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Apple's Latest Defense Against Spotify Criticisms Again Misses the Point

Evan Niu, CFA, The Motley Fool

This week, Apple (NASDAQ: AAPL) filed a formal response to the antitrust complaint that Spotify (NYSE: SPOT) lodged with European regulators earlier this year. The Swedish music-streaming leader argues that Apple undermines competition by taking a 15% to 30% cut of sales while also inhibiting the user experience in various technical ways. Scrutiny of Apple's App Store practices has intensified recently, and the tech titan went on the defense earlier this month.

Apple identifies ample competition across numerous categories where it competes with third-party developers. However, that argument misses the point, as the issue is how Apple competes, not whether Apple competes. Its latest defense does likewise.

Spotify interface displayed on various devices

Image source: Spotify.

Only 680,000 Spotify subscribers bill through the App Store

Der Spiegel reports that in its response, Apple is essentially saying that Spotify is making a big fuss out of a relatively small amount of money and using misleading figures to do so. Spotify CEO Daniel Ek noted in his blog post that Apple takes a 30% cut of subscriptions, without acknowledging that Apple's cut on subscriptions drops to 15% after the first year, a change implemented back in 2016.

Apple says that just 680,000 Spotify premium subscribers are being billed through the App Store, and that all of those subscriptions have aged to the 15% tier at this point. Spotify used to offer in-app subscriptions but discontinued them in 2016. Users now need to sign up for Spotify Premium outside of the app, and then can use the app to access the service. That means Apple's 15% tax only applies to 0.7% of Spotify's 100 million premium subscribers. So what's the big deal?

Spotify wants fewer App Store subscribers 

The statistic that Apple provides is hardly relevant to the actual issue at hand. The fact that so few subscribers are billed through the App Store is a direct consequence of Apple's tax being too high in the first place, which is what led to Spotify discontinuing in-app subscriptions.

Spotify app on iOS

Image source: Spotify.

In fact, Spotify directly appealed to subscribers to switch their billing method in 2015, even providing step-by-step instructions. For a while, Spotify passed along the costs to consumers, charging $13 per month for in-app subscriptions compared to the standard cost of $10 per month. Subscribers could save $3 per month by ditching the App Store and signing up directly, Spotify pitched.

Between discontinuing in-app subscriptions and calling on subscribers to switch billing methods, of course there are limited subscribers billing through the App Store, but Spotify's concerns still stand. If Spotify were to reactivate in-app subscriptions, it would indeed have to pay the full 30% on new subscriptions for the first year.

Furthermore, even beyond the money, Apple has a long history of giving its first-party apps various types of preferential treatment. Many of the App Store's guidelines don't apply to Apple, it seems, and that makes competing with the richest company on Earth even harder.

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Evan Niu, CFA owns shares of Apple and Spotify Technology. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.