Epic App Store Fight
Apple’s App Store monopoly is being attacked again! This time by Epic, last time by Basecamp, and previous times by Netflix, Match, Spotify, and I’m sure others. It’s a complex battle with sound arguments on both sides. So, in this post we offer two opposing views on the situation. The key question here is if Apple should have sole control over distribution and policies regarding apps for its own product. We will will start with a brief overview, then Colin Berkshire will make his case that favors Apple. We wrap up with Dave Michels suggesting the App Store model must change.
General
Epic intentionally poked the bear. It knowingly broke the rules, and then pounced with a lawsuit when Apple did what it would predictably do. Lawsuits are a meal best served with damages. Apple generally avoids these lawsuits by eventually reaching some compromise. Epic is crusading for real change. 
The App Store is an ingenious evolution of software distribution. Not only does it simplify search and installation, but Apple gets to profit from vendors that wish to sell iOS software applications. It was a new concept in software, at least on a mass scale, but gated or controlled ecosystems are hardly new. It’s harder to do this in hardware than software. In hardware, for example, you can’t really stop customers from tampering with the products they purchased other than things like voiding warranties.
Apple does this in hardware, for example, the iPhone was among the first mass consumer products with a non consumer replaceable battery. Software is much easier to restrict modifications as APIs can be restricted or locked. This is known as software locks. Software allows vendors to lock their products like never before. Deere now tells its customers they cannot modify or service their tractors. This really complicates our views of ownership. Another good example is Kindle books that you may think you own (after purchase). Amazon has de-installed those books when it felt it justified. Ownership is no longer 9/10s of the law.
While gaming on an iPhone may seem like a non sequitur to enterprise communications, the implications of this battle are huge. No wonder both Facebook and Microsoft jumped in – on Epic’s side. The biggest tech companies in the world indeed have a few opinions about the App Store. Apple’s App store is controversial to software vendors of all sizes, consider the recent battle with Basecamp over the Hey email app.
The issue at hand is really over Apple’s revenue model which does not apply to free apps. However, things get blurry when free apps have upgrades. Facebook is always free, but the company is still concerned enough with the App Store that it publicly joined the fight. Officially, its issue is over its new virtual-events business. However, Facebook and Apple have been feuding over the Apps Store for years. Unrelated (or not): Facebook is also upset that the privacy changes coming in iOS 14 will cripple its ability to serve targeted ads to users that use outside apps.
Microsoft’s involvement is even more interesting as its past includes monopolistic behaviors. Microsoft President Brad Smith claimed in a Politico interview that Apples’s App Store walls are “higher” and more “formidable” than anything Microsoft ever did in the past. The app store came up indirectly last December when the Financial Times named Satya Nadella Person of the Year. When asked about Stewart Butterfield’s then-complaints about Microsoft, Nadella said, “The question he [Stewart] should ask himself is whether Slack would even exist if it was not for Windows, and his ability to distribute on Windows without Microsoft getting in the way.” His point is that Microsoft does not play as a gatekeeper as Apple does. Slack and other developers can reach the Windows audience “without any tax collection.” But it’s odd to suggest Microsoft enabled Slack to exist. It’s not clear if Nadella is saying Microsoft’s open model is better or that Apple improved it with a tollbooth.
I am sure there are some vendors that are siding with Apple. In many ways software distribution has never been easier. Presumably Google thinks it’s fair. Google isn’t getting the attention of Apple, but its Android Play store is basically a mirror image. Epic is actually suing both as Google responded to Epic with nearly identical actions. While both Apple and Google are under attack, Apple is the one that sets the market, so that’s where most of the attention is focused. I think most presume Google will continue to follow Apple’s lead with regard to app store policies. It is important to note there are some important differences today, and Android is slightly more open than iOS.
Colin’s View
The battle between Epic Games and Apple is an epic one, with Apple’s App Store being declared to be a monopoly by Epic. The fight is over Apple’s “outrageous” commission. Apple charges a 30% commission for everything sold through an app, and Epic decided to allow direct credit card payments, bypassing Apple’s commission. Apple cut Epic off and removed their game, and now it’s in court.
Like so many current events, some perspective is needed to ground us. The spin-doctors are quite busy here.
Epic will talk about how Apple has a monopoly and how the 30% commission that Apple receives is punishingly high. Apple is a monopoly because you can only sell apps through their App Store. Taken in a vacuum this argument might sound plausible. Go underdog!
