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Apple, Under Antitrust Scrutiny, Halves App Store Fee for Smaller Developers -- 2nd Update

11/18/2020 | 01:35pm EDT

By Tim Higgins and Sarah E. Needleman

Apple Inc. is halving the commission it charges smaller developers that sell software through its App Store, a partial concession in its battle with critics over how it wields power in its digital ecosystem.

Starting next year, the iPhone maker said Wednesday, it will collect 15% rather than 30% of App Store sales from companies that generate no more than $1 million in revenue through the software platform, including in-app purchases. The fee will remain 30% for developers whose sales through the App Store, excluding commission payments, exceed $1 million -- meaning the reduction won't affect such vocal Apple opponents as videogame company Epic Games Inc.

Apple's 30% take has been at the heart of complaints this year from other tech companies and some users over how it manages the vast digital world of people who use iPhones, iPads and other Apple devices. Critics have charged that Apple's share is too large, is unfairly levied against different companies, leaves customers footing the bill and leads to workarounds by some developers to avoid the fees.

The Cupertino, Calif., company has said its fees help fund a system that allows users to download third-party software safely on more than 1.5 billion devices globally. Last year, according to Apple, the App Store ecosystem facilitated $519 billion in world-wide commerce, more than 85% of which went to third parties. Apple's fee is in line with what rival app stores run by Alphabet Inc.'s Google and others charge.

Apple said the lower fees would affect the "vast majority" of app developers that use its App Store, but didn't specify a number or percentage. Apple has said 85% of apps in the App Store don't charge users, and therefore their developers pay no commission. All developers are charged a fee ranging from $99 to $299 to be part of its developer program.

Apple will roll out comprehensive details of its "App Store Small Business Program" early next month and implement the changes starting Jan. 1, it said. Developers new to the App Store will qualify, along with those under the $1 million limit in 2020. Developers that qualify for the reduced fees but then exceed $1 million during the year will be hit with the normal rate once they clear that threshold.

"We're launching this program to help small-business owners write the next chapter of creativity and prosperity on the App Store, and to build the kind of quality apps our customers love," Tim Cook, Apple chief executive, said Wednesday.

Apple's opponents were dismissive of the move. Tim Sweeney, chief executive of Epic, which makes "Fortnite" and has been one of Apple's most prominent foes, called the announcement a calculated effort to sow division among app creators.

"Apple is hoping to remove enough critics that they can get away with their blockade on competition and 30% tax on most in-app purchases. But consumers will still pay inflated prices marked up by the Apple tax," Mr. Sweeney said.

Apple's shares were down slightly in early trading Wednesday after its announcement, in line with other major tech stocks.

The European Union, the Justice Department and the Federal Trade Commission are investigating Apple and other tech companies on antitrust grounds.

The FTC and the Justice Department declined to comment about Apple's move. A spokeswoman for the European Commission, the EU's top antitrust enforcer, said on Wednesday its investigations are ongoing.

Congress also has been examining the competitive practices of Apple and other large tech companies. In October, a House subcommittee investigating Big Tech accused Apple of wielding anticompetitive power that harms rivals and benefits itself. In particular, the subcommittee report questioned the size of the App Store fee.

"Apple's ban on rival app stores and alternative payment processing locks out competition, boosting Apple's profits from a captured ecosystem of developers and consumers," the report said.

Apple disputed the findings and earlier this year released a study it commissioned from Analysis Group that found App Store fees were in line with those of its closest competitors, such as Google Play.

Apple is seeking to bolster its position among regulators, said Oppenheimer analyst Andrew Uerkwitz. "It won't meaningfully impact Apple's revenue. Instead, it shows Apple cares about the little guy."

But the timing might not bode well for the company. "To do this under duress, I think robs it of the appearance of a supportive gesture to developers," said Jefferies analyst Ken Rumph.

Apple has made narrower exceptions to its App Store rules before. In September it said it was cutting its commission on some paid events and experiences sold through mobile apps through the end of 2020 to help small businesses that were struggling due to the pandemic.

In 2016, Apple agreed to let Amazon.com Inc. pay it only a 15% commission on subscription sales to Amazon Prime Video through Amazon's app on Apple devices, rather than the 30% fee that all other apps are required to pay on first-year digital-subscription sales.

Timothy Welman, a 24-year-old app developer in Westfield, N.J., said he is happy about Apple's new low commission. He has four apps in Apple's App Store, including Sunny the Bunny, a free app he launched in 2017, and says they have collectively generated about $600 in gross sales so far this year. "I find it a bit ridiculous that I would have to pay the same 30% as apps that are generating hundreds of thousands of dollars," Mr. Welman said.

The 30% fee dates back to the inception of the App Store in 2008, a year after the iPhone was introduced. In recent years, Apple has tussled over its commission with a range of app-based companies, including Spotify Technology SA and Match Group Inc.'s Tinder.

The Coalition for App Fairness, a group of developers including those companies that was formed in September to advocate for change to app marketplaces' rules, called Apple's move a symbolic gesture that ignores fundamental flaws with the App Store. It also said the $1 million threshold is an arbitrary benchmark.

"You have to apply to the program, and the vast majority of developers who generate livable revenue through their apps won't benefit from this change," a coalition spokeswoman said.

A Spotify spokesman called on regulators to ignore Apple's move and "act with urgency to protect consumer choice, ensure fair competition, and create a level playing field for all."

Apple's most prominent battle has been with Epic, maker of "Fortnite." In August, Epic rolled out a way to make in-game purchases that prevented Apple and Google from collecting the 30% cut they charge in their software stores. Both Apple and Google kicked the game out. Epic, in turn, sued.

Epic has framed its fight as opposing a system that suppresses competition and inflates prices. Apple has said Epic is simply seeking to avoid paying for the "tremendous value it derives from the App Store." In a court filing, Apple said "Fortnite" has been downloaded through the App Store almost 130 million times since 2018 and that Epic has earned more than $600 million from its relationship with Apple.

Apple's new initiative isn't likely to significantly strengthen or weaken its case against Epic, said Paul D. Swanson, a Denver-based antitrust lawyer at Holland & Hart LLP who has no involvement with either party. "If anything, Apple's pricing change could reinforce the argument that commission levels are based on Apple fiat rather than true competitive pressures, which Epic has said is its main beef."

Sam Schechner contributed to this article.

Write to Tim Higgins at Tim.Higgins@WSJ.com and Sarah E. Needleman at sarah.needleman@wsj.com

(END) Dow Jones Newswires

11-18-20 1334ET

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