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Did Apple Just Make a Huge App Store Mistake?

By Adam Levy - Apr 3, 2020 at 6:55AM

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Amazon's latest Prime Video update revealed a new way to make in-app purchases.

Amazon (AMZN 1.12%) recently made a big change to its Prime Video apps in Apple's (AAPL -0.09%) App Store. Amazon customers can now buy or rent digital videos on its platform directly from the e-commerce giant without the need to pay through Apple's ecosystem.

That tiny change is huge news.

Amazon is stepping around the standard 30% commission Apple usually takes on in-app purchases -- and Apple has given it permission to do so. The iPhone maker has a special program for subscription services like Prime Video. "Customers have the option to buy or rent movies and TV shows using the payment method tied to their existing video subscription," the company said in a statement.

Apple's wording here is key. It's not opening the floodgates for video subscription services like Netflix (NFLX -1.37%) to skirt the App Store tax. And the program only applies to video services, so Amazon's Kindle app, for example, still doesn't allow in-app purchases.

But the fact that this program exists shows Apple's willing to play ball, and it's loosening the restrictions on its App Store, which has become a key growth driver for the tech titan's bottom line in recent years.

Screenshots from Apple's App Store.

Image source: Apple.

Why would Apple give up its control?

Apple's App Store has become a point of controversy over the last few years, as both app developers and consumers complain the company is exercising unfair monopolistic power with its pricing. In fact, the Supreme Court ruled iPhone users have the right to sue Apple over unfair pricing last year. The EU began an antitrust investigation after Spotify (SPOT -2.04%) lodged a complaint.

Both Spotify and Netflix have been vocal about why they don't allow customers to subscribe to their services in their apps. Other developers like Epic Games, the company behind Fortnite, have also pointed out Apple's monopolistic power.

So, perhaps Apple's move was preemptive, to prevent regulators from determining their own rules regarding Apple's pricing. If Apple can loosen the restrictions just enough, it may be able to placate officials without leading to too much lost revenue from in-app sales commissions.

Will Netflix and Spotify come knocking?

With Apple opening the door for a company like Amazon to work around the App Store payment restrictions, it might see Netflix and Spotify come back again. Apple doesn't give specific guidelines on what it considers a "qualifying" streaming video service. By qualifying Amazon and not others, Apple could be seen as playing favorites, which would draw even more regulatory attention.

As it is, the restrictions don't seem to be impacting Netflix or Spotify too negatively. Both companies direct consumers to their mobile website from their respective apps to pay for their subscriptions. And both are seeing strong subscriber growth. 

But for lesser-known companies, which are more reliant on Apple's App Store for discovery, distribution, and payment processing, it could open the door for them to offer better pricing to subscribers. In that sense, it might be in Netflix's and Spotify's best interests to keep the App Store restrictions in place.

What it means for Apple's bottom line

Apple has managed to keep growing its App Store sales despite pushback on its commission policies. It's in Apple's best interest to stave off lawsuits and regulatory action by further relaxing its policies in areas that make the most sense.

Perhaps allowing subscriptions for video and music isn't a bad idea if it protects Apple's take rate for in-app game purchases. Games represent the majority of app spending on mobile. And games like Fortnite have a big enough user base and strong enough brand that they could collect and process payment information for in-app purchases instead of transacting through Apple. Fortnite players have spent upwards of $1 million per day on iDevices. Apple's take on that spending would add up to over $100 million in high-margin revenue over the course of a year.

For now, not much is changing with in-app purchases. Netflix and Spotify subscribers will still have to navigate away from the app to provide their payment information, and Fortnite players will see payments processed by Apple. But the tech giant seems more willing to listen to developers than it has in the past.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon and Apple. The Motley Fool owns shares of and recommends Amazon, Apple, Netflix, and Spotify Technology and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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