Apple Loses a Big Court Case. What Does it Mean for the App Store? - 7investing 7investing
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Apple Loses a Big Court Case. What Does it Mean for the App Store?

The company will have to allow companies to direct people to third-party payment options.

September 12, 2021

Apple (NYSE: AAPL) has always controlled its App Store with an iron fist. It solely decides what apps can be sold there and once an app gets accepted it has to abide by very specific rules as set by the company.

Most of those rules have met surprisingly little pushback, but a number of companies have taken issue with how Apple deals with payments for apps downloaded on an iPhone or iPad. The company takes a significant cut of any revenue (15-30%) and does not allow any third-party payment options. That puts well-known brands in a tough position as they have to give Apple its cut or force people to sign up for their app through a web browser, not directly on the app.

Three months after Judge Yvonne Gonzalez Rogers heard a case contending that Apple’s practices were unfair, she issued her ruling. Part of it went in the company’s favor, but the major takeaway was that she issued a permanent injunction saying that Apple must allow app developers to direct users to third-party payment options.

The ruling does not stop Apple’s App Store from being a walled garden — the company can still keep out apps it considers inappropriate and it does not make it smooth for companies to use third-party payment. Instead, it essentially allows app developers to choose to take users to a web page through the app where payment can be completed. That’s a victory, but many app developers may opt to not do that due to the ease of use of being able to offer payment directly through an app.

Matt Cochrane shared his thoughts on the Sept. 13 edition of 7investing on this story which broke just a few hours before we went on the air. Maxx Chatsko weighs in as well and host Dan Kline shares his perspective on this potentially landmark ruling.

A full transcript follows the article.

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Dan Kline: We have one more topic we would like to talk about today, we will happily take your questions and comments. It is a Friday, we have gone longer than expected. But we are doing that because there are so many of you participating. But here’s what happened today. And this happened kind of right before the show. A judge and I’m going to assume a federal judge, but I don’t know that answer. A judge rules that Apple must allow developers to direct users to third-party payment options. Previously, if you were in the App Store, and if you want to be on an iPhone or an iPad, you have to use the app store. You had to use Apple’s payment. So that meant if I was say, Netflix, and someone isn’t a member, and they joined Apple gets its 15 to 30% cut. Matt, what is the big overview of that no longer being the case? According to this ruling?

Matt Cochrane  41:18  Yeah. Well, so we actually we talked about this last week. And, you know, I think it’s long been big tech’s – you know, there’s been a lot of antitrust actions against big tech, I think this was by far the most vulnerable position of big tech, like these app stores that belong to either Android or Apple. And I think it makes sense. Like, you know, imagine if Microsoft Internet Explorer-like, and they wouldn’t allow any alternative payments means except through like a Microsoft thing, where they took a 30% cut on anything that was sold on Microsoft’s Internet Explorer. And I think, yeah, I think this was a long time coming. I’m kind of surprised it lasted this long, to be honest, to be honest with you, but uh, we’ll see where it goes from here. But like it’s gonna be like, it’s a game to Apple. But it’s not like it’s not thesis changing at all, if you hold Apple shares,

Dan Kline  42:05 So I want to let Maxx weigh in. But I want to push back a little bit here. And I think Maxx will have an answer for this. I actually think this is not the correct remedy. I think the correct the problem is this is more akin to if Microsoft said, You’re only allowed to use Edge, it’s no longer Internet Explorer, you’re allowed to use Edge. You are not allowed to download Chrome, you’re not allowed to download Firefox, whatever else it is. Apple is a walled garden, meaning you have to jailbreak your phone which violates all your warranties, if you want to put non-Apple apps on it.

And that is not something a regular person, that’s not something I can do you have to be really tech-savvy, or know someone really tech-savvy to do that. Android phones are not a walled garden. So what do I think the remedy should have been? I think Apple should have had to allow you access to alternative app stores. Most people would still go through the app store. But there would be opportunities. Like, it’s always seemed odd to me that like I didn’t discover Netflix in the App Store. I knew about Netflix. Apple didn’t sell that to me. But I actually think that is the bigger problem. More so than how Apple bills. But Maxx, I think you disagree. So why don’t you weigh in?

Maxx Chatsko  43:09  Yeah, I mean, you know, there’s no other like alternative on on these ecosystems, right? I mean, like, it’s pretty impractical. If you want to download it like on Android, you can download apps outside of I think it’s the Google Play Store, right. But it’s not, that’s not how most people use their apps. Right. So like you said, you brought up an example about Walmart and buying Legos, and you had to, you know, have alternative payment methods. But like, you can go buy Legos in the physical world, like in any other stores in your town. So I think it’s a quite a big difference between like, how that works, and how these like digital ecosystems work.

Dan Kline  43:43  Yeah. So my, my argument is, this is a store. Apple has all the expense of maintaining the store. And the reality is for most apps sold in the App Store, they’re not Netflix, most of them are like, I need an app to do something. And I searched that in the store. And then I find it app. So Apple is doing the work there. I actually think they should be allowed to treat it like a store. And the Legos example was, I’m in Walmart, and I say, hey, I want these Legos. And instead, I can pay direct and walk out and Walmart doesn’t get a cut. I understand. It’s not super easy. If you say okay, Apple has to have other app stores available. But you can’t tell me that someone else. What if Google Play was available on on your iPhone and the Google Play Store and was easily downloadable? To me, that seems like the more equitable solution. Matt, your thoughts here?