Lets do the reality check…
If Epic were to sell its games through Best Buy stores, they would need to offer Best Buy a wholesale discount that averages 50% and can be as high as 65%. If Epic sold their games through a little kiosk in a mall, the rent and commissions would be 15% to 65% plus they would have to cover the labor of the salesperson in the kiosk. Restaurants and many retailers at an airport pay a 50% to 80% commission. You know why beer is so expensive at a stadium? The venue typically charges an 80% commission on sales.
My company used to own an online retailer that was one of a dozen in our industry. We wouldn’t even start to talk to a manufacturer until they offered us a 50% discount, and we would often get a 60% discount off retail.
You could argue that online sales are somehow different than brick and mortar. But selling through Amazon typically costs 20% to 35%, through eBay costs the same (by the time you could credit card fees.) Google Play charges 30%, the same as Apple. (And Google Play is not the exclusive way to buy Android apps.)
I could go on at length about how from Plumbers to Dentists the finders fee/sales commission just tends to be in the 25% to 50% range. Sales costs just are about half of the cost of bringing a product to market…everywhere.
But the very notion of declaring Apple’s App Store a monopoly is silly when you stand back. Apple’s phones have about a 20% marketshare and that’s no monopoly. Apple does have a monopoly on this 20%, but that still doesn’t make it a monopoly. Simon and Growth Properties own more than 20% of America’s malls and they aren’t a monopoly.
Epic’s argument is akin to arguing that at your town’s biggest mall the owner of the mall has a monopoly. Of course they have a monopoly on the mall that they own, but that doesn’t mean they have a monopoly in the entire town.
Why doesn’t Epic just play by the rules, build in a 30% selling cost, and move on with the important part of it’s business?
I don’t find Apple’s 30% cut to be unreasonable.
Dave’s View
When I bought my first PC, I went over to Egghead to buy software. As I recall, the After Dark screen saver was very popular. In those early days, the ecosystem of software distributors and independent software vendors (ISVs) was flourishing. That’s the way products work, we buy them and then turn to the market to customize them. It might be wheels on a car or wallpaper in your den. However, mobile operating systems don’t work this way. If you want to install an app you have one store: The App store for iOS and The Play Store for Android. They are indeed great stores – full of products that are vetted, easy to find, acquire, and install.
Hmm. Let’s examine those. First vetted. Apple vets more than Google and as a result Google has more dubious apps. Apple protects its users against malware and other objectionable content. Some might find that nice, but it’s a form of censorship — and censorship is particularly complex in a monopoly. If your local library wants to ban Harry Potter, the books can still be obtained elsewhere. However, when Apple bans “objectionable content” that’s effectively it. Apple has banned lots of apps for various reasons. In comms alone Apple has banned Telegram, Zoom, and Tumbler. It has banned apps that reference Jailbreaking. It has banned Pulitzer Prize winning cartoons. It has banned major newspapers and magazines including the New York Times and Le Monde. It has blocked dictionaries that include obscene words. It has also blocked VPN software to users in China per the request of the Chinese government.
It’s nice that you can let your kids roam the App Store unattended, but it’s ridiculous there are not separate stores for grown-ups.
Now let’s look at app search, a core feature of the App Stores. If you want something just search, and Apple will make ranked recommendations. Apple controls app discovery, and what appears on top of the search results. You might think you are picking the most popular app, but it might just be the app that Apple consistently ranks the highest (which becomes the most popular app). Apple also has full access to search and install data which gives it a huge advantage over ISVs in market research.
Apple takes 30% if you purchase the app, Colin thinks that’s a bargain when compared to traditional distribution, but that’s not a fair comparison. First, I’m doing all the work – there’s no sales associates to pay. Nor are there any of the physical costs of distribution such as retail stores, shipping, inventory, and returns. It’s all digital. There’s no App Store Prime that promises to ship me app in two days. Apple has built a modern, automated, self-service machine yet continues to charge the fees of the last era.
Two things consistently cause prices to drop: technology and economies of scale. One thing consistently causes prices to go up: monopolies. The App store has always been 30% despite automation and tremendous growth. Colin thinks ISVs should just build the 30% into their prices – that’s what they do. In the meantime, Apple has become the most valuable company in human history.
Installation tends to work well on App Store apps, but I don’t think that would be a problem in an open ecosystem. It isn’t on Windows or MacOS.
Bottom line is while the ISVs are vibrant, the stores are locked tight. Our system relies on competition to ensure products and services are the best they can be. When someone buys a Mac, they selected it over a Windows PC and both are better as a result. Apple and Google know how to compete – they should open up their app stores to competition. They have a tremendous advantage with name and experience, yet they still won’t allow competition. That was justifiable when the ecosystem was emerging, but today mobile computers dominate the computer sector and indeed just about everything we do.
We have a mobile duopoly, and within each is an App Store monopoly. It’s time to open things up.