Apple’s Walled Garden is Under Attack
Its tightly knit ecosystem has been key to the company’s success. But calls to loosen the noose can no longer go unanswered.
In his 1983 Keynote address, Steve Jobs read out the following letter before previewing their infamous 1984 advertisement for the audience –
“It appears IBM wants it all. Apple is perceived to be the only hope to offer IBM a run for its money. Dealers initially welcoming IBM with open arms now fear an IBM dominated and controlled future. They are increasingly turning back to Apple as the only force that can ensure their future freedom. Will Big Blue dominate the entire computer industry? [Will Big Blue dominate] the entire information age?”
Throughout its history, Apple has always taken pride in challenging the status quo and unsettling the conglomorates that have set the norm. They fought larger rivals in bringing home the personal computer, or the Macintosh as they called it. They drew curtains on the Walkman / Discman era with the iPod and finally —
Fast forward 25 years from that fateful 1983 Keynote, and Apple unveiled a device of their own that would take its dominance to heights beyond the realms of even the most ludacris hyperboles. This device was none other than…. Wait for it — The iPhone.
While the iPhone itself was revolutionary for its time; Steve Jobs and the team at Apple had another, even more profound innovation to upend the world as we knew it — the AppStore. Not only did the AppStore allow users to download (and remove) pieces of software directly onto their phone, but also created a slew of new industries that were unfathomable in the days before every individual had a computer stashed away somewhere in their shorts.
“I think there are a lot of people and I’m one of them who believe that mobile’s going to get quite serious because there are things you can do…Obviously, mobile’s with you all the time, but there’s services you can provide with mobile that obviously are not relevant on a desktop, such as location-based services integrated into your application.”
These are the famous words of Steve Jobs in an interview during the initial launch of the AppStore and now etched into history for generations to come
The (Massive) Numbers
With a humble beginning of 500 Apps at launch, the AppStore blew past even Apple’s most optimistic estimates of success. With 60 Million app downloads in the first 30 days, the AppStore already had 30% the volume of downloads compared to the iTunes store which had been around nearly a decade. Today, the AppStore has now morphed into a powerhouse birthing more tech Unicorns than the best Silicon Valley VC funds could ever dream of — Instagram, Uber, PUBG, Tinder, WhatsApp and Snap are just a few that have radically transformed the lens through which we lead our lives today.
Current estimates peg the number of Apps on the AppStore to ~2.2 Million. These cumulatively brought in a whopping $50 Billion in revenue in 2019! Bringing a standalone AppStore to rank 64 of the S&P 500 sandwiched between Cisco and Morgan Stanley. Of this $50 Billion, Apple kept their commission of $15 Billion and passed only the $35 Billion to the app developers. Increasingly, and more audibly, are developers starting to scream afoul at the Apple Tax they must pay to remain a part of the AppStore ecosystem.
Over the past few months, the US Congress has been investigating whether or not US tech giants such as Apple, Google, Amazon, Facebook and Microsoft have been using their sheer size to stomp out the competition before they achieve any formidable scale. In other words, do they engage in Monopolistic trade practices?
While there has not yet been any official action taken against these companies, many others have filed suits against these giants — Apple in particular. The company is facing the heat from multiple different fronts amid calls that are getting harder to ignore. There are 3 primary complaints against the company -
i. The ‘Apple Tax’ — or the 30% commission the company charges for each transaction on the AppStore
ii. Rankings of search results in the AppStore — and the elevated listing of Apple’s own Apps even though irrelevant to the actual search
iii. Removal of Apps from the AppStore — often without giving developers the reasons for their removal
At a ~US$ 2 Trillion valuation Apple is undoubtedly a Goliath, ready to take on multiple David(s) simultaneously. This being said, it simply cannot ignore calls to change much longer, especially considering some of the Davids being taken on aren’t that small either.
The US Government
The US Government is arguably the richest and most powerful organization in the World. In its year-long investigation of tech giants it has raised a number of red flags against Apple, predominantly relating to the Apple Tax and the way in which the company promotes its own apps on the AppStore over rivals.
The more far reaching impact that they had however, was the subpoena of hundreds of incriminating internal Apple (and the other tech giants’) emails. These mails show the extent of control Apple seek over the AppStore and that it was not afraid to block apps / developers at any point to achieve the same.
