Lex Midweek Letter: Apple’s Epic fight

Dear readers,

Apple’s feud with Fortnite video game creator Epic Games has been a messy affair. Epic’s attempt to skirt Apple’s 30 per cent in-app payments fee by letting players use its own payment system resulted in Fortnite being removed from the App Store. Epic’s retort was a lawsuit and a cheeky parody of Apple’s famous Ridley Scott-directed “1984” advertisement, turning a wormy apple into the sinister Big Brother figure.

The courtroom battle came to an end this week. Over the course of the past three weeks, executives and lawyers have argued back and forth — trying to pin down a definition of monopoly. Epic claims Apple controls the market for app downloads on iPhones and iPads by not hosting other marketplaces and preventing apps from using alternative payment systems. Apple says Fortnite is available elsewhere and that offering alternative app marketplaces on its devices could jeopardise its highly prized security. Apple’s points are fair — but do not quite explain why its cut has to be as steep as 30 per cent.

Epic is not the only company riled by Apple’s hefty cut of app subscriptions and in-app purchases. Spotify and Netflix have both sidestepped the fees by selling subscriptions on their websites instead of their apps. Most app developers without the same name recognition cannot make the same choice. Most mobile app spending in the US goes through Apple or Google, who both take a charge of up to 30 per cent. The pair claim this is fair given the services they offer — including search functions that encourage users to discover new apps. But users are not made aware that purchases can be made elsewhere. Nor are they told about the cut that goes to Apple and Google. Both aspects seem ripe for change in the name of greater transparency.

With billions of dollars at stake, it’s not surprising the argument has grown so heated. User spending in apps rose 30 per cent to $111bn in 2020, according to app analytics company Sensor Tower. It estimates that Apple accounted for $72bn. A 30 per cent cut of that total is about $22bn. By 2025, Sensor Tower expects global spending in mobile apps to reach $270bn. If Apple’s take remains the same, it might expect to make $53.5bn. 

There is another way to look at how valuable the fees are to Apple: margins. Headlines from first-quarter results may have focused on revenues topping $110bn but gross margins were worth looking at too. For its Services business, this has now reached 66 per cent. Compare that with devices, where gross margins are 35 per cent, and it’s clear why Apple expects Services to drive company profits in the near future.

That’s if Epic does not derail its plans of course. Judge Yvonne Gonzalez Rogers’ decision to ask Apple boss Tim Cook some sharp questions — including why developer charges have not changed more since the App Store was launched in 2008 and whether that means it faces no market competition for developers — made the tech world sit up and pay attention. If Epic wins, expect every other developer to demand lower fees and more choice about how users pay in apps. 

A ruling is not expected for weeks — even months. But App Store commissions are already in flux. Apple and Google have both declared that they will reduce commissions for certain developers. Apple lowered its cut last year from 30 per cent to 15 per cent for developers who make $1m or less in revenue. More transparency around fees seems likely too. That heady 66 per cent gross margin figure may not be around for long.

Enjoy the rest of your week,

Elaine Moore
Deputy Head of Lex