The controversy over Apple’s App Store explained

Sascha: [00:00:03] From Equity Mates media. This is The Dive. I'm your host, Sascha Kelly. When you want to download an app onto your phone, there's really only one place to go. Depending on what phone you have. It's either Apple's App Store or Google Play Store and you might not be aware of every time you pay for an app or make a purchase within that app. Apple and Google take a 30% cut, and that is becoming a growing point of frustration for other tech companies. They're getting sick of Apple and Google, but mainly Apple and its dominance. And this frustration is being displayed publicly by the likes of Elon Musk, Mark Zuckerberg and Spotify CEO Daniel EK. It's Wednesday, the 7th of December. And today I want to know why is everyone so frustrated at Apple? To get into this topic. I'm joined by my colleague and the co-founder here at Equity Mates. It's Alec Renehan. Alec, why is everyone so grumpy at Apple? 

Alec: [00:01:01] Sascha. That's what we're going to explore today. 

Sascha: [00:01:03] They've always had control of the iOS ecosystem via the App Store, but this story has really hit the headlines last week because of Coinbase and Twitter. What happened? 

Alec: [00:01:16] Let's start with cryptocurrency exchange Coinbase. Last week, Coinbase CEO Brian Armstrong, a side note, was interviewed on the Equity Mates Investing podcast. He tweeted that the App Store had blocked customers from sending Nonfungible tokens or NFTs through the Coinbase app. Mm hmm. Every time you send an NFT to another wallet, there's a gas fee, basically a transaction fee. And Apple said Coinbase needed to pass on 30% of that gas fee to them because the transaction was being done through Apple's App Store and its in-app purchase system. Coinbase was not happy about this. It doesn't actually receive money from gas fees themselves. So basically they would have to find 30% of that cost and give it to Apple out of their own bank account. 

Sascha: [00:02:01] You can totally understand the frustration there. And a big part of Coinbase's app's functionality is effectively being disabled by Apple, and it's not like they're taking any money for themselves. So what about Twitter? Elon has been tweeting this week. I mean, of course he has the focus of his ire. Seems to be with Apple as well. 

Alec: [00:02:21] Yeah. And there's an important bit of context here because this was pitched in the media as an alien v Apple's App Store story. There's always another story here. Apple was the biggest advertiser on Twitter in the first quarter of this year. It spent $48 million, which was 4% of Twitter's total revenue in that quarter. So Apple's really important to Twitter. But when Elon bought the platform, Apple pulled back spending.

Sascha: [00:02:47] Okay, so that was all pre Elon and now they've changed their tune, their advertising dollars. 

Alec: [00:02:52] Yeah. And so that's the context for this spat that happened last week. So Apple pulled their advertising and then A1 tweets last week calling on Apple for the 30% fee applied to in-app purchases. He said on Twitter, quote, Did you know Apple puts a secret 30% tax on everything you buy through the app store and followed it up with. Apple has also threatened to withhold Twitter from its App Store but won't tell us why. 

Sascha: [00:03:17] That complained about 30%. Very similar to what Brian Armstrong said from Coinbase.

Alec: [00:03:23] Yeah, exactly. Now, Elon and Tim Cook have made up. Elon went to Apple's headquarters and they said they're all good. Side note, Sascha, because remember, there's always a back story with Allen. It is also being reported that Apple has agreed to reinstate all their advertising spend on Twitter. Oh. So this was a story about advertising spending more than App Store dominance, but it's certainly got App Store dominance in the headlines and in the diet.

Sascha: [00:03:51] You've got to give it to Elon. He really knows how to spin a story. He really knows how to work the PR. 

Alec: [00:03:56] There is another way to think about it, which is that Apple's basically agreed to pay tens of millions of dollars to get anyone to stop tweeting about their App Store dominance. 

Sascha: [00:04:03] Yeah, let's not do any. That sounds like a whole other episode. So let's get back to the bigger story. For businesses that make less than $1,000,000 in revenue. Apple takes a 15% cut. But for businesses that make over $1,000,000 in revenue, Apple takes a 30% cut. And that's really starting to annoy Apple's tech peers because it's not just Coinbase and Twitter. 

