Hollywood scholar with Apple TV Plus or a creative paradise with Apple Arcade, but the core business is much simpler. Apple sells iPhones and then makes money in the App Store from the free games and subscription services that work on those iPhones. And as the growth of the iPhone has slowed, the importance of this second activity has only increased. There may come a time when Apple’s other subscription offerings are able to move the business forward, but it’s not today.
For now, however, Apple’s “services” are the App Store, and the App Store is Apple’s royalty for free games like Fortnite. That means Apple likely won’t give in to Epic’s protests here without a fight – for such a big source of revenue, it has no choice.
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