As it seeks to transform itself into a services-oriented entity amid slowing hardware sales, Apple has suffered a potential setback in relation to an important revenue driver: the App Store.
On Monday, the US Supreme Court delivered a verdict that allows a group of iPhone users to pursue an antitrust case against Apple with regard to the firm’s online marketplace.
At the heart of the complaint against Apple is the 30 percent commission that the US firm charges for paid App sales on its platform. The plaintiffs argue that Apple’s hefty cut forces app developers to raise their prices, hurting consumers in the end.
As iOS device users have nowhere else to go but the Apple App Store for their apps, it amounts to unfair exercise of monopoly power by the Cupertino-based tech behemoth, the plaintiffs say.
The court did not accuse Apple of anti-competitive behavior, but ruled that consumers have the right to proceed with an anti-monopoly suit against the firm.
There are no immediate repercussions for Apple, and the company may yet emerge a winner in a legal battle that could stretch for years.
Still, the case brings some uncertainty to the prospects of the App Store and its operational model. If Apple loses in the end, it may be forced to change its business practices on the App Store.
That could, in turn, hurt Apple’s overall game plan, given that the App Store yields a significant part of the firm’s subscription-based service revenues.
Apple has sought dismissal of the case, arguing that the iPhone owners don’t have the right to sue the firm as it is only an intermediary.
Apple claimed it was a middleman for app distribution, and that it is the developers that set the price. Since developers are the ones who pay Apple’s commission, and not consumers, only the developers, if at all, should be able to file a lawsuit on the issue, the company said.
But the US Supreme Court, in a 5–4 verdict, ruled that iPhone owners have a “direct purchaser” relationship with Apple and that they have the right to pursue a case against the firm.
Apple is confident it can defend its successful business model, arguing that the App Store “is not a monopoly by any metric.”
“We’re confident we will prevail when the facts are presented,” the company said in a statement, pointing out that it has “created the safest, most secure and trusted platform for customers and a great business opportunity for all developers around the world.”
Apple argues that its developers set the price they want to charge for their apps and that the company has no role in that. Apple only shares in revenue with developers if the developer chooses to sell digital services through the App Store.
“Developers have a number of platforms to choose from to deliver their software — from other apps stores, to Smart TVs to gaming consoles,” Apple said. “The company is working hard every day to make sure our store is the best, safest, and most competitive in the world.”
The result of the iPhone users’ lawsuit could affect the way that Apple structures its business, apart from hefty potential penalties, as CNBC noted.
Aside from Apple, other tech giants that run electronic marketplaces — entities such as Google, Amazon and Facebook — may also need to relook their platforms if the final verdict goes against Apple.
The Supreme Court decision adds to worries that the business model of many digital platforms is fragile despite a well-recognized revenue sharing arrangement with partners and vendors.
Apple has been proud of building its app ecosystem in the past decade, and every year it announces how much money developers earned from its platform.
According to data released earlier this year, developers earned a collective US$120 billion from the App Store since 2008.
Some legal experts have said that Monday’s court decision marks a major advance in the history of antitrust law. The ruling means that in the future, consumers will be able to sue other platform operators, possibly breaking the profit-sharing model created by monopoly ecosystems.
From a business perspective, such lawsuit may, however, discourage people from innovation.
Apple has dismissed talk of enforcing a monopoly as it pointed out that developers can build apps for other platforms, including smart TVs and rival operating systems.
As for consumers, if they feel they are being forced to pay more for app purchases on the Apple platform, they can always seek other digital platforms.
Some industry watchers believe the antitrust lawsuit may accelerate the penetration of web apps, which will be similar to mobile apps on the App Store but can be accessed on web browser. Users will be able to use the app through a dedicated website.
Apple is confident it will ultimately prevail in the case, but if the outcome turns out something different, the company may have to pay hundreds of millions of dollars in fines.
Given its huge cash reserves, the tech giant can easily absorb fines, however large they might be. But what if the firm is forced to alter its business practices or fee structure on the App Store?
Well, that would be a different ballgame altogether!