Back in August, Netflix (NASDAQ:NFLX) was testing removing in-app subscriptions on iOS devices. At the end of 2018, it pulled the plug entirely for new and returning subscribers. New sign-ups now have to enter payment information via a web browser instead of subscribing in the app. Netflix removed the option to subscribe in-app on Android devices in May.
Apple (NASDAQ:AAPL) and Google, the Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) company, take 30% of all in-app subscription revenue for the first year of a subscription. That falls to 15% in subsequent years.
Removing in-app subscriptions will save Netflix hundreds of millions in distribution expenses over the long term.
How much could Netflix save?
It's important to note that existing subscribers won't see any changes to their existing billing methods. Netflix subscribers paid $853 million through the Apple App Store in 2018, according to data from Sensor Tower.
If all of those subscribers keep their subscription in 2019, Apple won't see much negative impact. Of course, subscribers tend to cancel subscriptions from time to time, or switch from iOS to Android (and vice versa).
What's more telling is that gross sales through the App Store grew $343 million over 2017, which was up $295 million from 2016. And the incremental growth doesn't show the entire picture of how much of that gross revenue is from new sign-ups.
If it hadn't made the decision to stop new sign-ups from subscribing in-app, Netflix would have likely added $350 million in gross subscription revenue via the App Store in 2019. Based on that estimate, the decision will save it $105 million in distribution fees it would have otherwise paid Apple in 2019 alone.
Revenue from iOS devices is considerably higher than revenue from Android. Google Play subscribers generated $105 million in gross revenue for 2018. That was affected by Netflix's decision to remove in-app Android subscriptions in May, and that number is now declining.
It's no surprise that Apple generates the bulk of in-app subscriptions for Netflix. Apple customers are, on average, more affluent than Android users, and Netflix is a premium product in many parts of the world. As a result, removing in-app subscriptions from iOS has the potential for much greater impact on Netflix's bottom line.
What gives Netflix the confidence to ditch Apple?
Removing in-app subscriptions for new sign-ups doesn't come without risks. Requiring users to go through a web browser and enter their payment information produces a significant amount of friction in the process, which could result in some potential customers abandoning their original plans.
That's why Netflix took the steps to test how users react back in August. Apparently, management liked what it saw, and abandonment wasn't a significant issue. Even losing a small percentage of customers due to increased friction is worth it for Netflix to save the commission it pays Apple.
On the other side of the equation, though, is an increased force driving users to sign up. That's Netflix's investments in its content library and marketing. As Netflix fills out its content library with new originals and licensed content, particularly in international markets, users are more inclined to take the extra step to sign up. But it needs to spend more on marketing, too, to inform non-subscribers of all the benefits of signing up.
While Apple and Google are excellent distribution partners providing a meaningful service to most subscription apps, Netflix has outgrown them. With over 130 million paid subscribers, a $2 billion marketing budget, and an $8 billion content budget, Netflix can afford not to pay the distribution tax to Apple or Google.
In fact, with its spending so high on marketing and content, it might be that Netflix can't afford to keep paying Apple and Google.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Alphabet (C shares) and Apple. The Motley Fool owns shares of and recommends Alphabet (A and C shares), 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.