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Apple's strategy to fight off antitrust regulators: Fix the App Store one rule at a time

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Key Points
  • In the past few weeks, Apple has made several changes to its App Store rules, allowing a larger number of companies to access a lower commission rate or evade Apple's mandatory 15% to 30% cut entirely.
  • But while the concessions can seem like a shift in Apple's approach to App store policy, when examined in the history of the App Store, they are a clear continuation of strategy going back to 2009.
  • The changes will likely have minimal effect on Apple revenue, while defending its core interests that Apple has the right to determine which software can operate on iPhones.
Tim Cook, chief executive officer of Apple Inc., center, arrives at U.S. district court in Oakland, California, on Friday, May 21, 2021.
Nina Riggio | Bloomberg | Getty Images

In the past few weeks, Apple has made several changes to its App Store rules, allowing a larger number of companies to access a lower commission rate or evade Apple's mandatory 15% to 30% cut entirely.

But while the concessions can seem like a shift in Apple's approach to App store policy, when examined in the history of the App Store, they are a clear continuation of strategy going back to 2008.

Apple has historically made small changes to its "guidelines," a 13,000-word document that says what iPhone apps can and can't do, while defending its core interests that Apple has the right to determine which software can operate on iPhones, and set its own financial terms for those developers.

Apple has also not yet changed its policy of taking 30% of in-app gaming purchases, which comprise the largest category of App Store revenue. Apple's App Store grossed $64 billion or more in total sales in 2020, according to analysis based on Apple disclosures.

JPMorgan analyst Samik Chatterjee said in a recent note that he believed the financial impact on the company on one emailing change would be "modest" and other tweaks reducing Apple's cut for some apps to 15% would be "minimal."

The regulators and developers who criticize Apple's App Store have a variety of complaints in the past decade: Its 30% cut is too high, its manual App Review process is arbitrary and powerful, the App Store depresses prices for software and teaches consumers that updates are free.

So Apple has carved out categorical exceptions to the 30% fee, allowed software makers the ability to appeal or challenge its rules, and changed single rules in response to lawsuits or media attention.

Events in the coming months may force Apple to tweak its policies again. A decision in a trial with Epic Games is expected in the coming weeks. The European Union is examining penalties and remedies after finding Apple violated antitrust laws after a Spotify complaint. South Korea recently passed a law that could force it to allow customers to use alternative billing systems.

But looking at App Store history, it's likely that Apple will continue to push in private negotiations and public lobbying for smaller, non-structural changes to the App Store that address some complaints but does not change its control over iPhone software.

Controversial from the beginning

Apple's App Store has faced controversy since its launch in 2008. A year after that, the FCC probed the company over its refusal to approve the Google Voice app.

Now there is more regulatory pressure from countries and developers around the world, and it is leading to more rule changes. Apple made some of the recent concessions because of settlements in a developer class action lawsuit in the United States and an agreement with Japan's Fair Trade Commission, although Apple is applying the changes around the world.

Those tweaks essentially allow companies like Spotify and Tinder's parent company Match Group to bypass Apple's sometimes 30% cut of gross sales, addressing a standing complaint that dates back at least five years. Apple also reduced its take to 15% for news apps that participate in Apple News, its own news app.

Apple officials say they are meaningful changes that address key concerns from software makers.

Some of Apple's opponents, even those that have petitioned for those changes, say that they don't go far enough, and are part of a pattern of dividing its critics by placating some of them with one-off rule changes.

"Our goal is to restore competition once and for all, not one arbitrary, self-serving step at a time," Spotify CEO Daniel Ek tweeted this week in response to Apple's in-app linking rule change.

"Apple's strategy is Divide and Conquer: carve off special deals for different developer segments," Epic Games CEO Tim Sweeney said last month in a statement to CNBC in response to Apple's news app concession.

Epic Games is suing Apple seeking to be able to install its own app store on iPhones — which is the big change that Apple wants to fight off.

A history of Apple changing App Store rules

2009: Apple does not approve Google Voice, FCC investigates. A year after the App Store went live, the FCC started probing it over its refusal to approve the Google Voice app, which acted as a second phone number.

Apple responded to the FCC, providing many details about its app review process for the first time, and arguing that it had the right to reject entire categories of apps.

In its letter, Apple also detailed for the first time its Executive Review Board, a body headed by Apple executive Phil Schiller, which makes final decisions on "new and complex issues."

The Google Voice app was eventually approved in late 2010.

