In hindsight, the App Store might be the smartest innovation of all time. That it came as an afterthought, and only really as a response to pressure that you couldn’t install third-party apps on the iPhone, makes it all the more incredible a story.
Some analysts have estimated that the iOS App Store has a profit margin of almost 80 percent, meaning that afterthought turned out to be Apple’s most profitable business. To be fair, Apple disputes that characterization, but considering Apple’s most recent quarterly results show that the company’s overall profit margin is a little over 40 percent, it’s probably not far off.
I don’t think there’s any question the App Store is its most profitable business. While the company doesn’t break out App Store revenues separately, of the $17 billion Apple generated in services in the last quarter, a good portion of that is from in-app transactions, app subscriptions, and downloads.
As far as the “smartest innovation” is concerned, sure, you could sell software to consumers before. The iOS App Store, however, opened the doors to a platform that Apple says now includes more than 1.5 million Apps and more than 1 billion users.
It is sometimes hard to think of the App Store as separate from the iPhone, despite the fact that the original plan for the App Store didn’t even include third-party apps. Apple points to research that shows the App Store generates more than $600 billion in economic value through the App Store.
Of course, Apple has a good reason to boast of all the money it helps developers make. All of the App Store’s success also comes with a huge cost, especially as many of those same developers have expressed criticism over the way Apple runs its platform, especially the 15 or 30 percent commission Apple collects.
Now, it appears the company is paying the price for the control it exerts over the app ecosystem. That developer criticism has started to add up, leading Congress to take action.
This week, a group of Senators introduced the Open App Markets Act, in an attempt to curb Apple and Google’s control over their respective App Stores. I don’t know that anyone could honestly argue that the biggest tech companies don’t have an outsized amount of control over the daily lives of their users. You can even argue they have too much control.
Whether Congress can effectively do something about the problem by passing a law aimed to fundamentally change the way smartphones work, is another question altogether.
As for the actual legislation, it’s quite simple. Basically, Apple (and Google) would be prohibited from requiring developers to use their in-app payment systems, and would be required to allow third-party app stores on their platform. They would also be required to provide API access to third-party developers to the same extent as first-party apps.
The law does state that platforms can impose guidelines designed to protect user privacy and provide security, however it’s clear that the bar is high. If passed in its current form, there’s no question that it would dramatically the change the App Store business model–and not necessarily in good ways.
By the way, the fact that the company doesn’t seem to see the damage it’s causing is another problem. So much of Apple’s current dilemma could likely have been avoided had the company been more gracious with developers over the past decade. Instead, it has tightened control over developers in ways that seem to only serve as a way to increase Apple’s bottom line.
For example, the company has targeted developers that don’t offer in-app signups. Last year, Apple was involved in a controversy with the developers of the Hey email app, because that app didn’t allow users a way to sign up. Apple also rejected updates to other apps under the guise that the developers needed to add in-app signups, even in cases where the apps were free.
And, of course, the company is involved in a high profile lawsuit with Fortnite maker, Epic Games. A decision is expected in the case sometime this summer.
Many of Apple’s moves seem intended to ensure the iPhone maker gets a cut from as many developers as possible. That isn’t to say that Apple isn’t entitled to making a profit, or that it doesn’t deserve a commission. I’m not even arguing that Apple hasn’t created an entire app economy that benefits millions of developers. That isn’t the point.
There’s really no question that Apple’s relationship with those developers is broken, to an extent that could have largely been avoided with a little bit of corporate relationship management. Had Apple invested in that along the way, it wouldn’t be paying the price now.