Apple’s One of the World’s Largest Video Game Companies (But for How Long?)

Apart from 2008’s Texas Hold ‘Em, Apple doesn’t have a single game title to its name, and yet it turns out that it’s actually making substantially more revenue from gaming than all the big console makers combined.

The secret is Apple’s App Store, and it’s not hard to see why Epic Games was so eager to go to war with Apple over its control of the iPhone app ecosystem. It’s a massive pie that everyone wants a slice of.

We already know that the App Store makes a staggering amount of money, but now a recent analysis from The Wall Street Journal (Apple News+) is putting some context around that, revealing just how much money Apple is pulling in from the gaming industry.

The WSJ analyzed figures from the recently concluded landmark trial between Epic Games and Apple, discovering that in 2019 the iPhone maker earned more from games on the App Store than all the money earned by Nintendo, Microsoft, Activision Blizzard, and Sony.

Specifically, the operating profits that Apple pulled in solely from game titles on the App Store in 2019 alone amounted to $8.5 billion.

To be fair, these numbers came from figures disclosed during the trial, using operating margins that Apple’s lawyers claimed were flawed, and therefore higher than reality.

With little fanfare, Chief Executive Tim Cook has turned the maker of the iPhone into one of the world’s largest videogame companies.

Tim Higgins, The Wall Street Journal

The trial judge, however, Yvonne Gonzalez Rogers, reviewed Apple’s financial records under seal, verifying Epic’s claims that Apple generated profits of more than 75% from the App Store — margins she described as “extraordinarily high.”

According to the WSJ, Apple’s $8.5 billion in profits from mobile games on the App Store actually gave it a $2 billion lead over the operating profit generated during the same 12-month period from Sony, Activision, Nintendo, and Microsoft, based on filings and analyst estimates for the other gaming giants.

Apple continues to describe these margins as “too high,” claiming that they leave out many of the operating costs of the App Store.

During the trial, Apple CEO Tim Cook claimed that Apple had “never tried to determine the specific profitability of the App Store as a stand-alone business,” as Apple’s former CEO and co-founder Steve Jobs had discouraged this practice to promote cooperation, rather than competition, among the company’s various business units.

Cook claimed that a 2018-2019 internal report submitted into evidence that outlined the App Store’s operating margins was a “one-off presentation.” The internal document wasn’t made public, but was among the information reviewed by Judge Rogers. The report, which had been sent directly to Cook, calculated the App Store’s operating margins as 74.9% and 77.8% for 2018 and 2019, respectively.

In other words, if these numbers are accurate, approximately three-quarters of all the money that Apple receives from its 15-30% cut of App Store sales is pure profit.

As an example, the WSJ report cites data from Sensor Tower, an analytics firm that regularly reports on the sales and revenue from various online marketplaces, including Apple’s App Store. Sensor Tower estimated that Apple received $15.9 billion in overall revenue from the App Store in 2019, with 69% of that coming specifically from games.

Based on the 75% margins from the case, this means Apple made $12.3 billion in overall profits from the App Store in 2019. This would be for all apps, games, and in-app purchases and subscriptions sold that year. The 69% share of that works out to around $8.5 billion.

Of course, the billion-plus Apple devices out in the wild easily explain why Apple’s revenues are so much higher than those of the big console companies, since there’s a much larger audience.

By comparison, Sony has sold around 500 million PlayStation devices in the past 20 years, but only around 130 million PS4/PS5 units. Microsoft’s Xbox sales come in substantially lower, at around 60 million. Nintendo’s best-selling consoles and handheld gaming devices are arguably behind it, with about 90 million Switch devices out in the wild.

Globally, App Store customers spent around $45 billion on mobile games last year, with almost 31 percent of that coming from China, and 26 percent from users in the U.S. While Apple likely made around $13.5 billion from its cut of those games, that still only works out to a fraction of the $275 billion it pulled in last year.

Notably, however, court records also show that 88% of all the App Store’s game revenue in 2017 came from only 6% of App Store customers, but it’s a group that’s clearly willing to spend:

• On average, App Store gamers in 2017 spent more than $750 annually.
• The top 1% of Apple gamers accounted for 64% of App Store game revenue, spending an average of $2,694 annually.
  

The biggest cash cows, the WSJ notes, include Honor of Kings, which was last year’s top-grossing game, while Pokémon Go and Candy Crush Saga also continue to dominate the charts year after year.

Even though Apple repeatedly claims it’s not a monopoly because of its relatively low marketshare compared to other platforms like Android devices, it’s clear that it holds a dominant position in the gaming market. In fact, during the trial, Judge Rogers noted that Apple enjoys “considerable market share of over 55% and extraordinarily high profit margins,” but stopped short of agreeing with Epic’s case that Apple was a “monopoly.”

Part of this was simply that Epic failed to prove its case. However, Judge Rogers also added that the mobile gaming market is evolving so quickly it’s impossible to assume that any single company will hold on to a dominant position for long.

The rise of streaming gaming services is starting to change that landscape, bypassing the App Store, and of course, there are still other legal battles to be fought, from Epic’s appeal of the Apple case to new legislation that’s beginning to take shape in several jurisdictions.