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Spotify has a point about Apple's App Store fees

Rob Pegoraro
·Contributing Editor

Spotify (SPOT) wants the European Commission to end what it believes is Apple’s discrimination against its iOS app.

On Wednesday, the Stockholm-based company filed a complaint with the EC alleging systematic unfairness by the Cupertino, Calif. firm. As a post by CEO Daniel Ek and a site about the issue called Time to Play Fair charge, after Spotify ended premium signups in its iOS app to escape Apple’s 30% cut of subscription revenue, Apple banned Spotify from even hinting in the app about subscription sign-ups or promotions at its own site, hindered app updates and shut Spotify out of such Apple products as Siri in favor of its own Apple Music.

“What initially felt like a mutually beneficial partnership, increasingly felt very one-sided,” Ek said at a conference in Berlin Thursday, according to prepared remarks. “And it’s now become completely unsustainable.”

Spotify has aired this grievance before, but taking it to the EC—which has levied multibillion-dollar fines against tech companies for anticompetitive behavior—does not represent Swedish sour grapes. Apple’s conduct stands apart from that of such rival app-store operators as Google (GOOG, GOOGL) for being particularly exploitative and punitive, with the ultimate costs passed on to customers who may get stuck with less competition and choice.

Apple’s app store isn’t like others

The key difference between the iOS App Store and Android’s Play Store: While both Apple and Google take 30% of app purchases and content subscriptions paid through their stores, with a drop to 15% on subscriptions after the first year, only Apple bans apps from taking your subscription money any other way. They can’t employ other payment systems, link to other payment sites or provide “other calls to action” suggesting such alternates.

In June of 2014, three years after the debut of App Store content subscriptions, Spotify started accepting Spotify Premium sign-ups in its iOS app but charged 30% more to cover Apple’s cut. It ended that practice in May 2016.

Spotify now wants the EC to force Apple to apply “the same fair set of rules and restrictions” to its own apps and those of others, allow a choice of payment systems, and let developers contact iOS customers with marketing messages. The company hasn’t posted the specific text of its complaint, which spokesman Chris Macowski said complied with commission privacy rules.

EC competition chief Margrethe Vestager told Bloomberg Thursday that the EC would take Spotify’s complaint “seriously.”

Late Thursday, Apple posted a statement denying that it had stalled Spotify’s “nearly 200 app updates” and noting Spotify’s CarPlay and Apple Watch apps—but treating its monopoly on in-app payments as a given.

Apple also went after Spotify by breaking down how little the streaming service relies on subscribers from the App Store.

“A significant portion of Spotify’s customers come through partnerships with mobile carriers. This generates no App Store contribution, but requires Spotify to pay a similar distribution fee to retailers and carriers. Even now, only a tiny fraction of their subscriptions fall under Apple’s revenue-sharing model. Spotify is asking for that number to be zero.”

Like Apple, Google takes the same 30% share of in-app subscriptions and drops that to 15% after a year. But Google also allows outside-payment options, which is why the Android version of Netflix (NFLX) lets you sign up in the app while the iOS version no longer does.

Google can’t even stop a company from offering a direct download—the popular game Fortnite isn’t at the Play Store because developer Epic Games hosts that itself to keep all the income.

30% to process a payment really is steep

It’s also important to remember that Apple or Google have to run their respective app stores that help you find apps, perform the tests that screen out malware, and provide the server capacity needed to process your download. And that’s all before you pay for an iOS or Google app.

But processing a subscription payment, like Spotify’s, doesn’t incur those costs. To put this more bluntly: Apple isn’t running Spotify Premium, Apple is running something similar to a credit card.

Meanwhile, as Spotify notes, Apple imposes no 30% tax on Uber or Postmates for providing physical services through an app.

“We believe this holds no practical purpose other than to force competitive services into higher cost structures and unfairly tax service activity on the iOS platform,” the investment firm KeyBanc said in a research note.

“Consequently, we believe Spotify's claims are likely to carry significant weight when presented to the European Commission's competition committee.”

The note estimated that 12% of Apple’s fiscal year 2019 gross profit could come from the App Store alone. And with Apple leaning further into services as a major revenue stream, any EC action could give that income a serious haircut.

One company with an app store has taken note: As of last week, Microsoft (MSFT) now keeps only 5% of non-game app sales at its Windows 10 store, unless the company helped that sale happen through the store’s search function or via one of its own promotions—in which case Microsoft still only takes 15%.

It could get worse

On March 25, Apple will host an event to announce new content services—which, advance reports suggest will feature a bundle of online newspapers and magazines for which Apple will keep 50% of subscription revenues.

If the prospect of Apple wanting 50 cents of every dollar for a transaction it enables makes a 30% cut seem moderate, it shouldn’t. These commissions amount to an exercise of raw market power, and tech giants that rank among the world’s richest companies can’t justify that by saying “everybody else does it.”

Email Rob at rob@robpegoraro.com; follow him on Twitter at @robpegoraro.