It's been about a month since Apple (NASDAQ:AAPL) launched Apple Arcade, the mobile gaming subscription service that gives subscribers unfettered access to a growing catalog of premium games. Apple Arcade was just extended to the Mac following the release of MacOS Catalina this month. The company offers a one-month free trial, which means that many consumers are now contemplating whether or not to keep the service, which can be shared within a family, for $5 per month.

But if Apple Arcade is too successful, does the company risk cannibalizing one of its most lucrative businesses?

The Apple Arcade logo on various Apple devices.

Image source: Apple.

The App Store's biggest moneymaker

Within the broader market for mobile apps, gaming is huge. Games represent the bulk of mobile consumer spending by far. For example, Sensor Tower recently estimated that mobile games generated $9.8 billion in gross revenue in the App Store in the third quarter -- 74% of total app spending, which includes premium apps and in-app purchases, as well as subscriptions.

Many developers now rely heavily on the all-too-familiar freemium business model, offering the game for free initially and relying on in-app purchases of digital content or in-game virtual currencies for monetization. That's led to a decline in quality, according to critics, as many developers now just try to get users addicted so they'll keep opening their wallets. That's also made it hard for some developers of premium titles to compete, as many users balk at spending a few dollars up front.

Apple Arcade is designed to address some of these criticisms. All of the included titles are ad-free and devoid of any in-app purchases. It's clear that Apple wants to incentivize developers to create higher-quality games that push creative boundaries instead of just looking for a quick buck selling digital consumables.

Sacrificing revenue for paid subscriptions

But Apple earns a 30% cut of all those digital content sales, which has contributed to growth in its important services business. More recently, the company has turned its attention toward growing the number of paid subscriptions it has across its platforms. Apple had 420 million paid subscriptions at the end of the second quarter, and earlier this year publicly set a goal of hitting 500 million paid subscriptions at some point during 2020.

Chart showing Apple's paid subscriptions

Data source: Apple. Chart by author.

Apple Arcade offers an incredibly strong value proposition, so much so that the service could potentially dissuade spending on mobile games outside of the service. To the extent that mobile gamers shift their playing to Apple Arcade instead of other games, that could take a bite out of services revenue growth. Is Apple willing to sacrifice revenue for the sake of growing paid subscriptions?

Apple Arcade has the potential to upend the economics of the mobile gaming market, offering a new revenue model that could reshape the industry, for better or for worse. To be clear, Apple has never worried much about cannibalization, trusting that if the company does right by customers, the financials will take care of themselves.

"If you don't cannibalize yourself, someone else will," Steve Jobs once famously said.