Apple Gives Ground in a Strategic Retreat From Strict App Store Rules
The company, under pressure from app developers and regulators, is making concessions while protecting lucrative parts of its App Store.,
SAN FRANCISCO — When Apple opened its App Store in 2008, a year after it introduced the iPhone, the 30 percent fee it charged developers to sell their software in the store was an afterthought. But as apps went mainstream, the store turned into a $20 billion a year business, by some estimates.
Now, under pressure from regulators and many of those developers, Apple is making a series of concessions that would appear to chip away at that giant business.
On Wednesday, prompted by an investigation by the Japanese Fair Trade Commission, Apple agreed to allow some companies, like Netflix and Spotify, to direct their users to payment methods outside its App Store when they sign up for subscriptions.
The tweak, coming after a similar change last week, was a strategic retreat of sorts, said analysts that track Apple’s business. Apple — so far — is standing its ground on the App Store’s cash cow: its share of the business from game makers.
While Apple does not normally detail how its App Store business is divvied up, evidence presented in a recent court fight with Epic Games, maker of the popular video game Fortnite, provided some insight.
In 2016, 81 percent of Apple’s App Store revenue came from games, compared to 3 percent for music and 4 percent for other forms of entertainment, according to a slide presented by Epic’s lawyers. And on the witness stand in May, Tim Cook, Apple’s chief executive, said the “majority” of App Store revenue still comes from games.
“That’s something Apple will fight tooth-and-nail to defend,” said Daniel Ives, an analyst at Wedbush Securities. Mr. Ives said any money Apple collects from so-called reader apps — the apps it gave ground to on Wednesday — was negligible at best.
Apple declined to comment.
Apple is facing growing pressure from regulators and politicians around the world. Its App Store is the target of an antitrust investigation by the Justice Department. Last month, the Senate also introduced antitrust legislation aimed at fostering competition with both Apple and Google’s app stores.
South Korea’s parliament on Tuesday passed a bill that will ban app stores — namely Apple and Google — from forcing developers to use only their proprietary payment systems. There are also pending investigations into whether Apple is abusing its dominance in the App Store in Europe, Britain and, most recently, India.
The court fight with Epic, which played out in a federal court in Oakland, Calif., earlier this year, arguably presents the greater threat to Apple’s App Store business. Epic wants to force the iPhone maker to allow app developers to avoid App Store commissions altogether, which would be a major financial hit to Apple. A federal judge is expected to soon issue a verdict in that case.
While Apple has described the changes as a major concession to app developers, critics have argued that the moves are more for show than a substantive revamp of its business.
“A year ago, these concessions probably would have worked, and they still might, but legislators have built up momentum that could be hard to stop,” said Paul Gallant, an analyst at the investment bank Cowen.
More substantive reforms that Apple is likely hoping to avoid, critics said, would include drastically reducing or eliminating the 30 percent cut Apple receives from App Store purchases (like an item bought in a game), allowing other companies to install competing app stores on iPhones, or letting customers download apps directly from the internet.
Apple has not budged on its 30 percent cut over the years, with a few exceptions. In 2016, it lowered its commission for app users’ subscriptions down to 15 percent after one year, and agreed last year to reduce its cut to 15 percent for small app developers.
The change announced on Wednesday allowed a set of so-called reader apps — which provide content for digital media like books, newspapers, music and video — to steer their customers to their own websites to purchase subscriptions.
Until then, under Apple’s longstanding rules, apps like Netflix and Spotify were not allowed to advertise on their apps that users could purchase subscriptions on their websites. Spotify does, however, email new members a link to its website where it advertises its paid subscriptions, though it does not explicitly tell users to circumvent Apple.
Last week, as part of a legal settlement with a group of app makers, Apple said companies could now email customers to tell them about ways to pay other than in their iPhone (or iPad) app. Apple also said it would create a $100 million fund for small app developers.
Daniel Ek, the chief executive of Spotify, wrote in a tweet on Thursday morning that Apple’s change was a “step in the right direction, but it doesn’t solve the problem.” He added that the goal was “to restore competition once and for all, not one arbitrary, self-serving step at a time.”
Tim Sweeney, Epic’s chief executive, said in a tweet that Apple had a great deal of leeway to determine which apps fall under the classification of reader apps and are now subject to different rules. And some critics noted that allowing companies to communicate with their own customers about payment methods was hardly a significant concession.
When Apple first opened the App Store, Steve Jobs, Apple’s chief executive at the time, worried that bad apps from other companies would sully the experience for customers. It soon became clear that outside developers were creating apps for the smartphone that made it even more useful.
Now those developers are trying to claw back what they gave up for access to the iPhone. But even in a worse case scenario for Apple — Epic wins and that victory survives inevitable court appeals — the iPhone maker is likely to continue to thrive.
“Even in the worst case scenario — and I don’t think this will happen — where the commission goes to zero, the good news is Apple still makes a lot of money selling the device,” said Tom Forte, an analyst at the financial firm D.A. Davidson.