Apple Inc. has been ordered to make the most significant changes to its App Store business model since launching the platform in 2008, and could cost the tech giant a few billions of dollars annually.
In a ruling Friday, US District Judge Yvonne Gonzalez Rogers said the company should give developers the option of bypassing their commission on in-app purchases — a deduction that runs up to 30%. which includes giving iOS Apps use “buttons, external links or other calls to action that direct customers to purchase methods” in addition to Apple’s payment system.
It’s a blow to Apple, but one the world’s most valuable company could possibly absorb. And Apple dodged an even greater risk — that the judge could determine whether it was monopolistic under federal or state laws. That may have helped some investors make the decision, though it still sent shares down 3.3% at $148.97 on Friday, marking their worst one-day drop since May.
Apple’s commissions from the App Store generated an estimated $6.3 billion in the US last year, most of which came from in-app purchases and subscriptions. That money is at stake as games and other apps prepare to turn consumers away from Apple’s payment system.
So how much does Apple stand to lose? It all comes down to how many developers try to bypass its payment system. Gene Munster of Loop Ventures, a longtime Apple watcher, put the range at $1 billion to $4 billion, depending on how many developers take advantage of the new policy.
Apple depicted the ruling as a victory, indicating that it is not too concerned about the financial impact.
“The court has confirmed what we all know: the App Store does not violate antitrust law” and “success is not illegal,” Apple said in a statement. The iPhone maker’s general counsel Kate Adams called the ruling a “great victory”, which “underlines the merits” of its business.
Apple’s adversaries in the trial — Epic Games Inc., the maker of Fortnite — also argued that the judge favored Apple. “This is not a win-win for developers or consumers,” Epic chief executive Tim Sweeney said on Twitter.
Earlier this month, Apple said it would allow developers of the so-called Reader app to point users to external purchase methods. That category includes media services like Netflix and Spotify, as well as news and book apps. But Friday’s decision means the rule will also have to apply to games and other categories, which have historically generated a lot of revenue for Apple.
Apple said it was too early to determine how or when the changes would be implemented and that it needed to negotiate with a judge. It also said that it would be involved in ongoing talks with developers about the changes.
According to the ruling, gaming apps account for about 70% of all App Store revenue, and it comes from less than 10% of the platform’s users. They help offset over 80% of App Store accounts with big spenders that generate virtually no revenue.
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According to estimates by Sensor Tower, Apple generated about US$3.8 billion in revenue from games in 2020, most of which came from in-app purchases.
But even though the ruling costs Apple a few billion dollars a year, it’s still a small fraction of its total revenue. In fiscal year 2021 alone, the company is projected to bring in more than $360 billion, meaning the change will not make or break its overall financial performance. And many developers may choose to stick to Apple’s payment system so that they don’t need to build their own web payment platform.
The judge didn’t force Apple to change its fees or store third-party apps on its platform, which would have been a major blow to the company’s revenue.
The ruling said Apple should let developers communicate with customers “through points of contact voluntarily obtained from customers through registration within the app.” Last month, as part of small concessions designed to settle class-action lawsuits with app makers in the US, Apple already agreed to allow those direct communications between developers and end users.
The ruling in the Epic trial only applies to the US, while changes to Apple’s previous App Stores – related to the Communications and Reader apps – were designed to be global.
The judge’s decision could eventually mean Epic’s Fortnite is back on the App Store. The popular game was originally taken down last year for using its own payment method, bypassing Apple’s fees. Now that an injunction is in place for Apple to allow that approach in some form, Fortnite may be poised to return.
Sweeney said Friday that Epic will reinstall Fortnite on the App Store only “when and where Epic can offer consumers in-app payments in fair competition with Apple in-app payments with savings.”
The decision is believed to mean that users will be able to make purchases via the web instead of having a competing payment system in the apps themselves. This means that Epic will require users to build a website to make purchases and include a link to that site in Fortnite in order to comply with the rules. That’s something that Sweeney means that Epic doesn’t want to do. Epic wants a built-in payment system, not an option to run on the web.
At a briefing, Apple said the reasons for banning Fortnite outweighed Epic’s decision to offer an alternative payment method and it’s unclear whether Fortnite will return. However, it pointed to previous comments that it would allow Fortnite to go back if it returned to compliance with App Store rules.
Sweeney said that Epic will continue to “fight for fair competition between in-app payment methods and the App Store for one billion consumers.”
The decision did not apply to revenue that Apple had previously lost by bypassing its payment system from Epic. The judge ruled that Epic owed Apple $3.7 million for Fortnite purchases made between August and October 2020. She also said that Epic will have to pay Apple a 30% cut for purchases made between November 2020 and the ruling.
Apple has argued that its tighter controls on the App Store help protect consumers and prevent developers from duping users.
“We’re still analyzing the decision, which is 180 pages long,” Apple’s Adams said, “but the headline validates Apple’s App Store business model.”
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