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Many Apple bulls contend that Apple’s best business is the company’s highly profitable services business. What comprises Apple’s services business? Music, cloud storage, iTunes, and the app store among others.
But as Bloomberg reports here, Apple’s services business may not be all that it is cracked up to be. App developers are starting to rebel against Apple’s onerous 30% cut of app sales and in-app purchases.
A thirty percent cut for providing what basically amounts to a website that keeps out malicious software and centralizes billing is criminal. Visa and Mastercard only charge around 2% for an analogous service, and retailers fight tooth and nail to get a better deal.
With the top 1% of app publishers responsible for over 90% of app store revenues, Apple may have a problem on its hands. And it could be a much bigger problem than you might expect.
According to Macquarie, an investment bank, if app store commissions were reduced to a more reasonable rate of 5-15%, Apple’s operating income would fall 21% by fiscal 2020.
Grumbling about app store economics isn’t new. But the number of complaints, combined with new ways of reaching users, regulatory scrutiny and competitive pressure are threatening to undermine what have become digital goldmines for Apple and Google.
“It feels like something bubbling up here,” said Ben Schachter, an analyst at Macquarie. “The dollars are just getting so big. They just don’t want to be paying Apple and Google billions.”
Apple and Google launched their app stores in 2008, and they soon grew into powerful marketplaces that matched the creations of millions of independent developers with billions of smartphone users. In exchange, the companies take up to 30 percent of the money consumers pay developers.
For most of the decade, the companies won praise for helping to build an app economy that’s projected to grow to $157 billion in 2022, from $82 billion last year. But more recently, smartphones and apps have become so important for reaching customers that these app stores have been criticized for taking too big a share of the spoils. Rather than supporting innovation, Apple and Google are being talked about as tax collectors inhibiting the flow of dollars between creators and consumers.
“They’re very aggressive about making sure companies aren’t trying to work around their billing,” said Alex Austin, co-founder of mobile company Branch. “They have whole teams reviewing these flows to ensure they get their tax.”
You can read the full analysis from Bloomberg here.
Jeremy Jones, CFA
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