- Spotify has gone to war against Apple in Europe, complaining that the way it runs its App Store is anti-competitive.
- It’s a bold move for a company whose market cap is 32 times smaller than Apple’s.
- But Spotify has bloodied Apple’s nose before when it circumvented App Store fees.
- It’s bad news for Apple that some of its most popular app makers keep challenging the App Store’s economics.
- Spotify’s complaint comes as there’s never been greater political will to regulate big tech firms.
Spotify has gone to war against Apple, filing a legal complaint with European antitrust authorities over what it claims is anti-competitive behaviour.
Spotify’s beef is about the 30% fee that Apple charges on App Store subscriptions. Apple makes life extremely difficult for services that try and avoid that fee, Spotify argues, meaning the company will have to raise its prices to account for the levy.
That would make Spotify more expensive than Apple’s in-house streaming service, Apple Music, which doesn’t have to pay the same 30% levy. That, Spotify says, is anti-competitive behaviour because Apple wins either way. You can read more about the complaint here.
Fighting Apple is a bold move, given Spotify is a comparative minnow.
The Swedish service operates a single business – music streaming – while Apple is a major player covering mobile, the cloud, media and entertainment, and computing. Apple, with a market cap of $US853 billion, is 32 times more valuable than Spotify, with its $US26 billion market cap.
With this in mind, it is hard to see that Apple will be overly worried about the complaint. Indeed, it is yet to even comment on the proceedings filed with the European Commission.
But that is only when the complaint is viewed in isolation. It should worry Apple that some of the biggest and most popular app makers are willing to challenge the economics of the App Store, which CEO Tim Cook keeps billing as a driver of Apple’s future growth.
App makers like Netflix are challenging App Store fees
Apple is suffering from peak iPhone and must look to its services division for continued growth. That includes businesses like iCloud, the App Store, and Apple Music.
But that growth faces a challenge if popular third-party developers keep challenging the App Store’s main source of revenue – its 30% levy. And there are indications that Apple will feel the pain.
Take the example of Netflix.
The streaming service is the biggest app maker to date to circumvent App Store billing, asking iPad and iPhone users to pay for its subscription service through its site rather than through Apple.
According to Sensor Tower data, Netflix is the top-grossing app for Apple in the US and the billing change could deprive the iPhone maker of as much as $US256 million a year in subscription fees. The Netflix move was widely seen as a blow to Apple’s narrative that its services division would be the driver of future revenue.
We also know that Apple will already be feeling the impact from Spotify pulling a similar stunt a few years ago.
Spotify used to make Apple an awful lot of money
Look at these two side-by-side charts from Sensor Tower.
They show that Spotify was Apple’s top-grossing app both in the US and globally in November 2015.
2015 is an important date in this dogfight – it was the last year Spotify billed every premium subscriber through iTunes, meaning it paid up to 30% of all subscription fees to Apple. The upshot was that Spotify was incredibly lucrative for Apple.
That changed in 2016, when Spotify wouldn’t allow new app users on iPhone or iPad upgrade to its paid Premium service through iTunes. Instead, it directed people to its website. That meant it could keep subscription revenue for itself, instead of handing a chunk over to Apple.
The impact was immediate, as shown by the Nomura chart below. The graph compares how much revenue Spotify and Netflix make through the App Store. Look at the red line denoting Spotify – and what happened in 2016 when the firm altered its billing process. You can see there’s a big dropoff:
That’s a pretty sharp decline! We can see from the grey line that the dropoff for Netflix will be even more severe.
Both Spotify and Netflix through their separate actions have paved the way for other big app makers, who have to fork out lots of money to Apple, to also take a stand.
We’ve seen a similar story with Google, where the maker of “Fortnite” decided to circumvent Google’s Play Store for the Android release.
Can Apple just keep creating its own competing services?
One answer to all of the above, of course, is that Apple has built its own perfectly serviceable music streaming service which is gaining in popularity. It is also about to launch a Netflix competitor.
As it currently stands, Apple wins if both Spotify and Netflix have reduced access to the App Store, because that would drive more people to download and subscribe to Apple Music. As Spotify’s CEO acknowledged in his statement on Apple, the App Store is the “gateway” to the internet for the billion people who own an iOS device. It’s a huge marketing tool for any app developer.
Apple can’t mimic every popular app that decides to avoid the App Store levy though, not least because the regulators might step in. And there has never been greater appetite to regulate the major Silicon Valley firms, both in the Europe and the US.
Given the political risk, it might just be easier to bow before this minnow after all.
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