(Bloomberg)—Apple Inc. and Alphabet Inc.’s Google are two of the world’s most profitable companies, and their app marketplaces are among their most profitable endeavors: according to analysts, Apple’s App Store takes in more than $20 billion a year with a profit margin above 75%.
Now such practices are coming under increasing scrutiny. U.S. senators and European regulators have griped about the “gatekeeper control” that Apple and Google have with their mobile operating systems. South Korea has moved to become the first country to impose curbs on the companies’ app marketplaces. And a U.S. judge has ordered Apple to make sweeping changes as a result of a challenge from one of the world’s biggest gamemakers.
1. What gamemaker has sued Apple?
Epic Games Inc., the maker of Fortnite, sued Apple over the cut it takes from App Store transactions and what Epic claims are antitrust violations. Epic believes it shouldn’t be forced to use Apple’s payment system. The iPhone and iPad only come with one digital marketplace for downloading apps and the App Store’s payment system charges developers commission of as much as 30%. Epic wants to use its own payment system for its hit video game Fortnite or for Apple to allow alternative App Stores. In August 2020, Epic circumvented Apple’s rules and added its own payment system to Fortnite. Apple quickly removed the game from the App Store and Epic filed its lawsuit hours later. Apple countersued for breach of contract.
2. What is Epic unhappy about?
Apple device users spent $72 billion on the App Store in 2020, with almost $22 billion of that going to the iPhone maker, according to SensorTower estimates. Some developers deride Apple’s fees as an unfair and unwarranted tax, especially since it applies not just to the purchase of an app, but to anything bought within one, such as digital weapons, costumes and other add-ons popular in Fortnite.
3. Why does Apple charge App Store commissions?
Apple takes as much as 30% of the revenue developers get from paid apps, in-app-purchases and subscriptions. The company argues the App Store’s success is related to its review process, tight integration with its hardware, and privacy and safety rules. The company’s payment system ensures consumers have a seamless experience and are protected from fraud. And for developers, there’s access to about 1 billion Apple device owners who often spend more on apps than Android users.
4. Is Apple backing down?
Exemptions have been added in recent years, but so far none apply to Epic’s case. In 2016, Apple lowered to 15% the cut it takes from subscriptions beyond the first year. In 2020, it also agreed to lower its share to 15% if a developer earns less than $1 million in any year. In August 2021, it settled a class-action lawsuit by paying $100 million to a range of app makers. It also agreed to allow developers the use of communications outside the iOS app such as email to promote alternative payment methods that exclude Apple. In September, there was a further concession for so-called reader apps spanning content like magazines, newspapers, books, audio, music and video. Starting in 2022, they will be allowed to add a link in their app to direct users to other payment systems.
5. What did the judge do in the Epic case?
U.S. District Judge Yvonne Gonzalez Rogers, who had overseen a three-week trial in May, ordered Apple to allow developers to steer consumers to outside payment methods for mobile apps. The judge concluded that Apple has engaged in anticompetitive conduct that harms consumers by preventing them from getting cheaper prices, but she didn’t go as far as Epic sought. She said she could not conclude that Apple is a monopolist, and stopped short of ordering Apple to cut its 30% fee, though she said it isn’t justified. She also ordered Epic to pay $4 million in damages to Apple for breach of contract. The ruling was seen as a blow to Apple’s App Store business model. Apple, however, called the ruling a justification, saying that “the court has affirmed what we’ve known all along: the App Store is not in violation of antitrust law.” Epic has announced its intent to appeal.
6. Where does Google come into this?
Google, via its Android Play Store, is also under scrutiny from regulators and developers. But a there’s key difference. Google lets Android devices run other app stores that can offer different payment methods. Still, Epic Games also sued Google when the internet giant removed Fortnite from the Play Store last year for the same reason as Apple.
7. What’s happening in South Korea?
In late August, President Moon Jae-in’s Democratic Party used its parliamentary supermajority to pass a bill that will ban companies from forcing developers to use their online payment systems. The bill was submitted in 2020 after Google said it would require all apps to use its payment system, charging up to a 30% commission on in-app purchases. That’s a model common in other parts of the world and also employed by Apple. Earlier this year, the search giant lowered commissions to 15% for the first $1 million of revenue earned by developers, in part due to a global backlash. Under the latest version, companies that operate app stores must allow their users to pay through a variety of payment systems. It stipulates that tech giants must not “abuse their status to force their users to only use specific payment methods.”
Apple is No. 3 in the 2021 Digital Commerce 360 Top 1000.