The U.S. Supreme Court is expected to allow an antitrust lawsuit to move forward that could force Apple to cut its 30 percent transaction fee it charges software developers who sell apps through iTunes and its App Store. The final ruling could potentially impact the music and media streaming landscape as we know it -- and endanger Apple’s future plans to expand its services business.
Oral arguments for Apple Inc. v. Pepper (17-204) -- in which a group of iPhone consumers have accused Apple of monopolistic practices with respect to restricting market activity in its App Store -- were heard Monday (Nov. 26) in Washington, D.C., with the federal court expressing near-unanimous, bipartisan support for the consumers’ right to sue.
Apple first implemented its 30-percent commission on app transactions in February 2011, shortly after its App Store officially launched to the public. In June 2016, the tech behemoth modified its commission slightly, such that it would take 30 percent of first-year subscription revenue but only 15 percent of renewal revenue in subsequent years.
To this day, the App Store continues to maintain strict terms of service that are intended to keep subscription payments within the iOS ecosystem, so that Apple can continue to get a lucrative cut of user payment activity. “Apps and their metadata may not include buttons, external links, or other calls to action that direct customers to purchasing mechanisms other than in-app purchase,” read the terms. What’s more, multi-platform services (e.g. almost every media streaming service) “must not directly or indirectly target iOS users to use a purchasing method other than in-app purchase, and your general communications about other purchasing methods must not discourage use of in-app purchase.”
This tight price control in a sprawling app marketplace -- which spans 2.1 million apps as of 2017 -- is in part what has allowed Apple Music to become one of the fastest-growing music streaming services in the world, surpassing 50 million registered users within three years. Apple Music subscribers often cite deeper integrations with Apple’s wider device and services ecosystem as a key reason why they stick with that offering versus switching to rivals like Spotify and Amazon Music, which maintain similar catalogs.
Apple’s music-streaming rivals have been among the most vocal critics of the 30 percent transaction fee. In 2011, Rhapsody (now Napster) issued a statement arguing that the fee was “economically untenable” for its streaming business, especially on top of the licensing fees the service was obligated to pay to artists, labels and publishers.
Spotify later followed suit: just days after Apple Music officially launched in 2015, the Swedish platform was running email campaigns urging users to shut off auto-renewing subscriptions through iTunes and instead to transfer their account to Spotify.com in order to save $3 every month.
When Apple changed its year-two subscription commission from 30 percent to 15 percent, internal execs positioned the change as incentivizing longer-term user relationships for smaller developers who might not have made enough income from one-off downloads alone. But Spotify’s vp/head of content and marketplace policy Jonathan Prince claimed in a statement that the announcement “doesn’t get to the core of the problem ... Unless Apple changes its rules, price flexibility is prohibited, which is why we can never provide special offers or discounts, and means we won't have the ability to share any savings with our customers.”
In fact, Apple’s App Store puts almost every rival music streaming service at a pricing disadvantage, forcing them to tack on Apple’s 30 percent transaction fee as an extra cost to the end user.
For instance, Pandora Premium, Deezer Premium, YouTube Music, SoundCloud Go+, Tidal, iHeartRadio All Access and Napster Premier each normally charge $9.99/month for subscriptions, but raise their prices by 30 percent to $12.99/month for purchases through iTunes and iOS. Similarly, Tidal HiFi normally costs $19.99/month, but increases its price by 30 percent to $25.99/month for Apple-owned channels.
Amazon Music has been less aggressive with price changes, raising prices only 10 percent for an Amazon Music Unlimited subscription through Apple, from $9.99/month to $10.99/month.
Spotify and Google Play Music are the only major music services that prohibit iOS users from upgrading to premium within their respective apps. Free Spotify iOS users who try to upgrade to Premium are greeted with a succinct message: “You can’t upgrade to Premium in the app. We know, it’s not ideal.” Below the message is a call-to-action button labeled “Learn More,” which redirects users to a separate transaction page for Spotify Premium on the web -- presumably violating Apple’s terms of service (see screenshot below).