Audio Clip: [00:04:28] So rules are a concern for many app developers because they depend on the Apple App Store as a gatekeeper to access users of Apple's iPhones and iPads. 

Sascha: [00:04:40] The last few years, we've seen more tech companies speak out. A list is Spotify Matter and Epic Games. The maker of the video game, Fortnite. I haven't played it, have you?

Alec: [00:04:50] Neither. But I've seen enough about it to know that it's big. Yeah, I think tech companies were probably never really happy with Apple and. And Google and their dominance and taking. 30% of their revenue. But those companies are so powerful. And so as a tech company or a developer, you're so reliant on Apple's App Store, you're not going to speak out. But that really changed with Spotify and Daniel EK in 2019, Spotify filed a complaint with the European Commission alleging that Apple was engaging in anti-competitive behaviour through its app store. And EK hasn't stopped there. More recently, he's claimed Apple advantages its own services, like Apple Music over third party competitors. And if you listen to audiobooks, you might notice that it's far easier to buy them on Apple than it is on Spotify. 

Sascha: [00:05:36] We know there were audiobooks on Spotify. 

Alec: [00:05:38] There's a whole saga with Spotify trying to get audiobooks onto the Apple version of Spotify. Okay. Long The short of it is Spotify have been trying to get around Apple's 30% tax because otherwise they're either giving 30% of their revenue to their biggest one of the biggest competitors or their audiobooks are 30% more expensive. Yeah, EK tweeted Apple continues to disadvantage competitors and the impact is huge on consumers. App developers and now authors and publishers. I can't be the only one who sees absurdity. 

Sascha: [00:06:09] I don't think he is. What about Epic Games and Fortnite? 

Alec: [00:06:14] Yeah. Another company that sees absurdity. Epic Games weren't happy with having to use Apple's payment system when people wanted to buy things in the. 

Sascha: [00:06:22] Games like swords and shields and things to fight. 

Alec: [00:06:26] Skins for characters and stuff like that. So Epic Games introduced their own payment system, bypassing Apple, not giving them the 30% cut. 

Sascha: [00:06:35] I see where this is going. Yeah. 

Alec: [00:06:36] Apple boots them from the app store. Not too happy. And the two companies go to court. Epic Games challenge Apple's restriction on apps having their own in-app purchasing system. The trial finished late last year and. 

Sascha: [00:06:50] Had a go. 

Alec: [00:06:50] Epic Games lost nine of the ten counts, but they are challenging. 

Sascha: [00:06:55] Okay. And then there is meta and Mark Zuckerberg. 

Alec: [00:06:59] Yeah. Probably the most outspoken person while an outspoken tech CEO about Apple's dominance. Earlier this year, Meta said it expects a $10 billion hit to bring in $10 billion less than they forecast because of Apple's recent privacy changes. That blunt the effectiveness of ad targeting by limiting Facebook's ability to track user behaviour across multiple apps. Now you listen to that and you say, good on Apple, good on them for protecting our privacy. And Apple's really trying to position themselves as a privacy champion. There is a more cynical reason, though. 

Sascha: [00:07:33] Tell me.

Alec: [00:07:34] Critics argue that Apple is at the same time trying to gain a bigger share of the online advertising business currently dominated by Google. And yes, you guessed it, metal. 

Sascha: [00:07:45] So Apple is trying to take a piece of the advertising business from the media, and Apple is competing with Spotify in music and audiobooks. It seems like there's a common thread here, which is that Apple is both the operating system and a competing product. 

Alec: [00:08:00] Yet that is the biggest point of frustration. Apple and Spotify are the best examples of this. They both have competing music apps, Apple Music and Spotify. They're the two biggest players in podcasting. 

Sascha: [00:08:11] You're probably listening to us right now on one of them. 

Alec: [00:08:13] Exactly. And they're both trying to catch up with Amazon's audible in audiobooks, their competitor. So the most vicious of competitors. But it just so happens that Spotify is also reliant on Apple's iOS platform to operate and access, you know, a third to half its users. 