These previously secret internal emails are now classified as public evidence to be used as legal evidence for future hearings / cases against the company themselves.
Think of this as having — all the DMs you’ve ever slid into being posted online… and used against you.
Thoughts: The DIY trend has recently taken the world by storm, and big tech is taking the concept to a whole new level. These companies are vertically integrating in ways never seen before.
The Godly power they seek stems from being the operator of the marketplace as well as wanting to be the biggest player within it. We can see a similar trend across industries with Amazon continuing to launch a slew of products under the Amazon Basics white label and food delivery aggregators like Swiggy operating their own restaurants / cloud kitchens. Apple too has taken inspiration from wildly popular Apps with the introduction of Apple Music and the soon to be launched Apple Fitness +.
This trend of being the marketplace operator and a seller within the marketplace is exactly what the government seeks to stop in its tracks. While the government has taken an agressive stance against big tech, it finally starts to adress the scores of consumer complaints against each of the companies. Elizabeth Warren summarized in her conversation with the Verge:
If you run a platform where others come to sell, then you don’t get to sell your own items on the platform because you have two comparative advantages. One, you’ve sucked up information about every buyer and every seller. And second, you have the capacity — because you run the platform — to prefer your product over anyone else’s product.
On this unique occasion where both Republicans and Democrats seem to be on the same side of the argument, it is not a question of ‘if’ but ‘when’ we can expect new legislation.
The European Commission
Without even knowing, most iPhone users have borne the brunt of the restrictions in iOS. Think of all the times that you have wanted to reply to an email on iPhone, and have the default, Mail app pop up even though you use the Gmail app for all your email. Or click on a link and have it open in Safari, even though Chrome is your mobile browser of choice. All this with no options to change the defaults. Apple has however, recently announced plans to allow such customizations with iOS 14.
Similarly, when companies would like to enable NFC third party payments on the iPhone, their only option would be to set up their payments systems through Apple Pay; with no alternative. This is another smart ploy by the company to keep transactions within their walled garden and ensure they keep collecting the Apple Tax every time the user swipes their card.
Thoughts: Just like in the US, the EU too would like to ensure that Apple does not have the complete authoritarian control on about 50% of the smartphones in their geography. Opening up the software would indeed lead to greater competition and better pricing for consumers.
Perhaps the loudest… and most controversial of Apple’s opponents is Epic Games, the US$ 17 Billion creator of Fortnite. The company decided they had enough of the Apple Tax and offered its users the option to make in app purchases on the iPhone, but not via Apple’s official payments system.
This goes directly against AppStore policies and Fortnite was taken down from the AppStore soon thereafter. Reports indicate that about half of Fortnite’s users decided to go directly through Epic’s payment gateway versus the default Apple option. It should be noted that prices on Epic’s own payment gateway were cheaper as users did not have to pay the Apple Tax.
Remember the iconic Apple 1984 ad from above? Epic event went the distance to release a parody on the advert, titled Nineteen-Eighty Fortnite and showing us how apple had now become the all encompassing behemoth like IBM once was, whom users needed freedom from.
Apple also threatened to pull the plugs on any games made on the Unreal Engine (a video game development engine also owned by Epic). This could have much further reaching implications considering famous titles such as PUBG, Final Fantasy, Dragon Ball Z and hundreds of other titles could be thrown off the AppStore for no fault of their own.
Another aspect, not much spoken about is the fact that Tencent owns 40% of Epic games so this could also be a front in the USA / China trade war currently underway.
Thoughts: 116 Million of Fortnite’s 350 Million players are on iOS. Epic will not be able to get a hold of these users for the next year at the very least. One small step out of line will have far reaching implications on it’s business. While Apple is completely within it’s rights to block Fortnite from the AppStore, this totalitarian control is exactly the type of power that the US and EU seek to control.
Apple upended the music industry with the release of iTunes (and iPod). Albums gave way for Singles and the music CDs were soon blasted into oblivion and it would have a near monopoly on music distribution. Unsurprisingly, the company did not take it lightly when a small Swedish upstart decided to crash their party and become the go to destination for audiophiles everywhere.
Spotify has filed multiple lawsuits against Apple still being hard fought today. Most notably for demoting their app in the AppStore, even below irrelevant search listings (which for some reason, always happed to be Apple owned apps). Additionally, the company has decried the Apple Tax as being anti-competitive.
