Spotify's dispute with Apple speaks of an uncomfortable dependence on app stores

The market for mobile web products is less a megamall of hundreds of shops than it is two supermarkets sitting on opposite sides of a sub-urban street.

Holding the keys to those supermarkets are two companies: Apple and Alphabet's Google. Should one of them decide not to stock your product, there's little that you can do to persuade them otherwise.

It's a situation that has left Spotify AB in a bit of a fix in its mounting dispute with Apple. The Swedish company accused the iPhone maker earlier this week of blocking an update of Spotify's music streaming service from Apple's App Store to foster its Apple Music product. Bruce Sewell, Apple's general counsel, responded Friday with a letter saying Spotify was seeking "preferential treatment," according to a copy obtained by Bloomberg. BuzzFeed reported Apple's reply earlier.
 

"This is Apple's store, the rights of developers are at the mercy of the store owner," said Horace Dediu, an analyst at Asymco. "This is true for any shop in the world." An Apple spokeswoman declined to comment.

Revenue divide

The cut of revenue that Apple takes from sales made via the App Store has long irritated developers. Until earlier this month, Apple received 30 per cent of all revenue that routed through its platform. That changed June 13, with developers now able to keep 85 per cent of their revenue once a customer has subscribed to their app service for a year.

The move, designed to encourage subscription-based apps and generate predictable revenue flows for Apple, was welcomed by many developers. Yet some said it didn't go far enough, advocating a model that would cut the percentage of revenue that Apple derived as the number of subscribers increased. That would ensure that the likes of Spotify, which has 30 million paying subscribers globally, retains its incentive to attract customers via iPhone and iPad apps.

"If that were to happen, the objection becomes the opposite one in that it favours large companies," said Jan Dawson, an analyst at Jackdaw Research. "Apple's always had consistent rules, because then you're not playing favourites with the big guys or the little guys."

Sewell said in his letter Friday that Apple's App Store guidelines help competition, rather than hurt it. Rivalries have never influenced how it treats other apps, he added.

Until last year, Spotify had reduced the impact of Apple's percentage by charging iOS users $13 each month rather than the $10 it charges those who subscribe through Spotify's website. Then, in June 2015, Apple introduced its own music streaming service at a cost of $10 per month, undercutting Spotify's iOS price.

It was a classic example of what has become known as Sherlocking - Apple introducing its own version of a third-party product that enjoyed prior success on its platforms. The name stems from Sherlock, a search tool on Apple's desktop computer operating systems that in the early 2000s was updated to incorporate the same tools that an external application had started offering just a few months previously.

Changing priorities

At the App Store's inception in 2008, Apple intended it as a way of locking customers into using its hardware by becoming dependent on the apps contained on its devices. This year, however, iPhone sales have slowed, and Chief Executive Officer Tim Cook has responded by seeking improved sales from services such as the App Store, Apple Music and iCloud. Analysts expect the company's revenue to fall 8 per cent to $215 billion this fiscal year, according to a Bloomberg survey.

That makes the stakes higher, and any concession to Spotify may spur other developers to seek similar terms.

Global revenue generated by services and apps on mobile devices could total $800 billion by 2020, from about $300 billion today, according to Asymco's Dediu. Platform owners such as Apple and Google are only likely to capture about 10 per cent of that, with the rest generated by direct sales within other apps or websites: Amazon.com sales, Airbnb bookings, Uber Technologies rides and so on.

US Senator Elizabeth Warren criticised Apple's influence this week, calling for more aggressive enforcement of antitrust laws. Apple, Amazon and Google have used their market power to "snuff out competition," the Democratic lawmaker said in a June 29 speech.

"Apple has to be careful to manage the public relations side of this well and placate those that are dangerous to its interests," Dawson said. "Some people are sensing an opportunity."