Upsetting the Apple-Cart

Apple’s moment of triumph is spoiled by a host of enemies at their gates.

In August, Apple crossed the threshold: the company’s valuation passed $2 trillion [1], the first company history to attain such a distinction. This comes only a short while after it became the world’s first $1 trillion company in 2018. Despite that, the current situation is looking increasingly grim. Apple is going to war.

Last week, Epic Games threw down the gauntlet publicly, using the launch of the latest Fortnite season to incite their user base to go around the Apple app store and subscribe to the season directly with Epic Games, effectively avoiding the 30% that Apple imposes on all the transactions based out of the App store. Apple responded by removing Fortnite from the app store altogether [2], which resulted in Epic Games immediately filing an antitrust lawsuit against Apple.

However, this goes beyond just the legal aspect of the challenge: Epic games also put Apple to trial in the court of public opinion. And unlike Disney’s manoeuvre last summer with Spider-Man [3], it looks like the giant isn’t about to come out unscathed this time. Releasing a parody [4] of Apple’s famous “1984” superbowl [5] ad, Epic Games framed the fight as a struggle against the tyranny of greedy corporations, singling out Apple for its monopolistic practices.

This is doubly important because Apple is already at war in the court of public opinion and has been for the past several years. Since the summer of 2019, they’ve weathered a number of incredibly public antitrust hearings contesting their monopolistic practices. This year, they’ve faced major public hearings (along with the heads of Amazon, Facebook, and Google) in Congress [6] scrutinizing monopolies within the sphere of tech. In Europe, Apple is currently facing antitrust investigations [7] into their practices regarding the app store. More and more, the public is becoming used to the idea of Apple in a new light: that of a shrewd robber baron institution getting ahead through market manipulation, as opposed to the futuristic trendsetter it used to be.

Over the course of the past decade, Apple has changed significantly. The company was built on the back of the disruptive capacity of the smartphone, coupled with peerless marketing which allowed them to build one of the world’s most solid user bases. However, this is no longer the house that Steve Jobs built. While, unlike Facebook and Google, the core of Apple’s revenue is generated via its manufacturing and sales (most notably of iPhones), this aspect of its business has been in decline [8]. In its place, Apple has started acting much more like a modern tech firm; its business model increasingly revolves around Software-as-a-Service [9]. In particular, the app store is an indispensible platform for developers. This is where its monopolistic nature emerges. Apple’s current genius lies in its use of vertical integration, creating both the world’s most popular smartphone and exclusive software to run said smartphone. Because Apple offers an exclusive market to app developers, it has an incredible amount of leverage, which it has no qualms using to its own (unfair) advantage.

There are multiple examples of this, though the two most recent stand out. In August, Apple blocked software updates for the WordPress application [10]. Their objective was to pressure WordPress into offering in-app purchases, something that the entirely free-to-use software didn’t support. In light of the sudden public scrutiny, Apple has since modulated its position [11], and has agreed to continue offering support for WordPress regardless. On the other hand, Epic Games distinguished itself specifically because it turned around and brought the fight right back to Apple. This in turn incited a movement, as other companies joined [12] to try and soften Apple’s iron grip.

But in addition to the business aspects of these antitrust issues, Apple is also embroiled in a heavily political fight. The US trade war with China, as well as a general wave of dissatisfaction with the Chinese response to Covid-19 and its actions since, has resulted in increasing departures [13]. Manufacturing companies are leaving, and Apple is in a very delicate situation.

While Apple’s manufacturing of the iPhone is no longer the core driver of its new growth, the iPhone remains the linchpin of Apple’s profits. No iPhone would mean no Apple app store and no Apple software, which in turn would sink the company. And the ongoing tensions between the US and China are having a major impact on whether or not the Chinese market will use the iPhone.

