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Epic Games wants to take a bite out of Apple

5 May 2021 7:15 PM
Digital technology

It is not just a court case that could become a problem for Apple.

Fortnite was the runaway hit in 2018 that has gone on to make millions for Epic Games. The game is played on most platforms but mobile is very popular, over 100 million played on iOS, over 75 million played on nothing else.

Most were in the US and most were under 25. While the game is free to play, you can buy in game items for your character. It does not allow you to play better, but it does allow you to change your outfit or do special dance moves to celebrate your victories. It appears enough players really want to stand out and so Fortnite makes millions.

Apple users can only download apps via the App store. App creators pay an annual fee to access the platform and submit If the game is passed by Apple as not contravening their rules it is free for developers to make their apps available. Should they charge for anything, Apple would take 30%. In November 2020 they announced that they would reduce that to 15% for income below $1 million per year. For subscriptions for services like Spotify, the rate is 15% after the first year.

Apple is not alone in charging 30% but then it did create the first App store and has been charging the rate that everyone else adopted since it launched in 2008.

The app store has played a major role not only in generating money for Apple but in improving what it can do. Instagram was built on improving the quality of the images captured by the phone hardware. An early app simply turned the flash on and allowed the phone to work as a torch.

There were dozens of apps created by developers hoping to make it to the top of the app store listing and if they were so popular the app might become part of the next software upgrade and added to the phone. Since it launched, Apple says developers have earned over $155 billion since the store began, but the court case filed by Epic Games is challenging that Apple is not working to help developers but rather to create a monopoly for themselves.

It is a complicated case.

Some context

  • Apple has over 700 million phones in use,

  • 280 million in China alone and 120 million in the US.

  • China about 10% of the market about the same in the rest of the world but almost 50% in the US.

  • Apple makes a major cut of it revenues from new iPhone sales

  • Updating the phone each year is a way to keep sales growing but phones are now so good and will last much longer than a year

  • Users probably only need to get a new phone every four years

  • An alternative is making the app store a more crucial part of the business even though they have not had to do much since its launch in 2009

  • Charging an annual fee to developers of $99 and then taking 30% of all transactions was the standard

  • From the beginning popular services like amazon books and streaming services like Spotify and Netflix asked why they needed to pay an ongoing fee when their apps were free and the content they sold were not dependant on Apple payment systems

  • Epic Games brought this to a head with its move to make mobile play a bigger part of the game and 75 million only play the game on their Apple phones.

  • They ask why they need to pay Apple a cut of their revenue for supplying items to users that own the phone that is able to run the game

  • Apple argues that it only takes money to ensure the app store has only has safe apps

  • And to develop the software to make creating apps easier for developers

  • It argues that developers only pay the $99 per year to build very powerful apps for almost a billion users

  • Recently it excepted the annual costs for NGO and educational developers and reduced the fees to 15% after the first year for long term subscriptions over $1 million per year

  • Doubtful that Apple would have fought the calls to lower the fees if phone sales were still strong

  • Apple is moving to offering more subscription based options to make the income more reliable. Apple TV and Apple music are two big pieces but it is a very competitive space

  • The App store is then a needed revenue stream

  • They offer a phone subscription service which allows you to get a new phone every year but costed over a two year period at 0% interest via a banking partner loan.

  • The monthly cost comes to about the same as buying the phone new

  • I am not aware of it outside of the US but it may become a popular model for manufacturers and banks around the world and is similar to the discounts Discovery and some other banks offer

  • The law appears to favour Apple for being allowed to decide what it charges developers even if many users might not agree

  • Competitors have lowered their fees to benefit from the potential marketing but may find it a bad move if it becomes core revenue for them too. Microsoft and Valve who operate a PC app store for games are two who have done so.

  • If the PR is bad, it may see users switch to other phones, for younger users that may be possible but for those over 30 that have pictures and accounts and music with Apple they will be less likely willing to switch.

  • Epic is looking to disrupt because it has to. Its PC store is not profitable and it has a lot more users on mobile. There is no guarantee it will create another Fortnite so it has to do what it can while it still has a popular game

Restoring your privacy or blocking Facebook

  • Apple is giving users more control over what info about them apps may access. For subscription based apps like Netflix, that may not be a major issue as they will be able to tell what you watched and so measure use and make suggestions for what to watch next.

  • For businesses that rely on advertising there is an expectation that tracking someone as the move between apps and across the web will make ads suggestions better.

  • Internet ad companies set themselves up as offering advertisers more effective ads by reaching people they know are likely to respond to ads.

  • Nothing wrong with that but users are not liking that to do so requires recording everything they do

  • Apple has seen an opportunity not only to impress users with more privacy but it also is creating an opportunity to offer its own advertising network as an alternative. It does have access to what users do and so can use it to offer an advertising advantage over Facebook and Google and importantly add another revenue stream

  • The catch is that rather than Apple being a company you use, you effectively become an asset Apple owns.

  • Apple may also focus on running the software in future electric vehicles. Adding a car as an extension of a phone app to get you around is not that crazy given how much of what a car does these days is electronic rather than mechanical.

Right to Repair

  • This brings us to who actually owns the phone.

  • Even when you take the subscription option, you effectively get given a loan to pay Apple for the phone, in which case it is your phone

  • If you consider that you can only have it repaired at approved repairers suggests Apple does not actually sell you the phone after all, but charges you for its use.

  • Apple says it only allows approved users to repair the phone to keep users safe. Safe from someone doing something that could damage the phone or that can replace a security device to compromise it. That is a fair point.

  • Approved repairers have to pay Apple for special tools and software to work on the phones and they will have to buy the parts only from Apple.

  • Even if you were able to repair the phone and had the tools, Apple prevents the parts working unless some software shows the repairer was approved. Is it just safety or excessive control

  • Car manufactures have required their vehicles to be serviced by only their approved agents, but the Competition Commission has ruled that owners should have the option to choose an alternative. Perhaps this will also apply to electronic devices.

  • Phones are built to be more and more modular, which should allow for components like screens to be standard across many models reducing the cost to make them and the waste when the phones are no longer in service.

  • But most importantly it means that it is more and more difficult for users to choose an alternative when you have invested some much in one company changing is like having a divorce.

The mobile phone as pioneered by the iPhone is the most influential device of the 21st century and if you thought that after two decades we would have resolved all the issues, it looks like we still have a long way to go.

5 May 2021 7:15 PM
Digital technology

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