Sascha: [00:08:32] And you have an example that still frustrates you to this day that I know you wanted to talk about. 

Alec: [00:08:37] Sascha Boyles, my blog. 

Sascha: [00:08:40] You said it back in 2015. So it's still boiling your blood seven years on. Yes. Amazing. 

Alec: [00:08:45] Have you heard of Phlox or Fiola? 

Sascha: [00:08:47] No, I haven't. 

Alec: [00:08:48] Okay. So it was a great app. It was so good it dimmed your screen and took the blue light out before that was, you know, the thing to do. It was great for late night scrolling and it was popular. 

Sascha: [00:09:00] It sounds a lot like night shift. 

Alec: [00:09:03] Well, Sascha, you see where this is going? Apple would have seen how popular it was. They track app store downloads. And then it just so happened that Apple released their own version of a screen dimming blue light removing app off feature. As you said, night shift. Anyone with an iPhone right now can't swipe down and can set night shift and take the blue light out of the screen exactly what effect locks did. Now, at this point, you're like, okay, that's all right. But the kicker and the thing that boils my blood, Sascha, is around the same time they boot f.lux from the app store and banished from iPhones. So they copy a feature that they say is popular, and then they kick out the developer of that feature from their ecosystem. Now, we should say Apple has their reasons, and there's an argument that it's better for users, better for you and I, that something that is good comes. A fault on the phone, but you can't look at that situation and say that's a fair outcome for the developers that invested their money and their time in building this feature. 

Sascha: [00:10:10] Yeah, I think you're right to be a little bit cynical of that situation, but I can tell you're pumped up, you're angry. So I'm going to give you a moment to take a quick break, cool down. And then I want to hear about how Apple justifies its dominance and whether all this frustration, especially yours, is going to change anything. Welcome back to The Dive. I'm your host, Sascha Kelly. Today we're talking about Apple and its dominance and how other tech players are starting to get a bit grumpy. Before we go any further, could you do us a huge favour? Pull out your podcasting app and give us a five star review. It really helps us get in front of other listeners. Let's get back to the story about this growing frustration from Apple's tech peers about the App Store and its dominance. Apple argues there is a good reason it charges this 30% tax on the App Store. 

Alec: [00:11:02] Yeah, they argue that the level of control they exercised over that ecosystem, the amount of code that they reject and also the 30% cut they take from in-app purchases is what allows them to provide superior quality and a more safe experience for us. 

Sascha: [00:11:18] I've always wondered why there's no computer viruses in the Apple ecosystem. 

Alec: [00:11:22] Yeah, and there actually are computer viruses for the iOS ecosystem. You just never see them because Apple controls their ecosystem with a tight fist and keeps it safe. So there's an argument that, you know, Apple's control is a good thing for users and that is certainly what Apple arguing caught. The second argument that they make, maybe not publicly, but inside their own four walls of their Cupertino headquarters, they've created this world. They've allowed it to exist. And they're not forcing anyone to play in the space. No one made Facebook, Twitter, Coinbase, epic games, or built an iPhone app. Apple doesn't even have the majority of the global market share. 70% of the world uses Android, not iOS. If companies want to play in the world that Apple created, they have to play by their rules. 

Sascha: [00:12:12] Yeah, I guess it's like the argument of it's my party and you just have to behave the way I tell you to. But that argument rings a little bit hollow because it's not like electricity. Utilities like AGL can just say, Well, I created this electricity, so you have to play by my rules if you want to use it. And Google doesn't say, Well, we created this search functionality on the Internet, so you have to do whatever we say. The law restricts companies that have dominant market positions. That is the basis of competition or antitrust law. But so far we've really just spoken about Apple. And it's not just Apple with a dominant app store. 70% of mobile users, as you said before, Alec, use an Android phone and they all have to download their apps through the Google play store.

