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Epic’s Fortnite Standoff Is Putting Apple’s Cash Cow At Risk

Apple isn’t in the services business; it’s in the App Store business
Credit: Vjeran Pavic/ The Verge

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 FortniteCandy Crush, and Pokémon Go alongwith 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.

Source: https://www.theverge.com/2020/8/17/21369460/apple-fortnite-app-store-services-business-model-epic-games

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