Consider that both Apple Music and Spotify charge US$ 10 / month for their service. While Apple gets the entire $10 for themselves, Spotify would only see $6.7 in their account. Proving to be a further disadvantage for cash strapped companies trying to compete against the giant with US$ 200 Billion in the bank and not enough ideas on how to spend it.
Thoughts: Spotify made a revenue of EUR 6.7 Billion in 2019. Their failure would see Apple take the lions share of this pie and cement their dominance in the music streaming industry. The stakes are large and there is even greater incentive for Apple in being able to block out similar upstarts. In this case, Spotify succeeded in beating Apple at their own game. But Apple will not make the same mistake again.
Not even Facebook, whose apps (Instagram, WhatsApp, Facebook, Messenger) have been in the Top 10 free apps in the store since as far back as memory goes, is immune to regulation from the AppStore.
Facebook enabled a feature for small businesses to host live events online and charge users a fee to participitate. Facebook decided not to charge businesses a commission for using their platform during the pandemic. However, all payments on iOS are required to go through Apples payment system, and hence are levied with the Apple Tax.
Facebook asked Apple to waive the Apple Tax on these transactions. Apple declined and in retaliation, Facebook added a note on the app saying that the fees being charged to the organizers were not by Facebook, but in fact by Apple. Apple simply rejected the app update and did not allow it to be made available to users.
While this spat between the two tech giants was trivial, and brushed under the rug without much of a showdown, the real power that Apple wields is brought to the fore in this debacle.
If they so desired, Apple could have just easily barred Facebook, and all their other apps from the AppStore without having to give it a second thought. They are the sole authority on deciding who gets a place within their walled garden. In this hypothetical (but very possible) scenario, there really would be no positive outcome for Facebook. Imagine a world with no WhatsApp, Instagram or Facebook available on your iPhone!!
About 25% of the worlds phones run iOS. This is further exasperated in the US and parts of Europe where iOS makes up >50% of smartphones.
Having lost these users, Facebook would yield nowhere near the market power they currently do and lose a lot of the network effects they enjoy being available only on Android. This would pose a serious threat to their very existence.
Thoughts: If Facebook, being one of the tech giants under review themselves, was not able to force Apple’s hand. Hope for the other 99% of the world lies in dire straits.
While all the contenders I have touched on above are astronomically large entities, very capable of bringing the fight to Apple, there are a host of other companies with similar concerns out there.
Consider a parental control app in Russia which showed the breakdown of the amount of time the user spent in each app. 3 years after they launched, Apple introduced an eerily similar feature — ScreenTime to the stock Settings app of the iPhone. The Russian app was pulled from the AppStore with no proper explanation given.
Apps in the US too face similar fate such as was the case with Hey — an email app to rival traditional mail service providers like Gmail. The iOS version of the app was rejected from the AppStore due to payment constraints. A version of this app however was allowed onto the AppStore after much cry from developers ahead of Apples annual developers conference WWDC 2020.
The Bottom Line — (How) Does this really impact me?!
None of the actions taken by Apple so far can be deemed illegal... Not yet atleast.
Search engine rankings, a strict AppStore approval process and charging fees for their services are all well within their gamut of influence.
This control in the past has helped keep the AppStore free of Apps that condone illegal activities or attempt to steal user data. This control and tight integration of the hardware and software has also been one of the reasons people (myself included) choose the iPhone over its Android counterparts.
Not only does the fate of this elevated experience hang on the verdicts of these lawsuits / hearings but also the shape of innovation in the decades to come. In Zuckerbergs own words —
[Apple has] this unique stranglehold as a gatekeeper on what gets on phones,” Zuckerberg said to more than 50,000 employees via webcast. He added that the company’s app store “blocks innovation, blocks competition” and “allows Apple to charge monopoly rents.”
Spinning off the AppStore into an individual entity can be equated to ‘Net Neutrality’ where all websites and developers are given an equal opportunity to reach the end consumer. No single entity would be given preference to the rest.
This neutrality is critical in ensuring that the pace of innovation does not stifle and all developers large and small are equally incentivized to keep bringing new products to market.
Apple has dug a deep moat around their ‘Walled Garden’ and will fight hard to keep it intact. The question now is, who will rise up to the challenge in ensuring that the future does not emulate the gore of 1984.