Apple and Epic Games have gone to war, with the two companies clashing over Apple’s App Store policies. Epic, in protest of Apple’s 30 percent fee for every digital transaction on its iOS platform, tried to turn things around with a direct payment option in Fortnite, leading to Apple banning the game altogether. But Apple’s Fortnite battle is not just about a particular App Store policy; it’s a battle that could decide the future of one of the key parts of Apple’s current and future business.
The 30 percent “Apple tax” is the beating heart for Apple’s service company, which it has claimed as growth as the iPhone business begins to slow down. That line of revenue has become a critical part of Apple’s business, the bright star executives have been able to point to revenue reports in recent quarters. Marking the label income as “services” leaves Apple unclear where the money really comes from – and on the scene, Apple executives talk about prestigious products such as Apple Music, Apple TV Plus, Apple News Plus, or Apple Arcade. But the money from these services is dwarfed by Apple’s cut of the money flowing through its App Store and its power to force big players like Adobe, Spotify, and even Epic to pay the toll. So if Apple squares off Fortnite, it’s not just about fighting over one app or one policy. It protects one of the major sources of revenue in the coming years – a resource that could permanently lose if Epic comes up.
The App Store may have started small, but today it is making Apple a hefty amount of money. In 2019 alone, Apple’s percentage of digital content was sold through the App Store for an estimated $ 18.3 billion, or nearly 40 percent of Apple’s total service delivery. (To reach that number, Apple says $ 61 billion in digital content was sold through the App Store in 2019, of which it took an estimated $ 18.3 billion cut, compared to the $ 46.3 billion that Apple reported in services revenue on their aggregate quarterly revenue of 2019.)
An overwhelming amount of that $ 18.3 billion comes from in-app purchases in free-to-play games like Fortnite, Candy Crush, en Pokémon Go bylâns with subscription apps like Tinder, Disney Plus, Twitch, and YouTube. As of today, SensorTower notes that of the 200 top-grossing iPhone apps, only one (Minecraft) costs money in advance. And Apple needs these payments to flow specifically through the App Store so it can collect on those purchases and subscriptions.
That may seem like a foreign business to a company that built its name on making hardware customers pay for quality, but Apple wasn’t always so dependent on App Store revenue. Back when Apple first announced the App Store in 2008, it announced that developers would get 70 percent of what they sell, and Apple would get 30 percent for ‘maintenance’, as former Apple CEO Steve Jobs referred to it stage. Jobs would argue at the time that “we do not expect this to be a major profit generator.”
The original model for the App Store was to take advantage of paid apps, while free apps would serve as a gateway to drive customers to more money. The best example of this plan came when Apple first added support for in-app purchases in June 2009. At the moment, it was limited to pay apps looking to add extra content, and with limits on subscription models. “Free apps remain free,” Apple’s then-mobile software chief Scott Forstall boasted at the announcement.
That policy lasted only five months until Apple opened the floodgates and allowed free apps to add optional purchases, which have dominated the App Store and Play Store charts – and net gross – since then.
But as business models changed and the amount of money that followed through apps grew, Apple began to tighten its grip. In 2011, Apple changed the App Store rules to restrict developers from selling subscriptions as in-app purchases, unless they were sold through Apple’s system (and submitted at Apple’s 30 percent tax).
Some companies, such as Netflix and Hulu, are following the change. Others, like Spotify, charge a premium on iOS for the extra charge and encourage customers to subscribe directly elsewhere. And others, like Amazon, dug into their heels, refusing to pay Apple’s fees, and denying them the ability to purchase content in their apps. (So far, Amazon’s iOS Kindle app has no option to purchase books directly, though Amazon has managed to cut a special deal with Apple for its Prime Video app.)
While the market for apps has continued to change and developers struggle to monetize, Apple has tried to push up subscription costs for apps (spanning huge apps like Microsoft Office and Adobe’s Creative Cloud suite to popular apps like Fantastic to One-Man Teams like Carrot weather). It’s the same logic that drives Apple’s own pursuit of subscriptions: users getting paid continuously for services means increased revenue. Apple even went so far as to reduce its 30 percent to 15 percent after one year for developers willing to subscribe. (After all, 15 percent of a recurring fee that has been charged for years is much better than 30 percent of one advance expense once.)
That policy has worked wonders for Apple: today, almost every top-grossing app on the platform is a subscription or service; and although Apple says the App Store paid out $ 120 billion to developers in 2019, it expects to mention that the company will also have roughly $ 51 billion over the course of the store’s lifetime. ‘Maintenance,’ indeed.
The net result of all these years of growth is that the App Store has become too big a part of Apple’s identity to give up now. Apple may find itself a Hollywood savant with Apple TV Plus as a creative haven with Apple Arcade, but the core business is much simpler. Apple sells iPhones, and then the App Store makes money from the free-to-play games and subscription services that run on those iPhones. And as the growth of the iPhone has slowed, the importance of that second company has only grown. There may be a time when Apple’s other subscription offerings can carry the company forward, but it is not today.
For now, however, Apple’s “services” are the App Store, and the App Store is Apple’s fee for free to play games such as Fortnite. That means Apple is unlikely to give in to Epic’s protests without a fight here – for a revenue source this is important, it has no choice.
