This article is part of a series that will discuss the dynamics around APIs, integrations, and fees in the SMB world.
Apple’s growth has slowed. This has left many analysts questioning how Apple will continue to find the upside its investors seek. Apple has even recognized this problem and is changing how it intends to report its financial results, obscuring its weaknesses. And frankly, we can’t blame Apple for its conundrum: sans mining asteroids for precious metals, it’s really hard to find 10%+ annual growth in a ~trillion-dollar company.
What Apple has said is that they expect to find the needed growth in their Services business unit. Comprised of the App Store, Apple Music, iTunes, and Apple Pay, Apple’s Services revenue is the second largest contributor to their overall revenue, and it grew 24% over the last year to $37B.
While Apple technically doesn’t break out the revenues for each Services division, knowing that Apple has paid out more than $100B to its App Store developers since inception lets us approximate that Apple has netted itself $43B over a 10-year period.
How did Apple earn their $43B in App Store fees? Well, it was previously done 30% at a time: for every $10 a consumer spent on an app subscription Apple would take 30%, or $3 worth. Apple would manage the payments, the “certification” to their app store, as well as the distribution. For this “value” Apple decided it deserved 30% of all ongoing revenues.
In June of 2016 Apple changed their fee structure and now takes 30% of the first year’s revenues and 15% thereafter. This move stands in contradiction to Apple’s current effort to find Services growth, though we doubt Apple knew their iPhone sales would slow so dramatically when they relaxed their fee structure in 2016.
So what’s Apple to do?
You might expect Apple to revert back to its old commission structure at a minimum. Beyond that one could reasonably prognosticate that Apple might charge even higher commissions to its app developers, or maybe even charge every app in their app store some fee regardless of app cost.
There’s only one slight hiccup with this thesis, however.
U.S. Supreme Court justices appeared open to letting a lawsuit proceed against Apple Inc that accused it of breaking federal antitrust laws by monopolizing the market for iPhone software applications and causing consumers to overpay.
The lawsuit said Apple violated federal antitrust laws by requiring apps to be sold through the company’s App Store and then taking a 30 percent commission from the purchases.
The iPhone users, including lead plaintiff Robert Pepper of Chicago, have argued that Apple’s monopoly leads to inflated prices compared to if apps were available from other sources.
We’ve found the most thoughtful response on this matter coming from Fred Wilson, a prominent venture capitalist. His full thoughts can be found on his blog, though we’re pasting the relevant snippets below since we agree with his thoughts.
1/ Apple argues that consumers cannot bring suit against them as it is the app developers who are the harmed party if there is one at all. I don’t agree with that for two reasons. First, developers pass the increased costs on to the consumer. Second, the developers are not going to attack Apple because they are their only way to get to market.
2/ Apple argues that a decision against them will harm the broader e-commerce market. I don’t agree with that either. If anything, opening up the distribution system for mobile applications would massively increase the e-commerce market which is artificially constrained by Apple and Google’s mobile app store monopolies. I wrote a bit about that earlier this year.
3/ The US Chamber of Commerce did write a brief in support of Apple in which they argued that “The increased risk and cost of litigation will chill innovation, discourage commerce, and hurt developers, retailers and consumers alike.” I cannot disagree with that statement more. Innovation flourishes when there is an open market where no one party can control what can be sold. Apple routinely prevents innovative new apps from being sold in their app stores. A good example of that right now are crypto-based games and other applications that threaten Apple’s 30% take rate on digital goods business model.
Apple and Google have constrained the distribution system for mobile apps in many parts of the world and the result is higher costs for consumers, less choice, and ultimately less innovation. None of this is good for the economy.
Fred Wilson, AVC
As we touched upon with the antitrust filing against Shift4, the heart of the matter is this concept of market power. Amazon has long-evaded antitrust verdicts because they use their dominant position to decrease costs for consumers, as does Walmart. Apple, conversely, seems to be using its heft to increase consumer costs by slapping a 30% tariff on all goods moved across its App Store. For example Spotify, a music software company that competes with Apple Music, has filed a complaint to the European Commission because Apple Music doesn’t charge itself the 30% Apple tariff when putting music in front of Apple consumers, thereby making its product materially cheaper.
So can Apple legitimately claim that their costs to support their App Store were anywhere close to the $43B in fees they’ve raked in?
We doubt it.
The Supreme Court will again take up Apple’s case in the summer of 2019, but the early implications for merchants needing or using POS systems are enormous.
Not unlike mobile phones, POS systems are necessary business devices these days. They manage your financials, tax reporting, labor scheduling, and many other critical business operations. So wouldn’t it make sense that merchants should choose a POS that gives them broad and unmetered access to extensibility and optionality? That the POS should be a conduit to help merchants be more successful?
We know, crazy idea.
Yet some POS companies don’t see things this way, and this is particularly scary in the world of cloud POS where merchants have no local data available to work around their POS overlord should they find that they have chosen the wrong POS provider by not doing their research.
Speaking plainly, legacy POS systems stored a merchant’s transaction data on a local database. If the merchant needed a solution – let’s say loyalty – they would seek out a solution provider. Maybe their legacy POS supplier had their own, much shittier loyalty solution and therefore refused to approve third party loyalty companies because it would mean the merchant wouldn’t choose the POS company’s solution, losing them revenue.
Well, under that model the merchant would flip their legacy POS company the finger and the loyalty provider of their choosing would integrate to the merchant’s POS database directly, giving the merchant what they needed.
Fast forward to cloud POS and that local data doesn’t exist: the data is stored on the cloud. So there’s no reasonable way for our third party loyalty provider to access the necessary data without the POS company’s blessing – even if the merchant prefers the third party solution and even if that solution is 100x better than the pile of shit offering from the POS company (because remember, POS is hard and POS companies cannot build everything themselves, at least well).
This is especially concerning to us, and it’s obviously a concern to a number of parties that are taking a similar view to Apple’s App Store shenanigans.
What happens if a merchant chooses the wrong POS? And even further still, what POS companies have open integration models today? Can a merchant reasonably expect that their POS provider won’t make a business model change and start screwing them?
In the absence of being a deity we can only look at past behaviors to predict future ones. We’ve lent some color to this issue before, at least as it related to restaurant POS systems. If one were to build a scale from Open to Closed you could find no worse offenders than the large legacy POS company NCR (note: Micros now has open APIs. Great job being the only large POS who doesn’t, NCR.) Many of the smaller legacy POS companies likewise suffer from a closed integration perspective but these offenders are slowly being put out of business.
The smaller legacy POS companies acquired by Global Payments and Shift4 are being modernized and are moving towards open APIs. Maybe that changes but we feel pretty good about their current trajectories. At least for now.
A bit of the unknown are the venture-backed cloud POS companies. As was evident with Lavu POS and more recently with Lightspeed, these POS companies need to earn a return for their investors. Too often that looks like closed ecosystems and monopolized product stacks. Depending on the financial success of their core POS business lines, closed integrations might be right around the corner for a few of them.
We will need to watch this closely as the market develops. And merchants should as well. But they won’t, even though POS is the most important IT investment they’ll ever make.
Don’t you just love brick and mortar?
