Apple (NASDAQ:AAPL) recently announced that its App Store transactions hit a record monthly high of $1.7 billion in July. It also stated that it had paid $33 billion to app store developers to date, up from $20 billion last July. $8 billion of that was paid out in 2015 alone.
Apple attributed much of that growth to China, but it didn't disclose exact figures. But according to a report from App Annie, Apple's App Store downloads in China climbed about 30% annually in the first quarter of 2015, helping it surpass the U.S. as the top source of iOS downloads in the world. That's not surprising, since Apple's total sales to the Greater China region more than doubled annually and accounted for 27% of its top line last quarter. Let's take a closer look at what that growth means for Apple, and how it compares to Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) app store sales.
Why the App Store matters to Apple
Both Apple and Google retain a 30% cut of their app store sales. Therefore, $8 billion in payments to developers implies that Apple's App Store generated roughly $3.4 billion in revenue for the company since the beginning of the year. Yet that represents just a sliver of Apple's $107.6 billion in revenues over its last two quarters.
However, the business is growing rapidly. In January, Apple announced that App Store gross billings in 2014 rose 50% annually, generating over $10 billion in revenues for developers. This implies that the business generated about $4.3 billion in revenues last year for Apple.
Apple reports App Store revenues alongside iTunes, Apple Pay, and other services in its "Services" division, which posted a 12% annual increase in revenues last quarter. Rising App Store sales can help offset declines in iTunes, which has been hurt by the rising of streaming music services like Spotify.
Google is falling behind
Last year, Google Play generated nearly 60% more app downloads than Apple's App Store, according to App Annie. However, Apple's App Store also generated over 70% more in revenues than Google Play during the year.
Based on Apple's claim of $10 billion in 2014 billings, that would suggest that Google paid out just $3 billion to developers after it took its 30% cut. That would mean that Google Play generated just over a billion dollars in revenue for the search giant last year. That disparity is stunning, considering that Android runs on nearly 80% of smartphones and over half of all tablets worldwide. By comparison, iOS runs on less than a fifth of all smartphones and 40% of all tablets.
Why Apple is winning
Google Android is installed on more devices worldwide, but the OS is a fragmented mess. As of this writing, only 18% of all Android devices worldwide have been upgraded to Lollipop 5.0/5.1. Thirty-nine percent of devices still run on KitKat 4.4, while the remainder run on earlier versions. Android hardware is also fragmented across roughly a thousand smartphone makers worldwide.
For developers, that fragmentation makes it tough to develop bug-free apps. By comparison, Apple hardware is the same across each generation, and iOS fragmentation is minimal, thanks to OTA updates. As a result, many developers launch apps for iOS first, and only port them to Android if they become popular enough.
Another problem is that Android users simply don't spend much money on apps. Last June, Andreessen Horowitz's Benedict Evans estimated that Android's ARPU (average revenue per user) was "roughly a quarter" of iOS. Evans claimed that this was due to the fact that Android handsets were cheaper, thus attracting frugal users, and that they were more dominant in lower-income countries.
Lastly, Google Play remains banned in mainland China. This forced many Chinese OEMs to launch their own Android app stores, which don't generate any revenue for Google. Apple, on the other hand, remained in China's good graces by ensuring that only government-approved apps were uploaded to its Chinese App Store.
The key takeaway
Apple's App Store revenue doesn't account for a meaningful percentage of its top line yet, but it will likely keep growing. More importantly, its growth can offset the decline of iTunes, Apple's main source of digital revenue prior to the arrival of iPhones and iPads. It also reveals that while Google dominates mobile operating systems worldwide, it faces a tough uphill battle in monetizing those users.