iPhone sales are falling, and Apple’s app fees might be next
iPhone sales are falling, and Apple’s app fees might be
next
By MICHAEL LIEDTKE March 6, 2019
SAN FRANCISCO (AP) — Last year, every time someone paid
$11 for Netflix through an iPhone app, Apple pocketed as much as $3.30.
Multiply that by every charge made through iPhone apps and you can see why
Netflix and other companies are fed up about what they consider Apple’s unfair
market power.
Late last year, Netflix rebelled against Apple’s fees,
which can range from 15 percent to 30 percent. Analysts fear other companies
may follow. And attorneys representing consumers in a pending Supreme Court
case charge that Apple is an unfair monopolist in the market for iPhone apps.
An adverse decision in that case could open a legal door that might eventually
force Apple to cut its generous commissions.
That could spell more bad news for Apple, which is
already reeling from a slump in iPhone sales that has knocked down its shares
by 25 percent. The company has been positioning its booming digital-services
business as its new profit engine. That plan could hit a snag if the app store
takes a hit, since it currently generates about a third of the company’s
services revenue.
Investors are now hanging onto Apple services as a “life
preserver in the choppy seas” just as it’s about to float away, Macquarie
Securities analyst Benjamin Schachter concluded after the Netflix move.
These app-store fees mostly hit app developers themselves,
although some pass along the costs to users of their iPhone apps. Spotify, for
instance, used to tack $3 onto the cost of its $10-a-month paid service — but
only for users who signed up via its iPhone or iPad app.
Apple has doubled down on digital services as consumers
cling to older iPhone models, hurting sales. Apple’s iPhone revenue this year
is expected to drop by 15 percent from last year $141 billion, according to
analysts surveyed by FactSet.
Services, by contrast, are expected to generate about $46
billion in revenue this year, according to the same survey. Schachter estimates
the app store will account for $16 billion of the services revenue. By those
estimates, both services and app store revenue will have doubled in just three
years.
Apple didn’t respond to the AP’s inquiries about its app
fees. It has previously defended the system as reasonable compensation for
reviewing all apps and ensuring its store remains a safe and secure place for
e-commerce. Google charges similar fees in its own app store, although its
overall business isn’t as dependent on them.
Besides the app fees, Apple’s services division includes
revenue from its Apple Music streaming service, iCloud storage, Apple Care,
Apple Pay and ad commissions that Google pays to be the iPhone’s built-in
search engine. Apple is also expected to roll out its own streaming-video
service this spring, although few details are available.
The potential streaming competition from Apple may have
triggered Netflix decision’s to bar customers from paying for new video
subscriptions through its iPhone app. Instead, it directs users to its website,
thus avoiding the extra fees. (Netflix did likewise with Google’s app store
last year.)
Netflix alone won’t put a significant dent in Apple’s
finances, even though it paid Apple more money last year than any other
non-gaming app, according to App Annie, a firm that tracks the app market. That
sum came to about $110 million, accounting for just 0.3 percent of the services
division revenue, based on disclosures made in Apple’s earnings calls last
year. More than 30,000 third-party apps now accept subscriptions through
Apple’s store.
Netflix declined to discuss its reasons for ending new
subscriptions through the app store. But its move drew more attention to an app
store tax that other technology companies have already attacked as an abuse of
the power that Apple has amassed since opening its app store years ago.
Almost three years ago, Spotify also stopped accepting
new subscriptions through Apple’s app store. Its move followed the debut of
Apple Music, which obviously doesn’t have to pay any commissions.
“They’re trying to have their cake and eat ours, too,”
Spotify spokesman Jonathan Prince told The Associated Press in 2016. “We find
it bad for consumers, unfair to consumers and ultimately something that could
stifle music streaming subscriptions across the board.”
Spotify regularly harps on the unfairness of Apple’s
app-fee system in its securities filings. The company didn’t respond to
interview requests for this story.
Few other apps reach as many customers as Netflix and
Spotify, making it unlikely that the rebellion against Apple’s app store
commissions will greatly swell, said Amir Ghodrati, director of market insights
for App Annie.
Apple doesn’t seem to be worried. In fact, it’s
reportedly demanding an even higher commission — roughly 50 percent — for a
Netflix-like news service that it is trying to create with a variety of
publishers, according to a recent Wall Street Journal report based on
unidentified people familiar with the negotiations.
That proposal faces resistance from The New York Times,
The Washington Post and other publishers who believe Apple is trying to exploit
its market power to extract excessive fees.
Most app makers, however, are too worried about losing
access to the app stores to speak out against the fees. Epic Games, maker of
the popular Fortnite video game, has been a notable exception.
Epic CEO Tim Sweeney lashed out at app fees as a
”parasitic loss ” at a video game conference 18 months ago, according to the
trade publication GamesIndustry.biz. “We should be angry about this, and we
should constantly be on the lookout for other solutions, and new ways to reach
gamers,” Sweeney said at the time. The North Carolina company didn’t respond to
interview requests.
Since then, Epic has refused to release its Fortnite app
in Google’s Play store for Android phones, although it continues to offer an
iPhone version. But Epic has opened its own app store for all video games built
for personal computers, and only takes 12 percent of the revenue — a rate that
Schachter fears Apple may eventually be pressured into adopting as well.
Sweeney broadcast a rallying cry for app maker on his
Twitter account in January, not long after the news broke about Netflix
abandoning Apple’s subscription system.
A 30 percent commission “completely breaks the economics
of content distribution businesses like Netflix, Spotify, Kindle, and any
digital stores that aim to compete,” Sweeney tweeted . “This has got to change
in 2019!”
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