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Will Apple Have to Make Big Payment Changes to Its App Store?

The company has made a small tweak in an attempt to take some regulatory pressure off.

September 7, 2021

The app store has been a bone of contention as Apple (NYSE: APPL) has made its devices walled gardens where there’s no way to get an app onto an iPhone or an iPad without going through the closely-controlled store. That has allowed the company to tightly control what apps appear on its devices and how those apps can do things like collect payments.

Some of those policies have received pushback from app-builders and even large streaming players and games companies. Those brands — as well as some smaller ones — want to collect payment in their app and don’t believe Apple should be entitled to an ongoing 15-30% share of that revenue. There have been members of Congress who agree with the idea that Apple has too much control and that could lead to some changes in how the app store operates.

Regulatory pressures  — albeit ones from outside the United States — did cause Apple to make a slight tweak to its payment rules in the app store. Now, content subscription apps (think Netflix or Spotify) can link from their app to their website to allow people to sign up for subscriptions which previously would have been grounds for removal from the app store.

It’s a narrow change, however, that does not affect games or many other kinds of apps. Has Apple gone far enough or will federal regulators step in? Maxx Chatsko and Matt Cochrane joined Dan Kline on the September 3 edition of “7investing Now” to look at what has happened and what may happen going forward.

A full transcript follows the video.

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Dan Kline: We’re going to talk about Apple again because there was some interesting news yesterday. Apple has tweaked its payment rules in its App Store. What does that mean? Well, traditionally, Apple takes a 15 to 30% cut of any transaction. So I download an app, let’s pick, I don’t want to pick the one we’re going to talk about here. That leads to funk now.

So when I downloaded WWE Network, if I had a subscription, I could download it and log into my subscription, Apple doesn’t get any money. If I didn’t have a subscription, and they wanted to enable me to get one on through Apple, Apple would get that cut. So some companies were doing workarounds. Netflix basically said, Hey, we know it’s inconvenient, but we can’t take you to our website. And we have to let you sign up. And now what’s happening is Apple is allowing you to go off site. So you leave the app, you go to a website, you can sign up. Matt, what are your initial reactions to this? This obviously wasn’t something Apple did willingly. It was something that they were forced to do for a variety of legal reasons.

Matt Cochrane  17:37  Right? Well, so they said they did it as a result of an investigation by the Japan Fair Trade Commission. So basically, Japan’s version of the FTC, and but they’re gonna make the changes globally. So look, I’ve been pretty vocal about most anti-trust action being taken against big tech companies. And I think most of it is, is a it’s just wrong. I think it’s like, you know, a lot of the cases have been dismissed, you know, by the judge, they don’t even go to trial. And I think I just think most of it is just wrong sided. They’re they’re bad solutions. I don’t think it’s good for innovation overall, or for the economy overall, for consumers.

That being said, I think, if you look at the presidental administration, Biden has has stocked the FTC and like his cabinet members, with people who want to go after big tech. And I think the biggest vulnerability is Apple’s App Store, and Google’s [Alphabet] (NASDAQ: GOOG) (NASDAQ: GOOGL) App Store, because they almost are like monopolies. Like Apple competes directly with services that because of the cost of acquiring their content, cannot like cannot bear Apples 30% fee. And Apple doesn’t let those services link to their websites for purchase like that. That just sounds like there is anti-trust case there. Um, so I think this is like Apple kind of making the bare minimum changes to like, kind of like get Japan off. Its back. But I think more is coming. And I think Apple and Alphabet are vulnerable here.

Dan Kline  19:02  So Alphabet does not have a fully walled garden. The only way you can install something on your iPhone, unless you jailbreak it, which invalidates your warranty is to go through the app store. You can add content to a Google-based device, not going through the store. It’s not always easy, but it is possible. So there are some differences here. I think the challenge, I ran a store and when you run a store, you’re selling items, and you’re making money on them. But you know that basically, the ones you choose to surface in places customers are going to see them, there’s some value to that. So that’s kind of why you’re getting a markup here.

With Apple, and Matt, I want you to weigh in here. I think the challenge is, if I go to the the App Store, and I type in, you know, app to record interviews, and it gives me five apps and I look at them and I picked the best one. Apple essentially did the marketing at surface something for me that I didn’t know. If I go into the app store and type in Netflix, I am not entirely sure Apple deserves 15 to 30 percent because obviously, the vast majority of Netflix customers do not get there by typing in streaming video service. They know what Netflix is.

