Epic’s Fortnite standoff is putting Apple’s cash cow at risk

Apple and Epic Games have gone to war, with the two companies clashing over Apple’s App Store policies. Epic, in protest of Apple’s 30 percent fee for any digital transactions on its iOS platform, attempted to circumvent things with a direct payment option in Fortnite, leading Apple to ban the game entirely. But Apple’s Fortnite fight isn’t just over a particular policy for the App Store; it’s a battle that could decide the future of one of the key parts of Apple’s present and future business.

The 30 percent “Apple tax” is the beating heart for Apple’s services business, which it has emphasized as growth as the iPhone business starts to slow. That line of revenue has become a critical part of Apple’s business, the bright star executives have been able to point to on earnings reports in recent quarters. Labeling the revenue line as “services” lets Apple obscure where the money is really coming from — and onstage, Apple executives tend to talk about the prestige products like Apple Music, Apple TV Plus, Apple News Plus, or Apple Arcade. But the money from those services is dwarfed by Apple’s cut of the money flowing through its App Store and its power to force major players like Adobe, Spotify, and even Epic to pay the toll. So when Apple squares off over Fortnite, it’s not just fighting over one app or one policy. It’s protecting one of the key sources of revenue in the years to come — a source it could lose permanently if Epic comes out on top.

The App Store may have started out small, but today, it makes Apple a staggering amount of money. In 2019 alone, Apple’s percentage taken on digital content sold through the App Store accounted for an estimated $18.3 billion, or nearly 40 percent of Apple’s total service revenue. (To reach that number, Apple says that $61 billion of digital content was sold through the App Store in 2019, of which it took an estimated $18.3 billion cut, compared to the $46.3 billion Apple reported in services revenue on its collected 2019 quarterly earnings.)

An overwhelming amount of that $18.3 billion comes from in-app purchases in free-to-play games like Fortnite, Candy Crush, and Pokémon Go along with subscription apps like Tinder, Disney Plus, Twitch, and YouTube. As of today, SensorTower notes that of the 200 top-grossing iPhone apps, only one (Minecraft) costs money upfront. And Apple needs those payments to flow through the App Store specifically so it can collect on those purchases and subscriptions.

That might seem like a strange business for a company that built its name on making hardware customers pay for quality, but Apple wasn’t always this reliant on App Store revenue. Back when Apple first announced the App Store in 2008, it announced that developers get 70 percent of whatever they sell, and Apple gets to keep 30 percent for “upkeep,” as former Apple CEO Steve Jobs referred to it onstage. Jobs would go on to claim at the time that “we don’t expect this to be a big profit generator.”

The original model for the App Store was to profit off of paid apps, while free apps would serve as the gateway point to drive customers toward spending more money. The best example of this plan came when Apple first added support for in-app purchases in June 2009. At the time, it was only limited to paid apps looking to add additional content, and with limits on subscription models. “Free apps remain free,” boasted Apple’s then-mobile software head Scott Forstall at the announcement.

That policy lasted for a mere five months until Apple opened the floodgates and allowed free apps to add optional purchases, which have dominated the App Store and Play Store charts — and net gross — ever since.

But as business models changed and the amount of money that followed through apps grew, Apple started to tighten its grip. In 2011, Apple amended the App Store rules to bar developers from selling subscriptions or in-app purchases unless they were sold through Apple’s system (and submitted to Apple’s 30 percent tax).

Some companies, like Netflix and Hulu, complied with the change. Others, like Spotify, charged a premium on iOS to account for the extra fee and encouraged customers to subscribe directly elsewhere. And others, like Amazon, dug in their heels, refused to pay Apple’s fee, and removed the ability to purchase content in their apps entirely. (To date, Amazon’s iOS Kindle app still has no option to purchase books directly, although Amazon has managed to cut a special deal with Apple for its Prime Video app.)

