Since introducing the App Store in 2008, Apple has run it the same way in 175 countries, up to 30 percent of the commission it has collected for each app sold.
The company calls the result a financial miracle. The store has generated more than $1 trillion in sales, helped create more than seven million jobs, and earned Apple billions of dollars in annual profits.
But as the App Store approaches its 16th anniversary, a patchwork of local rules is upending Apple’s hold on it.
On Thursday, European Union regulators will begin enforcing the Digital Markets Act, a 2022 law that requires Apple to open up iPhones on the block to competing app markets and alternative payment systems for in-app sales.
The changes follow similar demands in South Korea and the United States, where Apple has been forced to allow alternative payment processors. Similar concessions are being discussed in Britain, Japan and Australia.
The rules break what was once a single store into a patchwork of digital stores across national borders. The once-uniform experience of buying software on an iPhone now differs, depending on where people live.
“The App Store is completely collapsing,” said Eric Seufert, who invests in app makers and runs Mobile Dev Memo, a blog about the app economy. “The approach to compliance is quite similar: ‘Let’s lower the end a little bit.’ But it’s pain.”
Apple has worked hard to adapt to the changing regulatory landscape. An Apple spokesman said the company had spent months talking with the European Commission about the Digital Markets Act and hosted meetings with developers as it developed plans to change the App Store while minimizing the risks of malware, fraud and iPhone fraud.
Apple says its control over the App Store is critical to the safety and quality of the apps it distributes. The company has stopped giving up the 30% commission. But over time, it has made some concessions to developers and regulators by reducing commissions paid by smaller app makers and allowing developers to link to their websites to charge users directly for subscriptions.
The changes are expected to sting Apple’s sales and lower profits. Last year, the App Store brought in about $24.12 billion in revenue, according to Bernstein Research.
When the App Store first appeared, Steve Jobs, Apple’s co-founder, said the fee was a “big deal” because it allowed any developer — big or small — to deliver software to every iPhone. But for years, Apple’s fees have been a point of frustration for developers. Over time, regulators began to listen to these complaints.
In 2019, Spotify filed a complaint against Apple in Europe, accusing it of anti-competitive practices for preventing music streaming services from advertising where and how users could subscribe to their app. A year later, Epic Games, the maker of Fortnite, filed a lawsuit in US federal court accusing Apple of violating antitrust laws by forcing developers to use its payment system.
The complaints prompted developers around the world to start pushing for changes to the app economy. In 2021, South Korean lawmakers were among the first to respond by passing legislation forcing app store operators to allow alternative payment systems. Apple relaxed its requirement that developers use its in-app payments service, but said developers who used alternative services would owe Apple a 26 percent commission on sales.
Developers argued that the new commission rate is the same as the 30 percent rate after credit card processing fees are added. Their criticism resonated with regulators in South Korea, who said Apple’s plan undermined the goal of the law. The country’s telecommunications regulator said it may fine Apple $15.4 million for “unfair practices.”
Apple said it disagrees with the conclusion of regulators in South Korea and believes its changes comply with the law.
The company took a similar approach in the United States. During Epic Games’ lawsuit, Tim Cook, Apple’s chief executive, said that being forced to offer alternative payment systems “would be a mess.”
“We would have to find another system to charge developers,” he said, adding that Apple would still charge a commission.
The federal judge in the case ruled in 2021 that Apple had to allow alternative payments in the United States. Apple largely complied as it did in South Korea, except it said developers who used alternatives were owed a 27 percent commission.
“Clearly, this is window dressing,” said Colin Kass, an antitrust attorney with Proskauer Rose, who is not involved in the case. “Does it satisfy the court? It can.”
Apple said the judge had upheld its right to charge a commission and that its settlement fulfilled the judge’s request to allow in-app purchases. Epic said it planned to file a lawsuit challenging the 27 percent fee and asking the court to intervene.
In 2022, the European Union passed the Digital Markets Act to introduce competition to the App Store on iPhones, among other changes. Apple had two years to comply.
The company’s engineers have spent thousands of hours creating more than 600 new software tools for developers. In January, the company unveiled those tools and outlined three options for app makers in the European Union, home to about 450 million people.
Under Apple’s plan, developers could remain in the status quo App Store system and pay up to a 30 percent commission on sales. They could cut their commission to 17 percent by adding a new fee of 50 euro cents to every download over one million a year. Or they could avoid Apple’s commission by selling through a competing app store while still paying the download fee.
Apple said the plan was in line with the law and meant 99 percent of developers in the European Union would have their fees reduced or maintained.
But app makers said the plan violated the letter and spirit of the law. Under the new rules, a tech giant like Apple is supposed to allow app makers to sell subscriptions and services outside of their apps “for free,” said Damien Geradin, a European antitrust lawyer who advises app developers. He said Apple’s 50-cent fee and 17 percent commission violated that part of the law.
European regulators won’t weigh in on Apple’s proposal until after Thursday’s effective date. If they open a formal investigation, it could start a lengthy legal battle that could force Apple to change or risk fines of up to 10 percent of its global annual revenue, which was nearly $400 billion last year.
Mr Geradin said Apple was unlikely to succeed but, in the interim, could continue to collect commissions.
“It’s part of their tactics,” he said.
