Please ensure Javascript is enabled for purposes of website accessibility

Netflix Is Growing Weary of the Apple Tax

By Evan Niu, CFA – Updated Aug 22, 2018 at 3:46PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The video-streaming leader would rather bill subscribers directly.

It's now been nearly three years since Netflix (NFLX 0.41%) started offering in-app subscriptions through its mobile app available on Apple's (AAPL 1.92%) App Store. The video streamer had held out for five years, as the 30% cut that Apple takes can easily be the difference between economic viability and unsustainability. Apple restructured its fee structure in 2016, and it now reduces its cut of subscriptions to 15% after the first year, encouraging developers and third-party service providers to nurture long-term relationships.

Netflix, which has over 130 million total memberships around the world, is growing weary of Apple's cut.

Netflix interface in English

Image source: Netflix.

Cutting out Apple's cut

TechCrunch reports that Netflix is "testing" a way to cut Apple out of the loop in 33 countries. When members in those specific markets are up for renewal, Netflix is redirecting them to renew outside of the app, bypassing Apple in the process. Netflix confirmed to the outlet that it has been running and expanding the test since June, which will last until the end of September. The move follows a similar one where Netflix stopped supporting Google Play billing in May, likewise cutting the Alphabet subsidiary out.

While Netflix is still very much in growth mode, that growth is slowing as the company's membership base continues to swell. It would make sense if the company is incrementally shifting its focus away from member growth and toward profitability. Netflix's net margin over the past 12 months is a mere 3.5%.

What's less clear is how many of Netflix's members bill through third-party platforms as opposed to direct billing, as that mix would determine what overall kind of cost savings Netflix is pursuing. Netflix has famously low churn rates and the vast majority of subscribers are in it for the long term -- meaning that Apple's 15% cut of long-term subscriptions adds up over time.

When a distributor becomes a competitor

Spotify Technology (SPOT 2.00%) has been down this road before. The Swedish music streamer's solution was to charge subscribers an extra 30% when they signed up through Apple, compared to the regular $10-per-month price for subscribers that sign up directly with Spotify. The premium merely offsets Apple's cut, but Spotify no longer supports in-app subscriptions for new subscribers. The company has argued to regulators that Apple's practices are anticompetitive.

The big difference is that Apple is a major competitor to Spotify, but it does not compete directly with Netflix -- yet. Apple is building its own video-streaming service that will be chock-full of original content. CEO Tim Cook said in July that Apple is "not really ready to share all the details of it yet," but once the service launches Apple will be competing with Netflix. That will put Netflix in the same position that Spotify now finds itself in, where one of its most important distribution channels is also a worthy rival.

As a platform operator, Apple is able to glean all sorts of useful information about where the market is heading. "There are -- within the 300 million-plus paid subscriptions, some of these are third-party video subscriptions, and we see the growth that is going on there," Cook said. "It's like 100% year over year."

So not only does Apple get a cut of those subscriptions, it also gets competitive insights that can shape future strategies and offerings. I'd be weary -- and wary -- too, if I were Netflix.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of Apple, Netflix, and Spotify Technology. The Motley Fool owns shares of and recommends GOOG, GOOGL, Apple, and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.