Apple – The tax collector.

App store revenue shares are under pressure again.

• The original intention of the Apple App Store was to drive loyalty to the iOS ecosystem which begs the question whether all of the bad press that Apple is receiving for its mandatory 30% revenue share is worth it.
• Ahead of WWDC next week, the old bone of contention around revenue sharing via the App Store has risen its head yet again which combined with an antitrust investigation kicking off in the EU and Tim Cook’s refusal to testify to congress is creating a whirlwind of negative press.
• At the heart of the issue is the App Store where most developers are compelled to monetise their services within their apps which triggers a 30% revenue share payment that goes to Apple.
• This revenue share figure is derived from iTunes when Apple was selling music and it was originally intended to keep the store at breakeven with the return to Apple being realised via increased loyalty of the user to the iOS ecosystem.
• However, as the ecosystem has scaled far beyond what anyone thought was possible, this has gone from a cost centre to arguably the highest margin product that Apple sells.
• Apple has significant services revenues within which RFM estimates that the App Store itself contributes around $6bn in total revenues per year.
• Given the relatively fixed cost nature of this business line, I would estimate that the vast majority ($4bn – $5bn) falls straight to operating profit.
• This represents 7% of total EBIT generated in the last fiscal year meaning that if the App Store was to return to a 0% margin, the impact could hardly be described as catastrophic.
• The main issue is not necessarily the level of the revenue share itself but the fact that unless developers have an exemption (like Microsoft Office 365, Spotify or Netflix), they are compelled to pay the 30% share or face having their apps booted from the store.
• This is because Apple App Store rules ban the use of separate payment mechanisms unless the app falls into certain categories.
• The most recent developer to struggle with this is Basecamp whose $99 a year email service called Hey has had its updates disallowed because it allows users to subscribe for the service from outside the iOS ecosystem thereby bypassing the Apple tax collector.
• According to Basecamp, Apple’s response has been “pay-up or leave”.
• Basecamp has no other way to get its app onto iOS devices (unlike Apple’s Mac platform or Android) and it is this lack of choice that is being called out.
• Google has a similar revenue share system but critically, developers who do not want to pay the tax are allowed to use other payment systems to be used.
• Furthermore, there are ways of getting apps onto Android devices outside of Google Play as Google allows sideloading from external sources as well as other app stores.
• This is why Google remains relatively unscathed in this debate as while it is charging the same price, there are alternatives for those that are selling their products and services on Google Android devices.
• Cracks have been appearing in this business model for some considerable time and the very public spats with Spotify and others have led to a series of exemptions being created.
• However, smaller developers have neither the financial clout nor the volume to really put pressure on Apple which is why very little has changed to date.
• I suspect the investigations of by Congress and the EU are likely to prove to be pretty damning and so I suspect that there will be significant pressure placed upon Apple to cut its fees.
• This has generated a lot of negative press for Apple, and given that the profit in question is only 7% of the total, I am not convinced that it is really a fight worth fighting.
• The vast majority of the value generated by the App Store still accrues to Apple through the increased loyalty of users that are still willing to pay significant premiums for the devices in order to be members of the iOS ecosystem.
• Hence, other than pride, I can’t really see a rational reason why Apple would continue to be this obstinate on an issue that doesn’t make that much difference financially.