Fourteen years ago, Apple’s co-founder Steve Jobs launched a digital marketplace. Its role was simple: to provide a window through a thumbnail icon to a motley mix of games, tools and software.
When Jobs made the announcement at the 2008 developers conference in San Francisco, the audience was more interested in the Cupertino-based company’s new 3G compatible iPhone that came with an enhanced battery storage. He spent only five minutes explaining his ‘Third party applications’ feature, which was placed third in his top five list at the event.
The feature that Jobs explained would allow developers to write applications exclusively for iPhones. Apple would provide developers software development kits (SDK) to build digital products for the devices its sells. These apps would be distributed on iPhones and iPads via the App Store.
The App Store became to iPhones what iTunes was to iPods. It was the only storefront for users to buy or download applications on their smartphones.
The feature clicked, and it went on to become an important line of business for the smartphone maker. Within the first month of its launch, there were 1,500 apps — 27% of them were free, and the remaining paid. Of the paid apps, over 90% were sold for under $10. Apple said it had paid $21 million to developers within a month since the App Store’s launch. That’s two-third of all sales made via the digital marketplace. In the announcement, Jobs said the company would collect a third of the cash that developers make as commission.
Goliath vs. Goliath
Fast forward ten years and the App Store becomes the world’s largest digital marketplace with half a billion visitors per week. CEO Tim Cook told the audience at the 2018 developers conference that the company had more than 20 million registered third-party developers building apps for the iPhone maker.
“We’re going to achieve another new milestone,” Cook said. “The money that developers have earned through the App Store will top $100 billion.”
That’s about $14 billion into Apple’s coffers, which is just $4 billion short of the company’s iPad sales that same year.
Business was good for Apple, but not for all developers. Some were unhappy, and among the unhappy ones were large established businesses that were making billions of dollars in revenue annually selling games. One of them was Epic Games, the maker of the popular Fortnite game.
Epic’s CEO Tim Sweeney was an outspoken critic of both Apple and Google’s digital storefronts. In an interview to CNN, he said his company “felt stifled” by the two tech giants’ app store commission fees.
The Fortnite fight
Epic launched Fortnite in 2017 as a paid game for $40. After the game became an instant hit, Sweeney switched to a different business model. He made it a ‘freemium’ game in which users can download and play for free, but have to make in-app purchases to buy digital items like skins and avatars.
The model worked, and Epic was making a few billions annually from in-app digital sales. But the company had to pay Google and Apple a third of the revenue that came in via their app stores. That’s because the duo had their own payment systems to process purchases.
Epic fought back. In August 2020, it pushed a hotfix patch to its popular game, which didn’t require an approval from Apple and Google. The patch contained code that allowed users to purchase Fortnite’s in-game currency, V-Bucks, directly from the game maker, bypassing Apple and Google’s payment systems. It also notified that this purchase would cost them 20% less than what they pay via Apple or Google’s payment systems.
Within hours of the hotfix going live, Fortnite was pulled out from the app stores. In response, Epic filed a suit against Apple alleging that the iPhone maker engaged in anti-competitive and antitrust behaviour.
Keeping the ‘walled garden’ intact
Epic Games wanted Apple to open its “walled garden” ecosystem and allow other app marketplaces on its iPhones. The Cupertino-based company opposed the call by saying it would weaken the security offered to consumers.
In September, U.S. district Judge Yvonne Gonzalez Rogers largely ruled in Apple's favour after a weeks-long trial. In her full 180-page ruling, Gonzalez Rogers expressed concern that developers were being prevented from communicating with iPhone users about alternative prices.
But she gave Epic a key concession: that Apple, starting December 9, could no longer prohibit app developers from including buttons or links in their apps that direct users to means of paying beside Apple's in-app payment system, which charges a commission to developers.
In October, Apple said in a filing, that complying with the order could cause it and its consumers harm. It said it expects to win an appeal challenging the order, and that it wants the legal process to take its course, which could last about a year to play out.
Looking East
While the Epic vs. Apple war continues, the iPhone maker faces a threat from the East. Last week, South Korea’s competition regulator approved rules that will break Apple and Google’s app store dominance in the country.
The regulation will effectively restrain the two tech giants from forcing developers to use their payments systems. The law, an amendment to South Korea’s Telecommunication Business Act, is a first from any major economy against the two firms.
The rules, called the enforcement ordinance, will take effect from March 15. They specify that the law bars "the act of forcing a specific payment method to a provider of mobile content" by unfairly utilising the app market operator's status, the regulator Korea Communications Commission (KCC) said in a statement.
"In order to prevent indirect regulatory avoidance, prohibited acts' types and standards have been established as tightly-knit as possible within the scope delegated by the law," said KCC Chairman Han Sang-hyuk, according to a report by Reuters.
Barred acts include app market operators unfairly delaying the review of mobile content, or refusing, restricting, deleting, or blocking the registration, renewal, or inspection of mobile content that uses third-party payment methods. Potential fines for infractions will go as high as 2% of an average annual revenue from related business practices.
Samsung’s win?
Within a decade and a half, Apple’s App Store has spawned an entire industry that sells games, productivity tools and other software to its users. The App Store is the only way iPhone users can download or purchase these apps. The South Korean regulation could significantly dent the Cupertino-based company’s dominance in a market it created.
However, Apple’s loss can be Samsung’s gain. The South Korean electronics major sold 32 million smartphones more than Apple did in 2021. And, within the digital storefront ecosystem, Samsung’s store is available as an alternative in its smartphone, along with Google’s Play Store.
While it is not clear how the new law will be implemented in the Asian nation, a possibility of a Samsung app store in an iPhone in South Korea cannot be ruled out.
