Apple’s decision to collect a 30% tax on every digital item sold through the App Store may lead to its undoing, according to venture capitalist Bill Gurley.
It’s an extreme, hyperbolic statement. But before you dismiss it out of hand, Gurley makes a decent point which we’ve never considered before.
In short: Apple’s 30% fee was just high enough to scare off peers who could have made iOS better. Instead, they’re working through Android to build products that undermine Apple’s core business.
Gurley did a big analysis of the “rake” e-commerce companies charge. The rake is the fee a company charges. So, OpenTable collects 1.9% of money that flows through its reservation system. eBay collects 9.9% of the revenue that flows through its site. And so on.
Apple’s rake is 30% in the App Store. If a developer sells an app for $1, Apple takes $0.30, the developer gets $0.70. Or, if a developer sells a digital good inside the app for $1, Apple takes $0.30.
For the most part this has worked well for Apple. Thousands of developers built apps for the App Store. And dozens (more?) became millionaires despite the 30% tax.
As the App Store flourished, so did Apple’s hardware sales. The iPhone and the iPad exploded in popularity thanks to great hardware, great software, and the best mobile applications on the market from third-party developers.
Yet, the biggest Internet companies in the world looked at Apple’s 30% fee and “saw an instant road-block,” says Gurley.
Those companies? Facebook and Amazon, according to Gurley. We’d also toss in Microsoft.
“Both Amazon and Facebook could have been and should have been BFFs with Apple,” says Gurley, “And if Apple could go back in time, they would surely opt to be BFFs also.”
Apple, Amazon, Facebook, and Microsoft all have one common enemy: Google.
Instead of working on Apple’s iOS platform to destroy Google, Apple’s 30% fee forced Facebook and Amazon to find an alternative to destroy Google. Ironically, they opted for Android, which is more free and open.
“iOS could have been both the definitive Facebook mobile device, AND the definitive Amazon shopping device,” says Gurley. “They could have been integrated from the beginning at a deep level: your social network in contacts; your Amazon 1-click credentials a fingertip away. Jeff Bezos, Mark Zuckerberg, and Steve Jobs on a stage together talking about the truly amazing things these companies have done together. It could have been awesome. But it didn’t play out that way.”
Amazon built Kindle Fires using Android. It charges a low, low price for those Fires. This is a direct assault on Apple’s iPad business.
And now Facebook is building Home, its own semi-mobile operating system for Android. If Home is a success, then it’s bad for iOS.
Microsoft, which Gurley doesn’t mention, has reportedly been hesitant to launch Office for iOS because of Apple’s strict pricing and packaging rules. The iPad has done well without Office, but it’s missing out on a big opportunity if it’s shutting out Office.
Amazon probably would have built Kindle Fires even if Apple didn’t have a 30% charge. CEO Jeff Bezos, who is an investor in Business Insider, is just too aggressive to sit on the sidelines watching Apple define the future of computing.
Likewise, Facebook is ambitious, and wants to control its own mobile platform. That was unlikely to happen no matter how low Apple made its iOS fee.
Microsoft, for its part, is not going to watch Windows go from 90% of the personal computing market to 0% without a fight, so Windows 8 and the Surface were inevitable.
However, Gurley’s overarching point stands. Apple had an opportunity to make iPhones the greatest Facebook devices in the world. It could have made iPhones the best Amazon experience of all time.
Instead, those companies chose Apple’s rival’s platform to create an array of products that are the number one competitive threat to Apple’s business.
All because Apple wanted an excessively high 30% iOS tax. Apple has industry leading margins because of its hardware business. It didn’t need to be greedy on its iOS terms. It should have been willing to negotiate with Amazon and Facebook, says Gurley.
Gurley ends his post by citing business legend Peter Drucker: “The worship of premium pricing always creates a market for the competitor. And high profit margins do not equal maximum profits. Total profit is profit margin multiplied by turnover. Maximum profit is thus obtained by the profit margin that yields the largest total profit flow…”
Gurley added his own thoughts: “Most venture capitalists encourage entrepreneurs to price-maximise, to extract as much rent as they possibly can from their ecosystem on each transaction. This is likely short-sighted. There is a big difference between what you can extract versus what you should extract.”
Disclosure: Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.