Apple’s services growth is increasingly an advertising story
Apple’s Services business is on track to clear $100B in annual revenue. While we tend to think of Services as App Store fees and iCloud, roughly 40% of this revenue now comes from advertising, including Apple Search Ads and the enormous Google default search deal, estimated at $20B per year.
Apple’s multi-year privacy push did more than convince the market that iPhones are secure. It also changed how advertisers allocate their budgets. With less ability to track users across apps, more spend has shifted away from third-party networks and toward Apple’s own monetization surfaces. Apple is now one of the largest advertising companies in the world — without calling itself one.
At the same time, mounting legal pressure around App Store commission rules threaten the highest-margin portion of that Services stack. If even 20% of App Store transactions shift to external payments, Apple could lose ~$11.6B annually. That dynamic only increases the strategic importance of Apple Ads and on-device monetization going forward.
Google is already preparing to do this in South Korea, as a result of recent legislation there.
Commissions on outside payment methods are something most analysts agree are specifically allowed under the terms of the Epic v. Apple ruling, but 'allowed' and 'preferable' are quite different — one theory I've seen is that this filing is simply leverage, intended to get a stay on the ruling that is due to allow links to external payment methods starting on December 9.
Following the case of 'Apple v. Everybody'...
Apple seems intent on taking on the entire world to protect the margins on its App Store business. In our last issue, we covered Apple's proposed changes to the EU App Store to meet compliance issued by the European Commission (EC) Digital Markets Act (DMA). What's followed has read comically like a middle-school feud. Grab the popcorn folks, it's gonna get catty:
Meanwhile, Epic works hard to keep a second front against Apple alive in the U.S.:
If you find this a bit much, you're not alone. But keep in mind, we're talking commissions worth billions of dollars, so it's no wonder these companies are squaring off so publicly. I find an exchange between Eric Seufert and Ben Thompson on a recent Stratechery podcast (paywall) especially salient:
Eric Suefert: "People don’t recognize whenever you see a price in the App Store that was optimized for gross revenue by the app developer. So, you cut that feed, it’s not going to trickle down to the consumer; they’re not going to pay less."
Ben Thompson "100%....There is so much competition on the App Store that prices have long since been driven down to their optimal level and taking the fee. All it does is shift money from Apple’s pocket to Epic’s pocket."
At the end of the day, we'll likely see some resolution in the middle, but the only real change will be the shifting of profit between juggernaut's balance sheets.
Apple’s App Store and Other Digital Marketplaces [PDF]
Apple sponsored a study to compare commission rates charged by popular digital marketplaces (which includes the App Store, but also Uber, Airbnb, Etsy, Roku, Steam, and so on).
As evidence of the second point, yesterday saw some interesting whiplash on Hacker News: two of the day’s most popular comment threads were an [incorrect] report that Apple keeps their 30% cut even after a refund, and then the follow-up correction that no, they actually don’t do that anymore.
Google Play to pilot third-party billing option, starting with Spotify
Yes, this is the mythical 'third-party in-app payment option'.
No, this is not a 'get-out-of-commission-free card'.
The details of this pilot program are not public, but that doesn't mean we're without precedent: Google already offers a similar program in South Korea, and the commission rate is only reduced by 4% for non-Google payment methods.
The Small Business Program is a huge, clever U-turn by Apple
Via a middle-of-the-night press release, buried in the middle of this week's Apple Silicon MacBook noise, Apple just announced a new program to cut App Store commission rates from 30% to 15%…for ‘small businesses’.
In other words, commission rates are cut in half for all of the companies that hadn’t really been complaining all that loudly (perhaps because they lacked a tall enough soap box), but which everyone was assuming made up the silent majority.
It’s a great chess move. The impact on Apple’s App Store revenue will probably be statistically insignificant, and the big tech companies that are complaining loudly now look a whole lot more lonely.
This week, Apple released a couple of self-serve tools to help developers promote their apps.
They're…basic. But maybe a sign of more to come? After all, a robust array of tools integrated directly with the App Store could help justify that 30% commission rate…
Their Businesses Went Virtual. Then Apple Wanted a Cut.
At the risk of going overboard this week on the topic of App Store commissions, here’s a perfect illustration of the system’s quirks: COVID has forced business models to adapt, and formerly-offline activities like gym classes are now online gym classes.
…which suddenly makes payments for them subject to Apple’s 30%.
Remember a few years ago, when Facebook made algorithm changes and publishers swore to get serious about revenue diversification?
Turns out many of those publishers ‘diversified’ right into the open arms of Amazon’s affiliate program, which announced this week that commission rates would be cut in half. Ouch.
The Apple v Epic lawsuit is ongoing (recap: Fortnite tried to enable in-app purchases without going through the App Store framework, and got kicked off the platform by Apple in response), and it's bringing to light some very interesting details.
This thread is FULL of fascinating scoops, but the clear theme is that Epic wants to demonstrate that the App Store's benefits aren't worth Apple's 30% commission.
