Apple’s Slice
Seemingly few people remember it now, but when the App Store launched back in 2008, it was not the plan for Apple to make money from the service. As the company noted quite often back then, the 30% cut they took from paid applications was simply to keep the lights on — to cover the costs of running the store itself. No less than Steve Jobs noted that Apple viewed the App Store as simply a way to augment and sell more devices. It was to the iPhone what iTunes was to the iPod, he said. The devices were the real business.
And that has remained largely true over the past decade. But just in the past year or so, the tune and tone has started to change. The reason why is obvious: slowing device sales mean slowing revenue growth for Apple. The company needs new vectors to keep the business humming along. And because no device is likely to be able to top the iPhone when it comes to growth — mixed with the market’s current infatuation with recurring revenue business models, see: the new Microsoft — the company is taking a serious look beyond devices as a core growth driver for the first time.
Couple all of this with the fact that the App Store ended up being far more successful than Jobs could have ever imagined. And that beyond simply selling apps, the business has morphed into also selling in-app purchases (the current key driver of dollars, for gaming in particular), including subscriptions. And you can see what is staring Apple in the face: a path forward. Services. Services. Services.
And yet, this new App Store — the one that is a meaningful business to Apple — is still stuck in the past, in some ways. Notably, the 30% cut. A decade ago this was seemingly an arbitrary cut, a guesstimate based on what others took in terms of cuts from other businesses. Again, with the aim to run break-even. It seemed fine. Because everything was so nascent, no one knew any better.
These days, people know better.
The 30% cut is under assault from multiple angles. Spotify is the most high-profile example — antitrust complaints tend to do that — but it was hardly the first or the only grievance in this regard. Multiple businesses across multiple sectors are now vocally complaining about such a cut — and some, from small developers, to the biggest of the behemoths like Amazon and Netflix, are balking at coughing up such a bounty to Apple.
Meanwhile digital stores from other companies are revisiting their own cuts. Competition is doing its job.
But Apple, for its part, has largely held the line — see: their response to Spotify, which is fine in some ways and extremely disingenuous in others — yet it has made some small tweaks here and there as needed. One big one was dropping the cut for subscriptions older than one year to 15%. Other, more opaque ones, included negotiating one-off deals with larger players to make the cut more palpable.
The situation has now reached a crossroads. If the rumors are to be believed (and they should be), we’re on the verge of Apple launching not one, but two new services next week. (Or potentially three!) One is a premium video offering, the other a premium news offering.¹ (And maybe a credit card!)² These new services further complicate matters because it’s unclear what the cuts will be here as well.³ Notably, it has been reported that the news offering had Apple asking for a 50/50 cut with premium news providers — which sounds outrageous, yet some pubs are seemingly signing up for, because, well, it’s Apple. While others, perhaps in better positions of power, are not.
Waters that were already quite murky are about to have an oil tanker tip over in them. The chorus complaining around Apple’s slice of all these various revenue pies is about to get a lot louder. All the metaphors.
At the same time, Apple probably feels like they can’t afford — perhaps literally — to change the cut. In some cases, it may not make sense from a business perspective. In others, it may create a slippery slope where everyone wants a better deal. And because of the aforementioned push into services, Apple undoubtedly feels the need to stand firm here.
In large part because of said services push, this feels like an untenable situation. My guess is that something is going to have to give with regard to Apple’s slice going forward. Perhaps not across the board, but I have a feeling they’re going to need to make things a lot more granular. In particular, the 30% App Store cut is worth revisiting, to make things more sensible for developers and partners. Yes, it will add complexity, but this is what clearly needs to happen. After all, these are now very real businesses for Apple.
And about to get even more so.
¹ And there may well be other offerings that tie these, perhaps with Apple Music and iCloud, all together — the start of “Apple Prime” — we’ll see.
² The start of Apple’s move into a massive services industry: banking?
³ Peter Kafka has a fascinating report today that not only will Apple not be competing directly with Netflix and the like (at least not right now), but instead, their service will instead focus on upselling and re-bundling other content, such as HBO and Showtime. And they’ll apparently be hosting and streaming that content from their own servers. Wild!
Apple’s Slice
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