2011: Apple requires in-app payments for digital goods, creates the "reader rule." In-app purchases with a 30% fee were introduced in early 2009. But in February 2011, Apple significantly tightened its control over the App Store by announcing it planned to force companies to use Apple's in-app purchase system if they offered digital subscriptions.

At first, Apple offered exceptions for products like Kindle or the New York Times, where users may have purchased e-books or digital subscriptions off-app. But companies still needed to implement in-app purchases with Apple's cut, at the same price as their off-app subscriptions.

This didn't work for many publishers, who wanted to retain their direct relationship with customers. By June, Apple had backtracked on some of its more draconian guidelines, allowing companies to pass on the 30% fee to customers or to, if they chose, not offer an Apple in-app purchase at all.

Shortly afterwards, Apple's marketing chief Phil Schiller started to question Apple's 30% fee, and suggested lower revenue sharing levels, such as 20%, according to an email released as part of the Epic Games trial.

This is when Apple started to put its first restrictions on redirecting users in-app to the publisher's website, which were reversed in recent weeks.

2016: Apple reduces cut for 2nd year of subscriptions to 15%. By 2015, Spotify had publicly challenged tested Apple's restrictions on subscriptions, first by emailing customers to tell them it's less expensive to subscribe directly, instead of through the App Store. This was against Apple's guidelines, and its one of the rules that was officially clarified as part of Apple's concessions last month.

Shortly afterwards, Spotify removed Apple in-app purchases entirely and started a process of challenging Apple's rules with government regulators.

In 2016, Apple announced that it would alter its revenue sharing agreement, specifically for subscription apps. Apple still charged 30% for the first year of a subscription, but subscribers who lasted more than 12 months would cost the app a lower, 15% rate of gross sales. Apple also opened subscription billing to all App Store apps and introduced search ads, which let developers pay for better placement on an App Store search page.

The announcement was also months after Schiller publicly took over oversight of the App Store, replacing services head Eddy Cue, although Schiller had been involved with App Store policy since the beginning.

Although Schiller is no longer a senior vice president at Apple, he remains an Apple employee with the title "fellow," and continues to lead App Store policy.

2019: Apple backtracks on parental control apps, introduces appeals process. By the time Apple's annual developer conference kicked off in 2020, the App Store had received considerable antitrust attention, specifically to its ability to reject apps, especially apps that competed with Apple features, such as parental control apps which gave users the ability to set screen time limits for kids.

Apple reversed some of its policies about parental control apps in 2019 after negative media attention, allowing some of them onto the store, and creating software tools that they could use to build their apps.

But the skirmish highlighted that Apple's App Review process was arbitrary, and sometimes held up app updates over minor details or, worse, because the app didn't comply with in-app purchase rules.

Developer protests over App Review continued to grow through 2020, and at Apple's annual developer's conference, Apple said that it would implement an appeals system for developers to challenge Apple's rules, although many app makers say it hasn't solved their complaints with the approval process.

2020: Apple reduces cut to 15% for small companies. Last November, Apple introduced the Small Business Program, a high-profile olive branch to lawmakers and app developers.

It reduced the take from 30% to 15% for any company making less than $1 million per year through the App Store. But because apps are a winner-take-most business, it didn't hurt Apple's finances too badly — one estimate at the time suggested the top 1% of app publishers generate 93% of App Store revenue. But it did cut the fees for the majority of individual app developers.

Documents from a settlement in 2021 said that the creation of the Small Business Program was because of a class-action lawsuit.

2021: Apple reduces cut to 15% for news apps that participate in Apple News, allows developers to direct users to alternative payment systems. Antitrust attention on the App Store heated up in 2021. Earlier this year, Apple CEO Tim Cook testified at a trial over App Store practices against Epic Games. Multiple states and the U.S. Congress saw bills introduced which could force Apple to allow alternative app stores.

In August, Apple reduced its subscription cut for any publisher from 30% to 15%, addressing a segment of developers who had fought off App Store changes back in 2011. There was a catch though — those news apps had to participate in Apple's news aggregator.( News apps are not the main moneymaker on the App Store.)

Apple also settled a class-action lawsuit with smaller U.S. developers, paying $100 million and clarifying guidelines about apps emailing their own customers.

In September, Apple settled with the Japanese FTC and said that "reader" apps could link out to sign up customers for subscriptions on their own websites. All three of these changes addressed concerns that first popped up in 2011 when Apple created the reader rule.