The Paradox of The Anti-Competitive Apple App Store
Shouldn’t Apple be able to set the rules of it’s own app store?
The thing that makes a great company great is the presence of a perpetual hunger that never allows it to settle. It is constantly on the go for greater innovation to maintain the edge that secured that top spot and in doing so it is continually undergoing a process of reinvention and reimagination.
There isn’t a company that more clearly illustrates this hunger for greatness than those that make up GAFA.
As GAFA has shown us though, sometimes just a simple tweak to the business model is all that’s required to inject new momentum into company growth.
In particular, Apple has recently started taking itself more seriously as a digital services company. The idea here is that it will allow for the company to make deeper use of that extensive consumer base that it has accrued over the years.
The good news is that so far it’s been working. Apple’s services revenue stood at $37 billion by the end of last year, second only to iPhone sales. Even more impressive is the fact that this figure is expected to double by 2022 according to the Trefis Team.
The bad news is though, Apple is being repeatedly accused of bullying as it continues to roll out digital service products that directly compete with existing products offered on its App Store, while somewhat rightfully taxing these same products for using their platform.
On March 13th of this year the CEO of Spotify, Daniel Ek, released a statement where he declared that Spotify had filed a complaint against Apple with the European Commission (EC).
In the statement, he acknowledges that while Apple is the owner of the iOS platform and the App Store, it is still a viable competitor to services like Spotify. The issue is that they claim Apple gives themselves an unfair advantage in this scope.
In particular, Spotify states that the 30% tax on purchases made through Apple’s payment system to digital services forces them to charge prices that are well above Apple Music.
Here’s an excerpt from Spotify’s statement:
What we are asking for is the following:
First, apps should be able to compete fairly on the merits, and not based on who owns the App Store. We should all be subject to the same fair set of rules and restrictions — including Apple Music.
Second, consumers should have a real choice of payment systems, and not be “locked in” or forced to use systems with discriminatory tariffs such as Apple’s.
Finally, app stores should not be allowed to control the communications between services and users, including placing unfair restrictions on marketing and promotions that benefit consumers.
In response, Apple’s defense focused on the priceless nature of it’s consumer base and explains that one cannot expect to profit from it’s platform without expecting to give something back to the market.
Additionally, Apple goes on to explain which categories of apps are taxed and how.
Here’s an excerpt from Apple’s response:
A full 84 percent of the apps in the App Store pay nothing to Apple when you download or use the app. That’s not discrimination, as Spotify claims; it’s by design:
Apps that are free to you aren’t charged by Apple.
Apps that earn revenue exclusively through advertising — like some of your favourite free games — aren’t charged by Apple.
App business transactions where users sign up or purchase digital goods outside the app aren’t charged by Apple.
Apps that sell physical goods — including ride-hailing and food delivery services, to name a few — aren’t charged by Apple.
The only contribution that Apple requires is for digital goods and services that are purchased inside the app using our secure in-app purchase system. As Spotify points out, that revenue share is 30 percent for the first year of an annual subscription — but they left out that it drops to 15 percent in the years after.
Indeed, both sides of the argument are well rooted. On one hand, Spotify cannot hope to compete with Apple Music while it is being taxed so heavily. On the other hand, Spotify has gained significant momentum and profit from the App Store thus far and really should expect some charge for doing so.
So what’s going on here?
The Actual Conundrum
From it’s inception Apple has done a remarkable job of aggregating a humongous consumer base through it’s groundbreaking technologies and eye-catching marketing campaigns.
Above all these technologies however, was the implementation of the App Store itself. Coupled with the introduction of the iPhone, the whole concept of an ecosystem where both independent coders and Apple itself could develop and market applications to continually enhance the user experience of owned devices was nothing short of revolutionary.
In fact, the App Store has provided such a powerful and secure framework that it has generated over $120 billion for developers, and created millions of jobs. Indeed, countless companies were able to leverage the power of the App Store in order to grow and facilitate their business entirely.
Furthermore, there is much to be said about the effort that Apple puts into maintaining it’s connection with outside developers. In fact, in just a month’s time Apple is going to host its annual World Wide Developer’s Conference (WWDC) where there will be one-on-one consultations, hands-on labs and over 100 “ technical and design-focused” sessions with Apple experts amongst a host of other opportunities for outside developers to elevate their craft.
The above considered, it stands to reason that if Apple decides that it wants to charge 30% tax on digital goods and services for the first year with a further 15% every year after…then Apple should be allowed to do so…right?
On the other hand though, there is an underlying issue with the nature of the App Store that may just be amplified by the presence of this tax. By definition, the App Store places Apple in a delicate situation of attracting independent developers to use their platform, and competing against those same developers with their own home grown apps.
A large part of the problem is that homegrown apps will never be subject to the same rules as the outsiders. As a result of this, Apple really is both player and referee. However, this really is to be expected seeing as it is their App Store.
When we look at the recent additions of Apple Music, Apple News+, Apple TV+ and any of the other Apple Services, we see that there isn’t really anything groundbreaking about these services unlike the usual Apple product. Undoubtedly though, even the mighty Apple should be able to reinvent the wheel sometimes.
However, every time Apple reinvents a product that falls under the category of digital goods and services, that product is immediately put at a severe price disadvantage due to the Apple Tax on such goods.
That being said, the crux of the enigma comes down to the sheer size of the Apple consumer base. In the wise words of Oprah Winfrey “they’re in a million pockets.” If a company built itself up on this base, then they will certainly feel more than a pinch if Apple starts to compete with them while undercutting a price that was inflated due to Apple Tax in the first place.
Here’s my position on the rightfully confusing issue:
Apple fully has the right to charge any company for the use of its pristine platform and priceless consumer base. On the other hand, it has a responsibility to the developers that it invites onto its platform that it won’t directly compete with their product under unfair price conditions, especially if the outside app was developed first.
Keeping these thoughts in mind, Apple will need to take full advantage of the WWDC to make sure that it deals with the growing concern that it may be abusing it’s power in the app store.
I hope you enjoyed the read!
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