Spotify files complaint in EU over Apple App Store: Why it may change developer economics
The drumbeat of opposition to the current mobile app revenue splits offered by Google and Apple is picking up. Spotify's complaint in the European Commission versus Apple may alter developer economics. Apple counters that Spotify is looking for a free ride.
Spotify has filed a complaint in the European Commission over Apple's App Store business practices -- in a move that highlights angst over Apple's cut of app sales.
In isolation, Spotify looks like a competitor dealing with encroachment by Apple Music. But when you add the moves by Netflix and Epic Games to use their own distribution with their comments from a bevy of earnings conference calls about Apple's App Store, developers may ultimately see some economic relief.
Benjamin Schachter, an analyst at Macquarie Capital, has penned numerous research notes on the app economy: "We believe that platform fees (on mobile and elsewhere) will decline over time. It is now a topic that management teams are increasingly discussing," said Schachter.
Apple thinks the App Store is the best and safest place to buy and sell apps. Apple said its efforts provide value by providing payments, security reviews, marketing, design, and distribution. Apple fired back in a statement and argued that Spotify was looking for a free ride.
What Spotify is demanding is something very different. After using the App Store for years to dramatically grow their business, Spotify seeks to keep all the benefits of the App Store ecosystem - including the substantial revenue that they draw from the App Store's customers - without making any contributions to that marketplace. At the same time, they distribute the music you love while making ever-smaller contributions to the artists, musicians and songwriters who create it - even going so far as to take these creators to court.
Spotify has every right to determine their own business model, but we feel an obligation to respond when Spotify wraps its financial motivations in misleading rhetoric about who we are, what we've built and what we do to support independent developers, musicians, songwriters and creators of all stripes.
Spotify CEO Daniel Ek said Apple acts as "both a player and referee" in the app economy and that dual role is fundamentally unfair. Ek wrote:
Apple requires that Spotify and other digital services pay a 30% tax on purchases made through Apple's payment system, including upgrading from our Free to our Premium service. If we pay this tax, it would force us to artificially inflate the price of our Premium membership well above the price of Apple Music. And to keep our price competitive for our customers, that isn't something we can do.
As an alternative, if we choose not to use Apple's payment system, forgoing the charge, Apple then applies a series of technical and experience-limiting restrictions on Spotify. For example, they limit our communication with our customers—including our outreach beyond the app. In some cases, we aren't even allowed to send emails to our customers who use Apple. Apple also routinely blocks our experience-enhancing upgrades. Over time, this has included locking Spotify and other competitors out of Apple services such as Siri, HomePod, and Apple Watch.
The Spotify conundrum applies to other companies that need to distribute applications on Apple's App Store. For instance, Netflix is bypassing Apple's commission on all future subscriptions by no longer offering sign-ups through the iOS app in global markets. Netflix also turned off subscription sign-ups through Google Play. EPIC Games, the company behind Fortnite, is bypassing the app markets completely.
While 30% is a high tax for mobile game developers, 30% COMPLETELY BREAKS the economics of content distribution businesses like Netflix, Spotify, Kindle, and any digital stores that aim to compete. This has got to change in 2019!
Indeed, mobile app economics -- dominated by Google and Apple -- are becoming a broader issue. A sampling of earnings conference call comments highlight how the issue is moving to the front.
Gary Swidler, CFO of Match Group, laid out the moving parts of app stores on the company's fourth quarter earnings conference call. Match's biggest app hit is Tinder. Swidler said:
It's, obviously, a huge topic among developers, given the amount of fees that we pay to Apple and Google. It's something that we're incredibly focused on. If you just look at our Tinder business, at $805 million of revenue in 2018 and growing this year, and you assume we pay pretty close to 30% across the board, it's a massive expense for us. And you know that we make frequent trips to Cupertino to discuss this with Apple and Google as well. And it's something that we are thinking about very carefully. I know that there's a lot of noise being made in the industry, generally by players like Fortnite, by Netflix and the shift that they just announced. So it's something that we're watching incredibly carefully. And it is, of course, not just an issue for us, but it's an issue for everyone. But it's a complicated one. There is certainly real benefits that the stores bring to the table from a distribution standpoint in particular.
For our brands, they don't bring us much on the marketing side just because we have such high brand awareness at so many of our brands, and the reality is that when people go to the stores, they're searching for a particular app, and so there's not as much benefit. So the 30% to us does feel like a big number compared to the benefits that are being brought, but obviously, as we've sort of a balanced this out, all of our financial assumptions assume that we're going to keep paying that 30% because that's currently the business model. We're not assuming any relief there, but we're watching all these developments, including what you point out as new stores cropping up. And to the extent there are tools that we can use, whether it's new stores, whether it's something else, to reduce the overall 30%, we will certainly focus and try to benefit from that. But so far, we haven't made any significant moves in that direction, but we'll continue to watch this and see how we can benefit from it financially.
Swidler's comments are interesting on a few fronts.
Large apps such as Tinder, Fortnite, and Netflix can use their own brand recognition and scale for distribution.
But most apps aren't mega-hits.
For smaller apps, there may be some marketing benefits from being on the app stores and distribution.
EPIC Games rivals Electronic Arts, Zynga, and Take Two. They are all closely watching the pushback to app store fees. Frank Gibeau, CEO of Zynga, said:
There's a great partnership between our company and Apple and Google. They help us bring our games to market and reach audiences. There's obviously been some innovation recently on EPIC's front. But I think it's too early to tell exactly how that's all going to shake out. It's certainly not a forecastable event. So I'll leave that to let events unfold more to be able to comment on it.