So I wonder if some of this is just, it’s negotiating like anything else. We saw some of these new services like HBO Max, not debut on various platforms at launch, because they wanted better deals. I actually think this is more of a free market thing. Because Do you really think that Netflix customers would be like happy if it wasn’t in the app store because they couldn’t reach a deal?

Matt Cochrane  20:33 No, I don’t I just think like when Apple’s competing with the services and charges, like can charge advertising for their app store. Like I think it put them in a difficult situation where they don’t allow, like, competing ways to pay. It’s a good question. I don’t think like imagine if Google Search like, so you need a recording app. But you did it through Google search, and Google took and there was only one search engine you could use on your phone. There weren’t multiple search engines, just one. And Google took a 30% cut, because you’d showed up in the Google search column. I don’t know if that’s free market. I think it’s interesting, but I think this is a real vulnerability for both Apple and I think Alphabet too. But all the other thing I would say too, is like even this change that Apple made, and only applies to reader apps.

And reader apps are like magazines, newspapers, books, audio, music, and video. That doesn’t apply to games. So like the Epic, like, you know, with it’s also going on in Fortnight doesn’t apply. To a productivity app? Doesn’t apply. So there’s still a lot of things like this doesn’t apply to. And I just think Apple’s gonna be vulnerable here. Look, I think the Biden administration is going after big tech. And I think they made that clear with their appointments. And I think like, if there’s any low-hanging fruit for that, this would be it.

Dan Kline  21:49 it’s probably important to mention that there is bipartisan support for going after big tech for different reasons. And we’re not getting into those reasons, most certainly, but there is absolutely some fervor there. Look, the easiest thing for Apple to do here would be to end the walled garden. And the reality is, while you can get apps and I did when I when I was back in the app creation world, you can get apps onto a Google phone. It’s not that easy to do. So it’s not, you know, the average person is going to use the app store or one of the Google Play Store, whatever you call it there. Maxx. I have a question. It’s related to this. Sometimes you’re very techie. Sometimes you’re anti tech. Do you have an iPhone? Are you using like a jitterbug?

Maxx Chatsko  22:27  Yeah I have a flip phone, I use Nextel, Dan. Smoke signals. That’s how I text. No, actually, I have a question for Matt. We saw I think I saw and I just might be wrong. But wasn’t Microsoft going to eventually allow its operating system to be used on like Chrome OS? Wasn’t there’s some kind of like a cross-licensing deal going on there?

Matt Cochrane  22:47  The what platform is going to be used?

Maxx Chatsko  22:50  Wasn’t it? Were you gonna be able to use Windows on Chrome? Like offer like Chrome devices? Chromebooks? Is there like maybe a potential solution, there were all these companies are cross-licensing operating systems.

Matt Cochrane  23:00 So I think Microsoft has partnered a lot with a lot of companies, and that’s definitely since Nadella took over. That’s the direction they’ve gone in. I don’t know specifically, though, it’s like, on the Chrome OS or something.

Dan Kline  23:13  So since Satya Nadella or as our transcription service calls him, says, Hi, Nutella, took over Microsoft, he’s been very open about being willing to be cross-platform. So right now, we’re actually in the process of porting Android apps over directly onto windows. And Microsoft has been openly willing, I doubt your typical Chromebook could run at full windows. Now, that said, there are definitely thinned-down versions of Windows for lower-powered Windows laptops, for Internet of Things devices. So Microsoft has been gone from being one of the more walled garden companies where I think Office for Mac hadn’t been updated in like five years, at the point I worked there, which was, you know, six or seven years ago, or seven or eight years ago. To being a company that’s open to working with others. So we are going to move on here.

Matt Cochrane  24:06  And I would say like, it’s not a coincidence, either that like since Microsoft had done that, there are probably of all the big tech companies they’re the company that’s least in the crosshairs of government right now.

Dan Kline  24:18  That is definitely true. Max Lucas says the bet MGM app is not on Android and assume that is because they don’t want to give Google a cut. I would assume it’s because MGM and Caesars have for some reason been lagging the the also-rans in this space, and I’ve talked about this a lot. Eventually, if you’re the leader, and you don’t do something, you won’t still be the leader and that that huge edge you had and I’ve talked a lot about the edge Caesars and MGM have and having these massive players clubs. But I tried to place an online bet through the Caesars app while I was in Las Vegas and could not get it to work. That to me is a big weakness. So I wonder if they’re not on because they’re just not spending the time they’re just not seeing it as an opportunity. I actually hope that’s something that changes soon

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