Because Spotify is the global market leader when it comes to paid streaming -- reporting 87 million subscribers as of Q3 2018, versus Apple Music’s 50 million -- the former may be more willing than its other competitors to create friction for user payments in exchange for a greater return, especially as a public company with shareholder pressures.
Google Play Music doesn’t even tell its free iOS users how to upgrade at all. Instead, the app simply indicates that users need to “subscribe to download and listen offline,” without any additional hyperlinks or instructional resources on how to proceed. According to its website, the only two ways to purchase a subscription to Google Play Music are through Android devices or through the Google Play store on a web browser.
Meanwhile, cheaper subscription tiers with limited functionality usually absorb some or all of Apple’s transaction fee behind the scenes, keeping in-app user surcharges to a minimum. For instance, iHeartRadio Plus and SoundCloud Go are each only 20 percent more expensive in the iOS App Store versus on other channels ($5.99/month versus $4.99/month, respectively). Pandora Plus, which also normally costs $4.99/month, has no price hike in iOS environments.
In addition, many new services devoted to podcasts, international music and niche genres -- all of which are considered among the highest growth areas for music streaming -- choose not to transfer Apple’s transaction fee to the end user. In podcasting, while TuneIn Premium costs 25 percent more through iOS ($9.99/month versus $7.99/month), the majority of other apps like Overcast Premium and Slacker Radio Premium opt not to raise prices. Genre-specific offerings like IDAGIO and Primephonic for classical music, as well as fast-growing international players like Anghami Plus and Hungama Pro, also keep their iOS prices consistent with those in Android and web environments.
Why would smaller music apps with high growth potential, as well as bigger players like Pandora and Amazon, opt to sacrifice such a significant portion of their monthly revenue to Apple, a major competitor?
One potential answer is that the App Store provides valuable mass-market exposure to underdog apps and developers, and user acquisition remains a costly challenge even for the most seasoned companies. For instance, Spotify revealed in 2016 that it takes 12 months for revenue from a newly-minted Premium user to recuperate the platform’s costs of hosting them as a free user.
If the Supreme Court rules against Apple’s 30 percent fee, Apple Music’s competitors would no longer have to make a choice between reducing friction for their iOS users and relinquishing a sizable portion of their revenue -- and could potentially gain a stronger footing in the App Store as a result.
Some companies need this push more than others. Spotify is the most popular free music streaming app in the iTunes store, but ranks only No. 37 for total gross revenue. In contrast, TIDAL, iHeartRadio and Amazon Music are all in the Top 50 highest-grossing apps in the iTunes Store, but have not even broken into the top 100 free apps and still trail behind on overall market share. Pandora is ranked both the 24th most popular free app and the fourth highest-grossing app on iTunes, giving the company an edge over the competition despite its downward trend in active users.
Yet the deeper implications of the Supreme Court’s decision may be arguably less about empowering Apple’s competitors, and more about endangering Apple itself.
Over the past few years, Apple has been trying to evolve its business model from hardware-only into a diversified range of services. CEO Tim Cook declared in 2017 that the company’s overall services revenue is set to double by 2020. The iOS App Store is a key motor behind this wider transition to services: analysts estimate that the iOS App Store generated $22.6 billion in worldwide gross app revenue in the first half of 2018, nearly double that of Google Play.
But without a 30 percent safety net, analysts say Apple will face more pressure from shareholders to maintain margins in its other services verticals, including but not limited to Apple Music -- which, like every other streaming service, is struggling to turn a profit.
“Apple trades on being a high-margin business, but most of the content markets in which Apple could or does compete -- including music and video -- are relatively low-margin digital businesses,” Mark Mulligan, managing director of MIDiA Research, tells Billboard. “The tension is that the more that Apple pushes towards services revenue, the more its margins are at risk. Apple’s get-out-of-jail-free card is its app business, which is very high-margin and accounts for the vast majority of its services revenue. The 30 percent premium on subscriptions makes a significant contribution to that. With that premium potentially going, Apple will feel increased pressure on maintaining margins in its services business.”