Developers who want to get their apps onto Apple's (NASDAQ:AAPL) iOS App Store have to agree to some very strict terms and conditions. To many companies, the most important of these are the regulations that govern payments made for and through iOS apps. Any transaction made in an iOS app must go through Apple's payment system -- and Apple gets a cut.
Apple's "platform tax" is a huge source of revenue for the tech giant and a huge headache for its competitors and app partners (just how huge is a matter of debate: Apple has contested the figures Spotify (NYSE:SPOT) used in a European court filing, for example). As burdensome as it can be, Apple's platform tax is usually unavoidable: Apple's iOS is simply too important, and the company is simply too unwilling to budge on the issue. Except, it seems, when it comes to Amazon.com (NASDAQ:AMZN), which recently started offering transactions in one of its iOS apps that appear to exist outside of Apple's payment system.
Beating Apple's platform tax is a big deal
It bears repeating just how unusual it is for Apple to grant an exception to its platform tax. Apple's platform tax means big bucks to its parent company. Apple takes a standard cut of 30% of virtually any kind of transaction that takes place on its platform (allegedly, anyway -- in the aforementioned European legal battle, Apple claimed that Spotify was paying only 15%).
Apple's cut is particularly burdensome for subscription services, including subscription streaming services like Netflix (NASDAQ:NFLX). For recurring subscriptions, Apple takes 30% of every monthly payment for an entire year. After that, Apple takes 15%. The price is so steep that some services have simply refused to take part in the deal. Netflix, for instance, made the decision to stop working with Apple's payment systems in late 2018. But that means that Netflix's iOS app can't allow customers to sign up for the service within the app -- they have to sign up somewhere else, such as on Netflix's website.
Netflix's method is one way to try to "beat" the platform tax, but it's a rather extreme one. To keep Apple from getting its cut, Netflix is forgoing any subscription revenue from users who would be willing to sign up through iOS but unwilling to fire up a web browser to do the same thing on Netflix.com (mercifully for Netflix, this can at least be done on an iOS device via Safari or another browser; it's only the app that's off-limits). Other apps and companies have tried other methods; for example, it's easy to find games that offer discounts on in-app purchases for users who take the trouble to head to the game or company's website and buy directly from that company (by making the purchases there instead of within the app, customers avoid triggering Apple's tax). As with forgoing the revenue entirely, this is hardly "beating" the tax; microtransactions are by their very nature more likely to be made in-game, so Apple is still making a bundle off of these companies.
Perhaps the most important part of Apple's strategy is how stubborn the company is about its platform tax. Netflix's decision and Spotify's court filings (Apple's objections notwithstanding) suggest haggling on the platform tax is off-limits even for the biggest companies. Apple seems content to let unhappy app developers and companies eliminate paid transactions entirely rather than compromise on the 30% cut. So how did Amazon manage to cut a deal?
How Amazon worked out a deal with Apple (probably)
It's important to note that we can't know for sure how Amazon managed its deal with Apple (at least not yet), because the terms of the deal aren't public. But we can make educated guesses about what is going on.
First, the nature of Amazon's end: The big change for Amazon, and the reason that users have noticed that a deal was struck, is the recent appearance of buttons within the Amazon Prime Video app that allow customers to buy and rent movies. These buttons do exactly what they say they'll do, and they charge a customer's Amazon account rather than going through their Apple payment methods.
How did this happen? In a statement to The Verge, Apple asserted that it had "an established program for premium subscription video entertainment providers to offer a variety of customer benefits -- including integration with the Apple TV app, AirPlay 2 support, tvOS apps, universal search, Siri support and, where applicable, single or zero sign-on."
But this statement is a bit dubious. Apple's "established program" is news to us and to several reporters on the Apple beat, including The Verge's Dieter Bohn, Bloomberg's Mark Gurman, and 9to5Mac's Benjamin Mayo, each of whom expressed some degree cynicism regarding this "established program." If there is such a program, Amazon seems to be its first newsworthy participant.
The "established program" bit may be junk, but the rest of Apple's statement is interesting. It implies that Amazon's new right to process its own in-app financial transactions is tied to its support for various streaming-related Apple features, including the relatively new Apple TV app.
Apple's TV app is designed as a sort of "hub" -- almost like a platform within a platform. It is home to Apple's premium subscription video on demand (SVOD) service Apple TV+, but also to other non-Apple services like Showtime and Starz. The TV app offers users the convenience of having all of their different on-demand libraries in one place (and, of course, incentivizes them to sign up for premium services, giving Apple a cut via its platform tax). But the appeal is undermined by the fact that the TV app's support does not really cover all of the most popular on-demand libraries. Netflix, among other noteworthy SVOD services, does not participate. Apple wants to add more big-time services to the TV app, and it appears to want to do so badly enough to compromise on its previously ironclad platform tax.
A whole new ballgame
This is a huge development that could open the door for other companies with major streaming offerings to swap TV app support for platform tax leniency. Netflix may be unlikely to agree (Netflix is solely streaming-focused and does not offer in-app purchases like Amazon does, suggesting that there wouldn't be as much room to work things out), but other SVOD players may be game.
And if the platform tax is on the block in exchange for one major Apple goal, might there be other opportunities for wiggle room? Apple has apps for everything from games to news, providing lots of potential for collaboration with major apps currently paying its burdensome tax. Apple also has a high-profile dispute with Spotify that is still ongoing; since the deal with Amazon establishes that the platform tax is negotiable after all, a truce with Spotify seems much more likely than it did just a week or two ago. Apple's deal with Amazon is significant on its own, and the softening of Apple's stance regarding its platform tax may be more significant yet.