As Spotify, the world's largest streaming music service, and Apple (NASDAQ:AAPL) quarrel over App Store policies, the tech giant's powerful competitive advantage is on display -- a complete end-to-end ecosystem including hardware, software, services, and a massive user base. Thanks to this comprehensive ecosystem, Apple Music has some key advantages over Spotify, and Spotify probably won't be able to do anything about it.
Earlier this week, Spotify attacked Apple with some strong words. "[W]e cannot stand by as Apple uses the App Store approval process as a weapon to harm competitors," said Spotify general counsel Horacio Gutierrez in a letter to Apple on June 26 (via Recode).
Spotify's frustration with Apple is sourced from the larger tech company's decision to block a new version of Spotify's iOS app, which Apple deemed was attempting to circumvent Apple's billing systems, instead directing new customers outside the app to sign up for the paid version of the service. If this really is what Spotify is trying to do, the move would allow Spotify to acquire new subscribers through iOS without having to pay a 30% commission to Apple.
"This latest episode raises serious concerns under both U.S. and EU competition law," Gutierrez asserted.
Apple shot back with a letter of its own, saying Spotify is "asking for preferential treatment."
Apple general counsel Bruce Sewell explains: "Our guidelines apply equally to all app developers, whether they are game developers, e-book sellers, video-streaming services or digital music distributors; and regardless of whether or not they compete against Apple. We did not alter our behavior or our rules when we introduced our own music streaming service or when Spotify became a competitor."
Sewell also was sure to emphasize that the company has "recently introduced a new revenue split for subscriptions designed to help all developers keep even more of their service revenue stream." He continued: "Within a subscriber's first year, the traditional 70/30 split applies, but after a year of paid service with a subscription, an 85/15 share split kicks in. All current subscriptions are eligible -- if developers have subscribers they have already retained for over a year, the 85/15 split starts immediately."
Apple's competitive advantage
Beyond this very public quarrel between Spotify and Apple, there's an even more interesting storyline -- one that emphasizes the tremendous power of Apple's ecosystem.
As the company that made iPhone, iOS, and the App Store, Apple understandably has some control over the user experience and ultimately deserves a cut of revenue from customers acquired through its iOS devices. Further, Apple should obviously be able to promote its own apps on the device -- apps that, of course, won't have to give up the same cut since they're available for download on own Apple's own app store, or sometimes even pre-installed on the iPhone.
With over 1 billion active iOS devices, Apple's definitely has an advantage in some areas with its enormous and highly integrated ecosystem of hardware, software, and services. This ecosystem seamlessly ties together Apple's devices, the App Store, and its services, including its app subscription options for third-party apps.
But this isn't anticompetitive -- it's the reward of building your own platform. Whatever happens with Spotify's issue with Apple, third-party developers will have to continue giving a cut to Apple for the customers acquired through Apple devices. Yes, this means native Apple apps, such as Apple Music, may be able to charge less than the competition since they won't be shelling out the same commission to an app store. But if third-party developers built their own smartphone, operating system, and app store, they would get the same advantage.
Daniel Sparks owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.