Services Challenge Fairness of Apple App-fee System

As iPhone sales slip, Apple has been positioning its booming digital-services business as a new profit engine. But there could be a snag in that plan.

A brewing backlash against the rich commissions Apple earns from all purchases and subscriptions made via iPhone apps could undercut the app store, which generates about a third of the company’s services revenue.

Late last year, Netflix rebelled against Apple’s fees, which can range from 15 percent to 30 percent. Analysts fear other companies may follow. And attorneys representing consumers in a pending Supreme Court case charge that Apple is an unfair monopolist in the market for iPhone apps. An adverse decision in that case could open a legal door that might eventually force Apple to cut its generous commissions.

Apple shares have plunged 25 percent from their peak in early October thanks to concern over iPhone sales. Investors are now hanging onto Apple services as a “life preserver in the choppy seas” just as it’s about to float away, Macquarie Securities analyst Benjamin Schachter concluded after the Netflix move.

These app-store fees mostly hit app developers themselves, although some pass along the costs to users of their iPhone apps. Spotify, for instance, used to tack $3 onto the cost of its $10-a-month paid service — but only for users who signed up via its iPhone or iPad app.

Apple has doubled down on digital services as consumers cling to older iPhone models, hurting sales. Apple’s iPhone revenue this year is expected to drop by 15 percent from last year $141 billion, according to analysts surveyed by FactSet.

Services, by contrast, are expected to generate about $46 billion in revenue this year, according to the same survey. Schachter estimates the app store will account for $16 billion of the services revenue. By those estimates, both services and app store revenue will have doubled in just three years.

Apple has previously defended the system as reasonable compensation for reviewing all apps and ensuring its store remains a safe and secure place for e-commerce. Google charges similar fees in its own app store, although its overall business isn’t as dependent on them.

Besides the app fees, Apple’s services division includes revenue from its Apple Music streaming service, iCloud storage, Apple Care, Apple Pay and ad commissions that Google pays to be the iPhone’s built-in search engine. Apple is also expected to roll out its own streaming-video service this spring, although few details are available.

Almost three years ago, Spotify also stopped accepting new subscriptions through Apple’s app store. Its move followed the debut of Apple Music, which obviously doesn’t have to pay any commissions.

“They’re trying to have their cake and eat ours, too,” Spotify spokesman Jonathan Prince told The Associated Press in 2016. “We find it bad for consumers, unfair to consumers and ultimately something that could stifle music streaming subscriptions across the board.”

Spotify regularly harps on the unfairness of Apple’s app-fee system in its securities filings. The company didn’t respond to interview requests for this story.

Few other apps reach as many customers as Netflix and Spotify, making it unlikely that the rebellion against Apple’s app store commissions will greatly swell, said Amir Ghodrati, director of market insights for App Annie.

Source: Associated Press