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    AAPL   US0378331005


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Behind the Epic-Apple Trial Is a Booming App Market Worth Fighting Over

05/16/2021 | 03:44am EDT

By Roque Ruiz, Katherine Riley and Sarah E. Needleman

If there is one thing Epic Games Inc. and Apple Inc. can both agree on even as they battle each other, it is that the app economy is worth fighting over.

In the 13 years since Apple launched its App Store, the number of apps has exploded. The business of delivering them to people's smartphones has grown into a revenue stream worth tens of billions of dollars annually for Apple and the other main marketplace operator, Alphabet Inc.'s Google.

App stores have become critical gatekeepers in accessing software that lets users do everything on the internet, including watch television, read books and check the weather. Key to the stores' business models is that they collect a commission on consumers' purchases of digital goods and services. They don't take a portion of sales of real-world goods and services, like T-shirts or car rides purchased through an app from their stores, but when someone spends on a videogame perk or subscribes to an online fitness program, the gatekeepers get their cuts.

The fees that Apple and Google charge -- 30% in many cases -- are at the center of lawsuits filed by "Fortnite" creator Epic Games against the tech giants. Epic claims that Apple's App Store rules stifle competition and run afoul of antitrust law. Apple disputes Epic's allegations, saying that its rules are applied evenly and that charging a commission is legal and covers expenses such as maintaining user privacy.

The trial in Epic's case against Apple started May 3 and has the potential to upend a key part of the iPhone maker's services business.

Here is a snapshot of the rising app economy.

Consumers spend billions of dollars in app stores.

Consumer spending on digital goods and services has surged over the years, according to analytics firm Sensor Tower, and the amount of money the companies make off commissions has grown in tandem.

Apple launched the App Store in 2008 -- the year after it introduced the first iPhone -- with 500 apps. The Google Play store was launched in 2012 by integrating the Android app marketplace with Google's music and ebook platform. Each company's decision to require in-app purchases of digital goods, services and subscriptions to be routed through their payment-processing systems helped bolster revenue for both.

Apple and Google both recently pledged to reduce their commissions for developers in some instances starting this year.

Game apps dominate spending.

Mobile games generate revenue mainly through sales of virtual goods or access to special modes of play. That spending has propelled game apps such as Tencent Holdings Ltd.'s "Honor of Kings" and Niantic Inc.'s "Pokémon Go" to among the biggest apps by annual revenue in the App Store and Google Play, according to Sensor Tower.

Digital ads are growing in apps.

In addition to in-app purchases, many apps make money through advertising sales, a business that has been growing in recent years, data from Omdia show. Ads commonly appear in games as videos that reward players for watching them with in-game perks. Apple and Google set the guidelines that enable developers to generate revenue from in-app ads.

Apple doesn't make money directly from in-app ads, but Google does with its AdMob platform. Both companies offer developers the option to pay to have their apps featured at the top of users' search results or to reach customers on app-store pages. Such revenue isn't captured, however, in the chart below.

Netflix, Tinder and TikTok are among the most popular nongame apps.

More nongame apps have been among the top 10 apps for consumers' digital spending in the App Store than in Google Play in recent years. Those apps have included Netflix Inc., Match Group Inc.'s Tinder and ByteDance Ltd.'s TikTok.

Epic, whose "Fortnite" game has been among the top mobile apps by digital spending, has tried to broaden its attack on Apple and Google beyond the game world. It has sought testimony from the companies including Match and Spotify Technology SA, as well as smaller app developers, to help make its case. A Match executive told a Senate panel last month that app-store fees are the company's fastest-growing expense and would soon eclipse $500 million annually.

Netflix, Spotify and other companies have sidestepped Apple's cut by shifting to selling subscriptions and downloads through their websites instead of their apps. Apple bars companies from mentioning in their apps where else consumers can go to subscribe, and it doesn't let companies mention the 30% cut of revenue it collects.

Consumers are downloading more apps than ever.

The growth in downloads reflects how people are increasingly turning to mobile devices as their primary means of accessing the internet. It also speaks to the popularity of the free-to-play and "freemium" models embraced by developers, which give consumers a chance to try an app before having to commit to spending any money on it.

Free-to-play games are entirely free but offer the option to purchase virtual perks or experiences, while freemium apps provide basic features at no cost and charge for additional or full access.

The number of app-store developers is rising.

The pool of active developers on Apple's App Store and Google's Play store has steadily grown over the years, a trend driven by people's increased reliance on mobile devices for accessing the internet, according to analysts at analytics firm App Annie Inc. The pandemic accelerated that trend, boosting demand in particular for food-and-drink, shopping and game apps, they said.

Most apps in Apple's App Store are free.

The total number of apps in the App Store was lower last year than in 2017, in part because Apple purges those that no longer meet its criteria for inclusion. It completed big purges of apps from its platform in 2016 and 2017.

Meanwhile, the proportion of apps that are free and don't offer in-app purchases has increased. Despite this trend, Apple's App Store revenue has been rising because consumers have been spending more money in apps that do offer in-app purchases as well as on paid apps. The number of active iPhones world-wide also has increased to more than a billion this year from around 900 million in 2019.

Write to Roque Ruiz at Roque.RuizGonzalez@wsj.com and Sarah E. Needleman at sarah.needleman@wsj.com

(END) Dow Jones Newswires

05-16-21 0544ET

Stocks mentioned in the article
ChangeLast1st jan.
ALPHABET INC. 0.31% 2450 Delayed Quote.39.36%
APPLE INC. -0.22% 133.41 Delayed Quote.0.97%
DJ INDUSTRIAL 0.95% 34196.82 Delayed Quote.10.68%
MATCH GROUP, INC. 1.70% 164.27 Delayed Quote.6.84%
NETFLIX, INC. 1.04% 518.06 Delayed Quote.-5.18%
SPOTIFY TECHNOLOGY S.A. 2.91% 264.16 Delayed Quote.-18.42%
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Capitalization 2 226 B 2 226 B -
EV / Sales 2021 6,20x
EV / Sales 2022 5,90x
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