As the market for apps has continued to change and developers struggled to monetize, Apple has tried to push for subscription costs for apps (spanning huge apps like Microsoft Office and Adobe’s Creative Cloud suite to popular apps like Fantastical to one-man-teams like Carrot Weather). It’s the same logic driving Apple’s own pursuit of subscriptions: getting users to pay continuously for services means increased revenue. Apple even went as far as to lower its 30 percent take down to 15 percent after a year for developers willing to commit to subscriptions. (After all, 15 percent of a recurring fee that’s charged for years is far better than 30 percent of an upfront cost once.)

Those policies have worked wonders for Apple: today, nearly every top-grossing app on the platform is either a subscription or a service; and while Apple says that the App Store had paid out $120 billion to developers in 2019, it neglected to mention that it’s also netted the company roughly $51 billion over the lifetime of the store. “Upkeep,” indeed.

The net result of all these years of growth is that the App Store has become too big a part of Apple’s identity to give up now. Apple may fancy itself a Hollywood savant with Apple TV Plus or a creative haven with Apple Arcade, but the core business is much simpler. Apple sells iPhones, and then it makes App Store money from the free-to-play games and subscription services that run on those iPhones. And as iPhone growth has slowed, the importance of that second business has only grown. There may come a time when Apple’s other subscription offerings are able to carry the company forward, but it’s not today.

For now, though, Apple’s “services” is the App Store, and the App Store is Apple’s fee from free-to-play games like Fortnite. That means Apple likely isn’t going to give in to Epic’s protests here without a fight — for a revenue source this important, it doesn’t have a choice.

Comments

Another way to possibly look at this is how much the current app environment has changed. What is a mobile app truly worth? A 3xA game costs $60. There is now expected DLC to go along with those titles, but for games that generate their revenue from these outfits, decorations, and poses, how much is allowed before it is deemed greedy itself? Is Fortnite really worth the hundreds of dollars it’s users are encouraged to spend on it? Should there not be some cap one can spend on a game like candy crush to be given "full game ownership" status? Once you run out of that in-game currency, you feel as though you are playing a free to play game all over again. Maybe stop relying on in-game currency to drive revenue off of a single cash cow and make other games? I don’t know. I am just very disappointed with modern game developers use of in-game currency. There is no limit to the money you can throw at one of these games these days.

You’re also allowed to not pay a dollar for these games. It’s most often the few percent of top ‘cows’ that fund the game for the rest of everyone.

Very true – this is however a problem, when some of those few percents are kids who might not yet understand the value of money and who might spend thousands of dollars without realising how they are destroying their parents’ livelihood. Does Fortnite have a system in place to return such items?

That’s a parenting issue, not a store issue.

Apple and Google need to relook at subscription payment fees, because 30% for each and every subscription transaction is ridiculous. Think about it. If you buy v-bucks twice a month at $10 per transaction. That means Apple is taking $6 a month, and for 12 months, that adds up to $72 for IAP purchase amount that goes directly to Apple. Why is that in the retail world that Visa or MasterCard, only take 2%. Yet Apple and Google take 30%. If this was back in the 1920-40’s, we would put that under the category of extortion and racketeering.

Wait, hold on, I thought Apple took 15% on subscriptions. Or are you talking about something different?

Apple drops the subscription prices down to 15% after the first year. However, this is an IAP, which isn’t a subscription.

Ah gotcha, thanks for clearing that up. I suspect changes will come but Apple and Google will likely fight this to the bitter end, whatever that end may be.

it’s 15% on a subscription that has been active for at least a year. which doesn’t apply to anything Epic does. that 15% applies to something like Netflix where you were a member for say 5 years.

are you this stupid? visa/mastercard fees may be 2% at the store, but their real money maker is the 20-25% interest they make from people who use the cards.

The 20% – 25% interest is only if customers don’t pay off what they purchased each month. Otherwise the customer doesn’t pay a thing.

Apple is 30% no matter what. There is no other app store, it’s Apples way or highway.

Oh the customer pays, trust. The fees are directly passed down to the customer from the retailers, they add it into the prices. Just as Spotify did with iOS subscribers. Only difference was that you were never able to buy directly from the source that physical retailers could (i.e. you ain’t buying detergent from Tide), so you couldn’t see the difference in prices.