Trump’s recently considered ban on WeChat [14] would jeopardize the Chinese market. In mainland China, WeChat is ubiquitous; far more than just a messaging app, it serves a number of purposes, from transportation to hotel reservations, as well as cashless payments. In a recent survey, 95% of Chinese iPhone users said they would change phones should support for WeChat be removed from the Apple appstore [15] ; that’s 228 million iPhone users out of approximately 730 million users worldwide [16], and a full 8% of worldwide iPhone sales per year (which, year on year, is climbing [17]). The result of the loss of a market that size would be catastrophic: assuming the company would be able to absorb the financial hit, Apple’s stock would still enter a death spiral, potentially crippling the company.

It’s therefore a given that the Chinese market is incredibly important to Apple’s continued survival, which is why Epic Games’ actions are so interesting. A full 40% of Epic Games shares are held by Tencent [18], one of the largest corporations in China. In addition to that, Tencent is also responsible for WeChat, its flagship app. This means that the pressure on Apple has been created by a company in the sights of US sanctions, for its own benefit.

Epic Games’ war with Apple is based on the monopolistic practices that the company has shoved down the throats of both the public and its client for years. The threat of losing the pound of flesh it exacts for the use of its app store is all the more dire considering the risk of losing access to, effectively, its biggest market, due to the actions of the US government. Finally, the public nature of this fight means that there is no way for Apple to come out of it unscathed.

There’s no way of knowing how this fight will turn out. Perhaps the US will back down from a complete ban of WeChat; that is, after all, President Trump’s way of negotiating. If that happens, Apple won’t be in such a dire position. Or perhaps, simply, Epic Games and their allies will lose, although given the current international suspicion of monopolistic corporations, the PR damage will have already been done.

Wherever happens, in a few months a number of actors will be well placed to take a bite out of Apple’s very large revenue pie. And the clearest actions that Apple takes to mitigate that will be to Tencent’s direct benefit.

Sources:
1. Dan Gallagher, “Apple at $2 trillion leaves no room for error”, The Wall Street Journal, August 19 2020
2. Dave Thier, “Apple removes ‘Fortnite’ from the iOS App Store”, Forbes, August 13 2020
3. Shane McLorrain, “A game of cash and mouse”, Zeitgeist Zeitung, August 23 2019
4. Fortnite, “Nineteen Eighty-Fortnite – #FreeFortnite”, Youtube, August 13 2020
5. Apple, presented by Robert Cole, “Apple 1984 Super Bowl Commercial Introducing Macintosh Computer”, Youtube, June 25 2010
6. Cecilia KangJack Nicas and David McCabe, “Amazon, Apple, Facebook and Google Prepare for Their ‘Big Tobacco Moment’”, The New York Times, July 28 2020
7. Tom Warren, “EU opens Apple antitrust investigations into App Store and Apple Pay practices”, The Verge, June 16 2020
8. Trefis Team and Great Speculations, “Breaking Down The Drivers Of Apple’s Booming Services Business”, Forbes, November 29 2018
9. Daniel Sparks, “The Powerful SaaS Platform No One Is Talking About — and It’s Made by Apple”, The Motley Fool, September 12 2019
10. Anne Iovine, “WordPress founder says Apple blocked iOS updates in echo of Epic Games fiasco”, Mashable, August 22 2020
11. Mark Gurman, “Apple reverses move to have WordPress add in-app payments”, Bloomberg, August 22 2020
12. Daniel Van Boom, “News publishers join Epic Games in asking Apple for lower App Store fees”, Cnet, August 20 2020
13. Kenneth Rapoza, “New Data Shows U.S. Companies Are Definitely Leaving China”, Forbes, April 7 2020
14. Donald J. Trump, “Executive Order on Addressing the Threat Posed by WeChat”, The White House, August 6 2020
15. Felix Tam and Shiyin Chen, “Trump’s WeChat ban could turn Chinese iPhones into ‘electronic trash,’ consumers fear”, The Los Angeles Times, August 12 2020
16. “Number of Apple iPhone devices in use in the U.S., China and the rest of the world in 2017”, Statista
17. Will Feuer, “Apple stock reaches all-time high after Chinese government data shows iPhone unit sales spike”, CNBC, January 19 2020
18. Steven Messner, “Every game company that Tencent has invested in”, PCGamer, August 9 2020

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