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Why Apple will soon lose its tight grip on the App Store

This article was first featured in Yahoo Finance Tech, a weekly newsletter highlighting our original content on the industry. Get it sent directly to your inbox every Wednesday by 4 p.m. ET. Subscribe

Wednesday, March 23, 2022

Apple (AAPL) may soon be forced to loosen its vice-like grip on its App Store, as regulators from the U.S. to South Korea zero in on the tech giant’s high-margin business.

Developers ranging from Spotify (SPOT) to “Fortnite”-maker Epic have railed for years against the so-called Apple tax, a 30% fee Apple charges larger developers on app sales. Those efforts could soon pay off, if Apple wants to keep doing business in the European Union: The EU is expected to approve its Digital Markets Act (DMA), a landmark piece of legislation that should free developers from Apple’s fees.

And that could cost Apple billions.

“They've been under pressure for some time [to lower Apple Store fees],” NYU Stern School of Business professor Vasant Dhar told Yahoo Finance. “It just seems really high, and I think there is a case that they're being anticompetitive, and exploiting [the iPhone], which is at the epicenter of all of this.”

Apple contends the App Store, and its fees, protect hundreds of millions of iPhone users from malware and scams. But with the Digital Markets Act seemingly set to become law, and legislators in the U.S. and other countries prepared to take a bat to the company’s App Store practices, Apple might finally lose control of its famed walled garden.

Hits from all sides

Apple’s iPhone is, by far, its most important product. But with smartphone sales slowing, the company has been diversifying its business with its App Store becoming an increasingly important part of that strategy.

Apple doesn’t provide exact App Store sales numbers, instead bundling the amount as part of its Services business. In 2021, Services raked in $68.4 billion of Apple’s $365.8 billion in total revenue, roughly 19% of total earnings.

The company collects 15% from developers that make less than $1 million a year, while the larger 30% fee hits developers that make more than $1 million.

Those fees come into effect when developers use Apple’s in-app payment system. The catch is that developers can only use Apple’s payment system. If they try to use their own, Apple will boot their Apps from the App Store like it did to Epic’s “Fortnite.”

Apple Chief Executive Officer Tim Cook speaks at the Apple Worldwide Developer conference (WWDC) in San Jose, California, U.S., June 4, 2018.   REUTERS/Elijah Nouvelage
Apple Chief Executive Officer Tim Cook speaks at the Apple Worldwide Developer conference (WWDC) in San Jose, California, U.S., June 4, 2018. REUTERS/Elijah Nouvelage (Elijah Nouvelage / reuters)

And that’s where the complaints come in. Without the ability to use outside payment systems or install apps from outside the App Store, developers have to pay up. And now regulators are taking action, starting with the EU's Digital Markets Act.

It’s not just the EU. The competition watchdog for the Netherlands has fined Apple 5 million euros a week since January for refusing to comply with an order allowing dating apps to use alternate payment methods to bypass Apple’s 30% fee.

India’s Competition Commission, meanwhile, has launched an antitrust investigation into Apple’s App Store practices. Ditto the U.K.’s Competition and Markets Authority.

In the U.S., the Senate Judiciary Committee advanced the Open App Markets Act, which would prevent app store operators with more than 50 million users, essentially Apple and Google, from forcing app developers to use their proprietary payment systems.

That kind of pressure could force Apple to change its business practices surrounding the app store and how it profits from it.

“I think we might be at a point in time where, because of all these different types of legislation, [Apple] might have to strategically think about how they operate in this space,” Ari Lightman, professor of digital media and marketing at Carnegie Mellon University’s Heinz College, told Yahoo Finance.

It’s not just the fact that Apple could lose out on billions in developers fees, either. The laws also come with stiff penalties.

The EU’s, for instance, would allow regulators to fine companies between 4% and no more than 20% of their annual global revenue if they fail to comply with the law.

At Apple’s 2021 revenue, a 20% fine works out to $73.16 billion — a huge amount even for a tech giant. If other legislative bodies follow a similar penalty structure, the App Store model would be more of a liability than it’s worth.

Apple claims its service ensures user security

Apple, meanwhile, argues that its App Store fees, and strict limits on how users can install apps, come down to the price of maintaining the store and user privacy.

During a November talk at Web Summit, Apple’s senior vice president of software engineering, Craig Federighi, said that forcing the company to allow users to install apps from third-party sources, known as sideloading, would endanger consumers and hurt Apple’s image.

In a statement to Yahoo Finance, an Apple spokesperson said, “Governments and international agencies worldwide have explicitly advised against sideloading requirements, which would cripple the privacy and security protections that users have come to expect and that differentiate the iPhone experience."

According to Federighi, iOS devices usually don't get infected with malware because Apple’s App Store is the only place users can get apps for their devices. As a result, Apple vets every iOS app out there, ensuring they aren’t hiding malware.

Still, there’s a big hole in Apple’s argument: Apple lets users install apps from third parties on its macOS-based laptops and desktops.

At this point, it doesn’t seem as though any amount of arguing is going to help Apple out of this situation. Its App Store model is destined to change in the coming months. And for a company that’s trying to diversify its revenue streams outside of the all-important iPhone, any losses could spell trouble.

By Daniel Howley, tech editor at Yahoo Finance. Follow him @DanielHowley

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