Secondly, like you said, you might be buying v-bucks twice a month, but with a visa/mastercard, you’re likely making purchases on average once a day (groceries, meals out, transport, even your app purchases, or digital subscriptions). For sure they can afford to take a smaller cut of so many transactions.

actually, this is wrong. Apple no longer allows this. in their current policies, you are not able to charge more for iOS users so the retailer always gets the 30% loss from the transaction. Linus Tech Tips talked about this with their app. They wanted to charge Apple users more because of the 30% fee but Apple wouldn’t let them.

Not sure how I’m wrong…as Spotify did do this, regardless of whether they can or cannot now. And my point was to illustrate how the customer does pay for the visa/mastercard network, even if they’re paying off their cards and not accruing interest. Which the Spotify example still illustrates.

If I am not wrong, Apple is also handling chargebacks, as well, and is directly responsible if a chargeback does occur. They do not take money away from the merchant even if the money has been charged back from Apple. This policy may have changed, I am not sure, but at least in the past, that was the case.

I am unsure of the other associated maintenance / upkeep fees of the platforms, and most of it may be simply be a "premium" for them to get their ROI.

Asking Apple to make a minimum return on their investment is equivalent to asking a pharmaceutical company to stop charging high margins and simply charging only 0.8 – 5% markup (or whatever the "fair" value is). Just because a product, regardless of whether it is a drug or a mobile platform, has matured, isn’t grounds to force the seller to charge less fees.

Debit transactions have an even lower interchange fee (~0.8% + $0.20/transaction) and no interest charges. It’s not entirely free, as banking customers usually need either a direct deposit / minimum balance to avoid a $10/month service fee, and there’s other downsides like weaker protections and potential overdraft fees.

But it goes to show that the actual transaction costs are not really that high. Credit card companies are making a profit on both ends.

people should not really be comparing credit cards directly to Apple. because credit cards are in essence lending money every transaction (sure, they get it back, but the risk is they don’t). Apple is never ever lending money to consumers. they have enough money to be a bank but they choose not to.

To be clear….Visa and MasterCard do not make any interest…the issuer of the card – a bank, credit union, or similar company issues the card, has the risk of fraud and bankruptcy, and they charge interest when a cardholder cannot pay. Visa and MasterCard issue no cards themselves. They make money on all transactions, but it is in the range of 0.11% and is earned from the merchant and from the issuer. It’s nice income.

As to fees, for these purchases the cost is more like 3% and most of that goes to the card issuer as income, not Visa or MasterCard.

Many cardholders do not revolve their card balances so no interest is owned.

For those that revolve, no doubt, the interest is expensive and likely more than their budget can absorb.

The "ridiculous fees" that are the literal market rate charged by Xbox, Nintendo, Sony and Steam?

Oh don’t get me wrong – I totally agree, that it is the parent’s responsibility to educate their kids accordingly and/or to set up appropriate barriers for the safety of their children.
Due to lack of knowledge mistakes might happen. Seeing as these items do not really depreciate, after being bought, and considering that every other store is obligated to take back purchases for a certain amount of time (I know this does not apply to everything everywhere, but it does apply to purchases made by a minor – at least in most of the EU) – I don’t really understand why this should not be the case with such in game purchases. It doesn’t hurt anybody and it would actually somewhat justify the horrendous fees every online marketplace seems to take (compared to offline credit card fees e.g.)

It’s a parenting issue…to an extent…to the extent that it is easily enabled, easy to use, and easy to get out of control….that is more than a parenting issue.

I believe any app in the app store has to go through Apple for a refund, even if the developer wants to, Marco Arment talked about that.

It does allow returns, but only a couple times. A parent should never just give free reign to their kid to buy whatever they want. There are easy controls built in. In fact, just haveing in-app currency actually helps with this, as it’s easy to limit the amount of in-app currency the kid has. I pay Microsoft $20 and then my kid can get 2000 v-bucks or whatever and spend it like they want. But I still have to pay Microsoft again before they can buy more V-bucks. The control is simple enough.

Just here to point out that AAA is far easier to understand and uses the exact same amount of characters.

5XA-2 games are great these days

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