Apple is making strategic moves to head off antitrust fights

·Technology Editor

Updated Wed, Nov 25, 2020, 12:42 PM6 min read

In this article:

Wednesday, November 25, 2020

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

But it might not be enough for the iPhone maker

Apple (AAPL) is playing the game, and playing it well. With antitrust investigations for the tech giant piling up on both sides of the Atlantic, Apple is making strategic moves to seemingly assuage regulators’ concerns and avoid being dragged into a series of protracted legal battles.

And now, the company is changing the very business practices that spurred those inquiries. Last week, the tech giant announced that it is cutting App Store commission fees for developers who make less than $1 million a year in App Store revenue. That, according to app analytics firm Sensor Tower, equates to a huge number of developers who just saw the fees they have to pay Apple drop to 15% from 30% of the total price of the app.

The initiative, called the App Store Small Businesses Program, may engender enough goodwill to smooth over relationships with a large swath of its developer community. But it still might not be enough to save the iPhone maker from a bruising antitrust fight. Especially when companies like Spotify (SPOT) and Epic Games are pushing for bigger changes.

And according to one expert, Apple’s effort could actually backfire entirely.

Apple’s App Store has made billions, and enemies

Apple requires any developer selling digital goods and services through the App Store to use its proprietary Apple payment system. And when they use that system they are in turn forced to pay commission fees, which works out to a one-time 30% fee on digital goods and services.

For subscription services, that fee starts at 30%, but drops to 15% for every year payments are made after the first 12 months. Google’s Play Store uses the same fee structure.

Apple doesn’t break out specific App Store revenue, instead the company lumps it into the company’s services business, which saw revenue of $53.8 billion in fiscal 2020, up from $46.3 billion in 2019.

According to Bloomberg, it’s those fees and the proprietary payment system that kicked off the Justice Department’s antitrust inquiry.

But it’s not just the fees that developers take issue with. Heavy-hitters like Spotify, Epic Games, Microsoft (MSFT), and Facebook (FB), have complained of the ways Apple locks down its App Store, prohibiting certain apps and putting conditions on how app makers can contact their customers.

FILE - This March 19, 2018, file photo shows Apple's App Store app in Baltimore. Apple has dropped the hugely popular “Fortnite" game from its App Store after the game's developer introduced a direct payment plan that bypasses Apple's platform. Its developer, Epic Games, said in a blog post Thursday, Aug. 13, 2020, that it was introducing Epic Direct payments, a direct payment plan for Apple's iOS and Google Play. (AP Photo/Patrick Semansky, File) — Apple dropped the hugely popular “Fortnite" game from its App Store after the game's developer introduced a direct payment plan that bypasses Apple's platform. (AP Photo/Patrick Semansky, File)

Spotify, for instance, is considered a reader app that users can download and access content they’ve purchased elsewhere without having to pay for it through the App Store. But because of that, Apple prohibits the company from providing users with any links to off-app purchase options. In other words, Apple keeps Spotify from telling its own customers where it can sign up for a paid Spotify Premium service in its own app.

Microsoft and Facebook, meanwhile, have taken issue with Apple’s decision to ban certain gaming apps from the App Store, directly impacting Microsoft and Facebook’s cloud gaming offerings.

Epic Games fired the biggest salvo of all against Apple, saying that requiring the use of its payment system unfairly forces Epic to pay the App Store commission. To that end, the “Fortnite” maker updated its iOS version of the game to include a secondary payment option linked to Epic rather than the App Store, and offered users a discount for using its offering instead of Apple’s.

Apple, after discovering the change, removed “Fortnite” from the App Store and banned it. Epic responded by kicking off its own public relations campaign against Apple and filing a civil antitrust lawsuit.

Risk of backfiring

Apple, however, has repeatedly sought to defend itself against accusations that it operates as a monopoly. In his testimony during July’s House Judiciary Committee’s Subcommittee on Antitrust, Commercial, and Administrative Law hearing, CEO Tim Cook told lawmakers that Apple “does not have a dominant market share in any market where we do business.”

Apple CEO Tim Cook testifies remotely during a House Judiciary subcommittee on antitrust on Capitol Hill on Wednesday, July 29, 2020, in Washington. (Mandel Ngan/Pool via AP)

After its dust up with Microsoft and Facebook, Apple moved to allow cloud gaming services for iOS and iPadOS, albeit with some heavy caveats like requiring that all games be made available for download, which is antithetical to cloud gaming.

The company has also denied that it harms competition through its App Store fees, saying that while the App Store generated $519 billion in global billings and sales in 2019, more than 85% of that went to third-party developers.

And last week, Apple moved to slash the very App Store commissions it has been criticized for, reducing the fees to 15% from 30% for app developers that earn less than $1 million in revenue through the marketplace, as part of its App Store Small Business Program.

That’s a sure fire public relations win. And according to Sensor Tower, the vast majority of apps, 97.5% of apps the firm tracks, earn less than $1 million in annual revenue. Meaning a huge number of developers are likely very happy with Apple’s decision.

As for Apple, Sensor Tower estimates that just 4.9% of the App Store’s overall revenue can be traced to those smaller app companies, ensuring Apple doesn’t take a massive hit to its bottom line.

But it might not be enough, according to Cornell Law School professor of law and economics George Hay.

“There’s nothing in our law which says excessive prices is an antitrust violation,” Hay told Yahoo Finance. “So that’s why lowering the prices has no legal significance. It may have a PR impact, it might buy off some potential complainants, maybe it’s just a good business decision...But it has no direct legal significance.”

Former Federal Trade Commission Chair and George Washington University Law professor of law and policy William Kovacic went further, saying that Apple’s move could backfire entirely, giving larger developers reason to question why Apple doesn’t reduce App Store fees for everyone.

“When you make these adjustments, your opponents say, ‘The only reason you are doing it is because you have learned and become aware of how inappropriate your conduct was...And now, because you have the litigation gun to your head, you’re making these changes. And if you’re making these changes, why couldn’t you have made others’,” Kovacic told Yahoo Finance.

There’s also the chance, he explained, that by making so many changes to App Store policies, regardless of how large or small, Apple could engender enough positive responses from developers to get its various detractors to back off.

Whether that sways the likes of the Justice Department or European Commission, though, remains to be seen.

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