Why Apple's App Store is under fire

Key Points
  • Officials in the United States and Europe are looking into whether Apple's control of its App Store platform could be anticompetitive.
  • At the same time, top app makers, including the makers of Tinder and Fortnite, are criticizing Apple for business practices such as the company's 30% cut of digital purchases through iPhone apps. 
  • Developer anger comes days before the company's annual software conference, WWDC, when Apple reveals new programs and convinces app makers that its platforms are worth developing for. 
Apple CEO Tim Cook participates in an American Workforce Policy Advisory Board meeting with U.S. President Donald Trump and others in the White House in Washington, March 6, 2019.
Leah Millis | Reuters

Apple's business practices are under new scrutiny as officials in Europe announced an investigation this week into whether the App Store — the only way for most people to install apps on an iPhone — violates EU competition rules. 

At the same time, top app makers, including Match Group, which makes dating app Tinder, and Epic Games, maker of the popular game Fortnite, criticized Apple over longstanding App Store policies, including the company's 30% cut of digital purchases, and its proclivity to release software that competes with third-party apps. 

Scores of smaller developers also griped on social media about Apple's App Store rules, following loud complaints by David Hansson, CTO of Basecamp, a private enterprise software developer. Hansson said on Twitter that Apple rejected an update to Basecamp's new email app, Hey, because of an Apple requirement that certain apps must allow users to pay for subscription services through the app. If implemented, Apple would take 15% to 30% of the revenue from any user who signed up through the app.

"Apple squeezes industries like e-books, music and video streaming, cloud storage, gaming and online dating for 30% of their revenue, which is all the more alarming when Apple then enters that space, as we've repeatedly seen. We're acutely aware of their power over us," a Match Group representative said in an email. 

The App Store is one of Apple's most important services, a fast-growing unit that brought in over $46 billion in 2019, accounting for nearly 18% of the company's revenue. Investors see the services business as a growth engine for Apple, and the company has set a public target of $50 billion in services sales this year. Apple doesn't break out how much of its services revenue comes from the App Store.

"One thing that has come out in recent days is how aggressively Apple is pushing people towards in-app purchases," said Matt Ronge, CEO of Astropad, which makes software and hardware that enables iPads to be used as a second monitor or drawing tablet. "Seems to me it's all about that services narrative. And a lot of that growth is from subscription revenue on the App Store."

What developers are upset about

The App Store is the only way for most users to install software on an iPhone.

In order for a developer or company to update an app on the platform, it has to go through a process called App Review. An Apple employee checks the app against a lengthy list of "guidelines" and, often within minutes, makes a decision whether the update is approved or whether the app maker needs to make changes, as CNBC previously reported.

There are three primary issues developers say they have with the App Store: 

Opaque review process. Developers say decisions made during App Review can seem arbitrary, and apps are often removed entirely from Apple's platform over what developers characterize as minor or unfair reasons. In addition, it can be hard to communicate with Apple representatives and get reinstated.

Basecamp's Hansson had previously testified at a congressional hearing that app developers live in fear of an arbitrary Apple rejection. 

The cut. Apple takes 30% cut of paid apps and in-app purchases. The cut for paid subscriptions drop to 15% after a year. Developers say Apple's take is excessive and makes their own businesses significantly less profitable.

In its most recent annual filing, Apple said it believes that people buy Apple computers based on the availability of third-party software and noted that developers can stop making software for Apple products if it seems less expensive or more lucrative to develop for competing operating systems such as Google's Android or Microsoft Windows. 

Unfair competition. Software makers also worry that Apple could use data about what is trending on the App Store to create competing Apple apps or features. Once those Apple features are introduced, they often use access to core parts of Apple operating systems that developers don't have access to, developers allege. Apple introduces features that compete with existing software regularly enough that there's a nickname for it — "Sherlocking." It's a reference to a search tool called Sherlock, which Apple introduced for Macs in 1998, that competed with a third-party product called Watson.

Ronge said Astropad's product was "Sherlocked" last year when Apple introduced a competing product, Sidecar, as part of its MacOS operating system, despite years of friendly relations between Astropad and Apple's developer relations department. Because Sidecar is built into the operating system and uses system functions that Astropad does not have access to, it is hard to compete with Apple, Ronge says. 

This week, Astropad published a blog post called "Dear Apple" suggesting that Apple gives users the ability to set default apps, offer alternative payment methods that don't take a 30% cut, and allow some apps to be "sideloaded," or installed in a way that doesn't involve the App Store approval process.

Apple vs the world

Apple argues that its close control over the App Store enables the company to make sure software running on iPhones is safe from a security perspective. It also notes that lots of companies make money on the App Store — both directly from Apple-facilitated payments, as well as through general commerce that happens through apps

"We follow the law in everything we do and we embrace competition at every stage because we believe it pushes us to deliver even better results," an Apple spokesman said in a statement.

"It's disappointing the European Commission is advancing baseless complaints from a handful of companies who simply want a free ride, and don't want to play by the same rules as everyone else. We don't think that's right — we want to maintain a level playing field where anyone with determination and a great idea can succeed," the statement continued. 

Tim Sweeney, CEO of Epic Games, which pays Apple a 30% cut of digital products inside the hit game Fortnite for iPhones, reacted: "Here Apple speaks of a level playing field. To me, this means: All iOS developers are free to process payments directly, all users are free to install software from any source."

Antitrust pressure over the App Store is building in the United States, too. The House Judiciary Committee's antitrust panel is working to get Apple CEO Tim Cook to testify on competition topics alongside chief executives from Amazon, Facebook, and Alphabet, according to Politico

The EU probe is likely a bigger concern for Apple than the "saber-rattling" in the House of Representatives, unless new antitrust legislation is passed, said Chris Sagers, professor of antitrust law at Cleveland State University. One issue for any potential antitrust case against Apple in the United States is that the iPhone doesn't appear to have dominant market share against Google's Android — only about 46% of the smartphones sold in the U.S. in the first quarter were Apple's, according to Counterpoint Research. Google's Google Play app store also takes a 30% cut of digital purchases.

"The landscape is the same as it has been for the past five or seven years in that Apple is at some risk of the 'Big Case,' which would be a monopolization case with the potential to significantly disrupt the company. But I think the risk of that is the same now as it has been for a long time, and it's not really a very large risk in the United States," Sagers said. 

The tension is coming at a particularly unfortunate time for Apple: The company's annual software development conference, WWDC, starts next week and will take the form of a series of videos and Cisco WebEx calls because of the coronavirus pandemic.

Ronge said he will be monitoring WWDC for Mac news, and that his company will continue to maintain its Apple-oriented products. But his company no longer prioritizes Apple development. Astropad's big launch planned for this year is Windows support. 

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