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More Companies Are Bypassing Big App Stores, Costing Apple, Google Millions

More Companies Are Bypassing Big App Stores, Costing Apple, Google Millions

By Brian Fung, The Washington Post | Updated: 7 January 2019 17:05 IST

Highlights

Netflix's announcement could save it hundreds of millions of dollars
It was the latest firm to cut off a lucrative relationship for Apple
Spotify ended support for in-app subscription payments in 2016

A growing number of software companies are looking to bypass the dominant app store gatekeepers at Apple and Google - selling their services directly to consumers and undercutting the tech giants that for years have controlled how most of iPhone and Android users discover, download and pay for their apps.

The revolt is being led by companies such as Netflix, which became the latest firm to cut off a lucrative relationship for Apple when it confirmed that new customers will no longer be able to pay their monthly subscription fees through iTunes. Instead, subscribers are being redirected to make payments on Netflix's own website.

Netflix's decision follows that of another major online service, Spotify, which ended support for in-app subscription payments in 2016. And amid the explosive growth of its video game Fortnite, digital publisher Epic Games has said it intends to create its own app store for games in a bid to compete with existing online storefronts. The company already offers its Android app for Fortnite outside of the traditional Google Play Store.

Netflix's announcement could save it hundreds of millions of dollars and is potentially devastating for Apple. Through in-app payments, the iPhone maker currently takes a 30 percent cut of revenue from an app's first-year subscriptions, and 15 percent of revenue generated by long-term subscribers.

Apple made as much as $257 million (roughly Rs. 1,800 crores) from Netflix this way in 2018, according to estimates by Sensor Tower, a San Francisco-based market research firm. But as Netflix continues to grow internationally, Apple stands to miss out on up to half a billion dollars in 2019 from Netflix alone, said Randy Nelson, head of mobile insights at Sensor Tower.

"You have this app that is an incredibly popular app in terms of installs, but over time is going to be generating less and less revenue for Apple," Nelson said. "It puts Apple in an intriguing and interesting situation."

Netflix said in a statement that existing subscribers can still use iTunes to pay for their subscriptions if they choose.

"Apple is a valued partner with whom we work closely to deliver great entertainment to members around the world across a range of devices including the iPhone and Apple TV," Netflix said.

Apple and Google didn't respond to a request for an interview. Epic Games declined to comment. Spotify didn't immediately respond to a request for comment.

After Spotify transitioned customer payments away from in-app billing, Apple witnessed a sharp decline in the amount of revenue it received from the company, according to Nelson - falling from $11 million a month in April 2016 to barely $1.5 million a month by December 2018. (Sensor Tower says it produces its estimates by comparing, among other things, app store rankings and combining those with concrete revenue numbers it has in its possession.)

A similar dynamic affects the Google Play Store, Nelson said, which now receives no revenue from Spotify after it ended in-app billing there as early as 2014. Netflix followed suit in May 2018. Simply existing on either app store does not come with significant costs for the companies.

The shift by Spotify - and then Netflix and Epic - underscores the growing dominance of those firms in their own right. Netflix's position as the world's biggest provider of streaming video gives it the power to snub Apple's platform without sacrificing its visibility to potential customers. But a small-time developer with weaker brand recognition benefits greatly from being on Apple and Google's platforms, which can help customers discover new apps through promotion and marketing, said Doug Creutz, a game industry analyst at Cowen & Co.

"[Netflix and Epic] are two of the biggest entertainment products on the planet. They don't need the app store to help them sell their products," Creutz said. "Most software developers don't have that luxury. Most of them need the placement the app store provides."

Epic Games' runaway success with Fortnite has catapulted the publisher into a leading position. The company reportedly made $3 billion in profit in 2018, thanks in part to its hit game and the cultural phenomenon it has become. The experience, according to chief executive Tim Sweeney, has taught Epic how to build a better rival to the Play Store, the App Store and Steam, the game industry's leading equivalent of iTunes.

The idea to take a 30 percent cut of a developer's revenue and pass on the remaining 70 percent was a "breakthrough" in the earlier days of the internet, Sweeney told Game Informer last month. But as the digital economy matured and more developers began to offer software, he said, the platform companies have continued to extract the same amounts even as the costs of running an app store have fallen.

"The economies of scale have not benefited developers," Sweeney told Game Informer.

Epic Games has said its app store will be friendlier to software makers, trimming just 12 percent off their revenue. It launched last year for Macs and PCs, and is expected to launch as an Android app in 2019. But Epic has run into a barrier with Apple: The iPhone maker's fine print for the iOS App Store forbids apps that serve as marketplaces for other products, including apps.

The logjam means it could be some time before the Epic Games store becomes available for iPhones and iPads. More broadly, it highlights how Apple, famous for its control over every part of its ecosystem from the chips to the devices to the operating system, still retains a significant amount of influence over how the rebellion against legacy app stores may unfold.

Still, other factors could come into play to shift the balance. Massive content publishers such as Electronic Arts, Activision Blizzard and Ubisoft have all built digital storefronts in recent years that seek to draw users away from popular platforms such as Steam, build direct relationships with gamers and give the publishers greater control over their own intellectual property.

For now, those publisher-based app stores have largely focused on selling PC games and their in-game items. But Brian Nowak, an industry analyst at Morgan Stanley, foresees that model spreading to consoles and mobile devices. That could put pressure on legacy app stores to reduce their fees - not just at Apple and Google, but potentially at Microsoft and Sony as well.

"The big winners here are the video game publishers," Nowak said. "If the 30 percent mobile app store take rate went down, it really helps companies like Zynga."

The push to reject in-app payment systems by major software companies points to further troubles ahead for the tech industry amid fears of an economic slowdown. Shares of Apple plummeted Thursday as chief executive Tim Cook warned of slower iPhone sales, particularly in China. On a positive note, he said, revenue from business segments such as services - a category that includes the App Store - had grown compared to this time last year.

But as recent decisions by Netflix and Spotify may suggest, a wider revolt against in-app billing could take a growing bite out of that services revenue.

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