Matt Cochrane  44:37  Uh, yeah, well, look, I think a lot of the vitriol directed at big tech is misdirected, and that a lot of the proposed antitrust actions will actually stifle innovation. They will hurt consumers. But look, I do think the iPhone- I think it’s a walled garden. And with no alternative means to download apps and that hasn’t changed. So I think this ruling is right. I think it actually gets it right. I don’t usually side that way on these matters. But, um, but there is no alternative way. And Apple wants control about what gets put on his phone. Right. So like, I don’t know what’s better. I think Apple still has control now. But I think you have to allow alternative means.

Dan Kline  45:16  So Matt, there is there is actually a very simple way to do this. And that’s to allow web-based apps, which is actually not something you can allow through the app store. What does that mean? You go to Netflix, and from Netflix, you can give your phone number, and they send you a link, which downloads effectively the Netflix app front, just the logo, but when you click on it, it doesn’t take you to the app, it takes you to Netflix like that would be an easy workaround for this.

And then in theory, once you signed up, you might say, geez, now I’m a member, I’d prefer to have the app directly. That’s actually something that’s technically possible to do. But it violates terms and services, you can do that while you’re testing an app in the App Store. I do think there are remedies here. But Matt, let me ask you, who is this going to help?

Matt Cochrane  46:02  So there’s actually a lot of companies that it helps and you just think about companies that make their money through apps, right. So, like they sell a lot of subscription services for like their their dating services and matchmaking services and things like that, um, you know, Tinder, you can subscribe to a premium service. is going to benefit greatly. And you know, you already see their stock up. Zynga, the mobile game publisher. There, they make 50% of their revenues from the Apple App Store. So this is a huge benefit to Zynga.

There’s other video game publishers like Activision, like they just rolled out their Call of Duty mobile game, you know, they have several other mobile games, I think 15% of their revenue comes from the Apple App Store. So gaming companies, especially like when you think about mobile games, so Zynga, Activision. Activision makes Candy Crush. But anybody who who makes money through the app store, now, Apple’s not going to be taking, or doesn’t have to take the 30% cut, they have to allow these, these game makers, these other apps to allow alternative means of payments. That’s a huge, huge bonus to these types of companies.

Dan Kline  47:06  So Maxx, Apple was first here, but Google, which again, isn’t a fully walled garden, is pretty much a walled garden, unless you’re on like an Amazon device or something that’s, that’s sort of just using a port of Android. Do you think the next logical step is that this is going to impact to Google or Android and then to an extent Microsoft, which, in the limited Windows world also has, you know, similar things when it comes to apps and downloads?

Maxx Chatsko  47:35  Wait, Matt knows more about this than I do. But again, I think like taking a cut isn’t the issue. It’s the fact that there’s no alternatives. If there are alternatives, then I don’t think anyone’s gonna care of the, you know, the App Store or Google Play is taking a cut. But there have to be alternatives available. Right? And that’s, that is like one of the key, you know, anti-competitiveness is really like what all these antitrust concerns come down to. And some of them again, like Matt says, are kind of silly and frivolous and political. But some of them do really make sense. Like, if there’s no alternatives. Yeah, there’s probably gonna be an issue there.

Dan Kline  48:11  Let me ask both of you the question, Matt, you go first. If I click on your app through the app store, and this new ruling, doesn’t say you can’t use Apple’s payment system, it says that Netflix or whoever is allowed, or Spotify as we’re going to comment on, can direct you to a third-party payment platform. That third party is actually going to be more awkward because it’s going to be web-based instead of app-based where your iPhone pre fills everything, and it’s really easy to do. But Matt, if I start at the App Store, do you think Apple should be getting a cut of some sort? Even if the transaction happens in a third-party way?

Matt Cochrane  48:50  Alright, um, I don’t know. That’s a loaded question. I don’t know. I mean, honestly, I haven’t thought through that enough. So let me take a pass. But I don’t know if it’ll be more awkward. Dan, like, I think PayPal and there’s plenty of other like payment methods that are very frictionless and seamless. So I don’t think it’ll be as awkward as you say, like, I think PayPal or CashApp or Venmo. I mean, there’s a million payment methods that are really easy to do now. So it’s not like Apple Pay is the only one which would be really easy to do. You have a PayPal button. If you have one-touch PayPal set up on your phone. Like it, you just press a button and it’s done.

Dan Kline  49:24  Maxx, any last words on this topic here?

Maxx Chatsko  49:27  No, I mean, you know, I think, again, like trying to direct people to websites from your phone, the whole point of having a phone is that it’s, you know, native to that device. So that’s the point of having apps. And so again, like, you know, I think things are gonna have to stay in the apps and the workaround as kind of everyone’s agreeing, I think, is to have alternatives available for payments or downloading apps or whatever it is.

Dan Kline  49:48  It’s important to note that this ruling actually just creates what I just described. It does not force Apple to put like a Shopify or a PayPal pay button. It allows the app and what Netflix has been doing is they just don’t allow you to subscribe to Netflix through an iPhone. So there’s basically a screen that comes up that says, hey, not a subscriber, we know this is inconvenient, but you have to leave your phone and go to and go to a browser, what they’ll be able to do is bring you to the web page where you enroll, and obviously, that is easier some places than others.

You know, I don’t think that’s going to be a big boon for small apps that don’t integrate all of these payment methods. But Matt, you are right, that the Netflix’s of the world might be more willing to pay, you know, 2.5%, or whatever the number is, they can probably negotiate lower to Shopify or Square or Venmo or Zelle, or CashApp or they’re there a lot of them.

Or other payment methods are Amazon pay or whatever else it might be. We are running out of time, we appreciate how many of you played along we appreciate how many questions and comments we got. I appreciate Matt and Maxx, for turning on a dime, we were going to talk about Amazon’s new TVs. Maxx wasn’t even going to stick around. But instead, we did a completely different second half of the show.

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