There’s a bit of a revolt brewing in Apple’s App Store.
Just days ago, Apple (AAPL – Get Report) announced that the decade-old App Store, which hosts millions of apps and has raked in billions in revenue for Apple, broke a new record with its highest-ever single day sales number, generating $322 million in sales during the first 24 hours of 2019.
Meanwhile, a growing number of app publishers say they want a bigger slice of the pie. Apple takes a a 30% cut of app transactions on the App Store, and some publishers are protesting the fee — or making moves to bypass it entirely. In late December, Netflix (NFLX – Get Report) — the top-grossing iOS app of 2018, netting $780 million according to Sensor Tower — removed iTunes billing for new customers, forcing them to sign up on Netflix’s own site. Similarly, Spotify ended iTunes subscription billing in 2016. And weeks ago, Epic Games, maker of the uber-popular Fortnite, announced plans to open its own app store with a revenue share that lets developers keep an 88% cut.
There’s also an anti-trust case that could potentially jeopardize the App Store revenue model. In 2011, a group of iPhone owners sued Apple on the grounds that it inflates the prices of apps partly due to App Store fees, and constitutes a monopoly on app distribution. That case is now on the docket at the Supreme Court, with oral arguments heard in November 2018.
The backlash comes at a time when Apple is placing ever greater emphasis on services — a category that includes the App Store, along with iTunes, Apple Pay, iCloud and other software-based products — amid weakening iPhone sales and slower growth in the smartphone industry at large.
While the precise revenue breakdown of Apple’s services segment isn’t known, the category makes up a growing portion of Apple’s overall revenue picture. On Apple’s November earnings call, executives reported $10 billion in services revenue for the quarter, representing year-over-year growth of 27%, and told investors that the company is on track to double its fiscal 2016 services revenue by fiscal 2020.
In an interview with Jim Cramer on Tuesday, Apple CEO Tim Cook stressed that Apple is on the right track, despite any current pessimism on Wall Street: “The product pipeline has never been better. The ecosystem has never been stronger. The services are on a tear,” he said, also teasing new services offerings coming this year.
Consumer spending on the App Store has also skyrocketed in recent years. According to App Annie, iOS consumer spend nearly doubled from about $20 to $40 billion between 2015 and 2017, with games comprising the largest spending category.
With more high-profile brands backing away from Apple’s App Store, does this put a dent in Apple’s services story?
A mass exodus from the App Store isn’t likely, according to App Annie’s Danielle Levitas. While powerful brands like Netflix may be capable of migrating users to their own sites, for most other publishers, she said, the bargain of increased friction for users won’t be worth it.
“I do not believe this trade off works for the vast majority of publishers and brands–especially for those that are app-first experiences,” Levitas said.”We expect some other publishers will test going outside of the app store for subscriptions, but that in the long run, this won’t be viable and the market forces will work to perhaps adjust pricing to create the greatest win-win-win with the stores, publishers and consumers.”