Alec: [00:12:58] Yeah. Google has similar dominance with their Android platform. They have a similar payment structure, 15% on the first million earned each year and then 30% on all revenue after that goes to Google. It's an interesting question why Apple gets all this attention and not Google. There's probably two reasons. The first is that Google might have more market share globally, but Apple has the really high value users in North America. That's reason one. Reason number two is that Apple is a lot more exacting and controlling when it comes to what code they'll approve and what apps I'll approve compared to Google. So anecdotally, they're probably the two reasons why Apple is really the focus of this story. But it is a duopoly. It's two giant tech companies that we're really talking about today. There's a whole other story in Google's acquisition of Android in 2005 for just 50 million. I put it up there as the best acquisition of all time, but maybe we save that for another dive episode. 

Sascha: [00:13:54] So Apple and Google, two of the biggest and most successful companies in the world. Surely there's others that are trying to replicate this model of dominance as we see in the mobile world. 

Alec: [00:14:05] Yeah. So the two app store giants play in mobile, but this business model is replicated over and over again in software. There's Salesforce with their AppExchange, which provides a platform for third party developers to build apps for businesses that use Salesforce. Mm hmm. There's Shopify. Same thing that they offer over 8,003rd party apps for Shopify users. WordPress, the website builder. They have more than 50,000 plugins developed by third party developers offered through the WordPress platform. Atlassian is a good Australian company taking on the world. They have a marketplace where third party developers build apps for Atlassian users. This is a tried and true model in software. Apple wasn't the first. They certainly perfected it, but there are plenty that have come after them that have used a similar model. The biggest company trying to follow Apple one to keep an eye on is Medha, a.k.a Facebook. Zuckerberg has lived under Google and Apple's tyranny as he pivoted from desktop to app and he doesn't want to keep doing it. So he wants to become an ecosystem player in VR and the Metaverse. He does currently have a VR store where you can download third party apps developed for the Oculus Virtual Reality Headset. 

Sascha: [00:15:24] As you outlined then it's becoming a common business model in the software world. But in. No one quite has the dominance of Apple and Google. Is that going to change any time soon? 

Alec: [00:15:34] That is the trillion dollar question. The U.S. Justice Department has been investigating Apple since 2019 over allegations around abuse of market power, but nothing has really come yet. Last year there was a bill introduced into the US Senate called the Open App Markets Act that would ban app stores from forcing developers to use their payment system. So think back to the Epic Games lawsuit. Exactly. That criticism. It's slowly moving through the Senate. It has a bit of bipartisan support from both Democrats and Republicans, but doesn't look likely to pass. And Apple and Google certainly have got their lobbying machines into high gear about it. 

Sascha: [00:16:15] I can imagine they don't want that to pass. But it's not just in the U.S.. 

Alec: [00:16:19] Yeah, that's right. India fined Google 130 million USD for abusing their dominant market position with the Google play store. Last year or maybe 2020. And just last month, the European Union passed the Digital Markets Act. Now, this is one to watch. South Asia only passed last month. So we'll see how it plays out. But it could force Apple if a tech company is labelled a gatekeeper under this law, it could force that gatekeeper to let users access third party app stores and let developers use third party payment systems. So this would break the business model, at least in Europe, for Apple and Google. 

Sascha: [00:17:00] Well, you ended on a glimmer of hope in our cynical conversation. 

Alec: [00:17:06] Yeah, we say that.

Sascha: [00:17:07] Place. 

Alec: [00:17:08] In two years when we all have viruses on our iPhones, then maybe. 

Sascha: [00:17:11] Yeah, going to say, take our 30% back. Take it. Look, it's certainly a really interesting topic, Alec, and as you outlined then one to watch. If you've enjoyed this episode, then please tell a friend about it. We don't take attacks from you spreading the word further. We don't take 30%. It's absolutely free and it is the best way for our podcast to grow. If you just joined us for the first time, welcome. Go and check out our back catalogue. Remember, you can follow us on Instagram. It's where we like to communicate with you. So do make sure you're following us at the handle @thedivebusinessnews. You can contact us by email thedive@equitymates.com And you can subscribe wherever you're listening right now. Apple or Google or another player and you'll never miss an episode again. Thanks so much for joining me today, Alex. 

Alec: [00:17:58] Thanks, Sascha. 

Sascha: [00:17:58] Until next time.