Apple Defends Its App Store Position as CEO Tim Cook Prepares to Testify Before Congress

Apple CEO Tim Cook at WWDC 2015 Credit: PriceM / Shutterstock
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Today marks the opening of a massive antitrust hearing in which the four biggest tech companies in the U.S. — Apple, Amazon, Facebook, and Google — will be called upon by U.S. lawmakers to answer the numerous allegations that have surfaced over the years as to how they’re each engaging in various anti-competitive behaviours.

The CEOs of all four companies have agreed to testify before the U.S. House Judiciary Committee as part of its ongoing investigation into whether the behaviour of the big tech companies violates antitrust regulations, and follows the testimonies of numerous smaller companies such as app developers and accessory makers from earlier this year.

It also comes on the heels of reports that the U.S. Department of Justice is poised to launch an antitrust investigation into Apple and other tech companies following similar actions already underway in Europe.

While each of the tech companies will have different issues to answer for, in the case of Apple the bulk of the scrutiny appears to centre primarily around the “ironclad” control that it exercises over its App Store, focusing primarily on the 30 percent revenue cut that it takes from developers, but also extending into the policies that seem to target certain developers unfairly, promote its own apps and services over rivals such as Spotify, and even whether its privacy policies are designed to push out competitors.

It’s an issue we’ve seen come up numerous times over the years, sometimes simply in the form of grousing by developers like Spotify (a complaint which now forms the crux of an EU antitrust investigation), but often even more blatantly at those times when Apple rejects apps or even whole categories of apps, often with seeming capriciousness. We saw this last year with the parental control apps fiasco (which Apple eventually backed down on), and then only a few weeks ago with the Hey email app.

Defending Its Position

While Apple always insists that it’s putting the needs of its users first, more often than not it has a hard time convincing people — and especially iOS developers — of that fact, since its position is sometimes untenable as a large corporation, and even when it has a valid point, it’s often made some pretty big missteps when it comes to the optics of its actions.

For example, Apple had a valid technical reason for cracking down on parental control apps, but since the move came right after Apple had released its own Screen Time feature in iOS 12, the move to block third-party parental control apps seemed blisteringly anti-competitive — even despite the fact that Apple doesn’t make any revenue whatsoever from a feature that’s already built into iOS 12. The developers who felt the sting of Apple’s rejection naturally disagreed, and some of their points were equally valid, since many had offered their apps on the App Store for years before Apple suddenly brought the hammer down.

Likewise, the debacle with Hey had a similar feeling of Apple not applying its policies equitably, since the key issue was the developer’s choice to bypass Apple’s in-app purchase system for subscriptions in the exact same way that apps other from companies like Netflix and Amazon had been doing for years. The problem, Apple said, was that email apps weren’t exempted under its rules, but many felt that was a hair-splitting justification.

With Apple CEO Tim Cook scheduled to testify before congress today, Apple’s Senior VP of Worldwide Marketing, Phil Schiller, spoke with Reuters yesterday to once again defend Apple’s position, claiming that it’s all about “levelling the playing field for developers,” rather than having unfair power over them.

One of the things we came up with is, we’re going to treat all apps in the App Store the same – one set of rules for everybody, no special deals, no special terms, no special code, everything applies to all developers the same.

Phil Schiller, Apple Senior VP of Worldwide Marketing

When Apple first came up with the App Store back in 2008, Schiller said the goal was to entirely flip the entire software marketplace on its head by giving every developer equal shelf space. This was a huge contrast to the world of PC software that came before it, Schiller adds, since prior to the advent of the App Store, software developers and publishing houses were used to easily spending up to 50% of the retail price of their software packages just to pay for prominent shelf space. With that barrier to entry, it was basically impossible for small developers to break in.

A New Model

In the Reuters article, Ben Bajarin, head of consumer technologies at Creative Strategies, points out one predecessor to the App Store was a small online service called Handango, which allowed developers to deliver apps to Palm devices over cellular connections. However, this still came with a marketing cost — a 40% commission.

So when the App Store came along in that era and offered to host apps for the increasingly popular iPhone platform at a mere 30% commission, almost every mobile developer jumped on it as it was a much better deal than what had come before.

Unlike retail software sales and services like Handango, however, developers did have to pay a price in less tangible currency — surrender to Apple’s often capricious control of the App Store through a set of then-unpublished rules, and of course the use of Apple’s own billing system, which also isolated them from direct contact with their customers.

Unfortunately, in the ten years since the advent of the App Store, along with the fact that it’s the only option to get their apps onto Apple’s devices, many developers feel that the commission has become far too high. While some agree that it was fully justified back in 2008 when small companies could gain global distribution and exposure solely through the App Store, many believe that time is past and fees should drop significantly, possibly even into the single digits that payment processors charge.

Of course, while Apple does act as a payment processor, it does far more than that, since of course the entire storefront is run and supported by Apple, which also hosts the apps themselves and subsequent updates, and it’s been Apple’s position for years that the cost of operating the App Store, combined with the benefits of exposure that it offers to developers, still justifies its 30% cut.

‘Opening the Gate Wider’

Apple CEO Tim Cook is scheduled to testify before the Committee today at a hearing that will begin at 12 p.m. ET, and in a prepared opening statement shared with the press earlier today, emphasized that the App Store doesn’t stifle competition because it’s actually opened the “gate wider” for developers.

We want to get every app we can on the store, not keep them off.

Tim Cook, Apple CEO

Cook also insists that Apple does “not have a dominant market share in any market where we do business,” noting that there are many other companies in the smartphone market, including Google, Samsung, and LG, that have a much larger market share than Apple, and the iPhone is “far from the only choice available to consumers.”

Apple believes that the regulatory scrutiny is fair and understandable, Cook adds, but he also notes that Apple will “make no concession on the facts” and disputes any allegations that Apple is anti-competitive.

After beginning with 500 apps, today the App Store hosts more than 1.7 million — only 60 of which are Apple software. Clearly, if Apple is a gatekeeper, what we have done is open the gate wider.

Tim Cook, Apple CEO

Cook also echoes Schiller’s comments to Reuters yesterday, emphasizing that the App Store began in 2008 as “a high-end virtual department store with a carefully curated selection of products,” with the goal of offering a more “boutique” marketplace for distributing software online than what had come before. Digital distribution was in its nascent stages at that point, and most software developers had to rely on boxed software in brick-and-mortar stores or shipping physical media like CDs. The few digital stores that were available charged higher commissions and offered a much worse user experience.

Cook also points out that Apple has never raised its commission or added any other new fees, and in fact a few years ago reduced its fees for longer-term subscriptions, with developers able to pocket 85% of their app revenue from subscribers who stay on after the first year, while also exempting additional categories of apps from the need to use the in-app purchasing system for subscriptions.

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