The Apple tax is rotten, a costly drag for users

Tim Cook, Apple’s chief executive, is unflappability personified. When facing tough questions from investors, journalists or lawmakers, Cook tends to speak with the sparkling precision of an iPhone’s diamond-cut edges — slowly, commandingly, in an elegant Southern drawl that conveys exactly the sort of finality you’d expect from the head of a $2 trillion tech titan.

Last week, though, Cook might have felt a bit like a spinning pinwheel under the polite yet relentless interrogation of a Federal District Court judge charged with deciding whether Apple is a ruthless monopolist. In the process, the judge, Yvonne Gonzalez Rogers in Oakland, California, highlighted a scourge affecting just about every Apple customer and the software developers who want to build apps for them.

Call this scourge what it plainly is, the Apple tax — the billions of dollars a year that Apple collects from large swaths of the technology industry for the privilege of selling things to iPhone and iPad users. Once, in the early days of the iPhone, Apple’s 30% fee on app purchases, and its restrictive rules, could be defended on the grounds of its great innovation in the mobile market. Apple, after all, was the first to market the modern touch-screen smartphone and the simple, one-tap way of adding apps to it, and it seemed reasonable for the company to collect tremendous winnings from its creation.

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But for how many years should Apple get to milk billions of dollars of almost pure profit from an invention first released back when George W. Bush was president? What justification is there any longer for Apple’s severe restrictions on how users and software makers can do business with each other, other than that it has the market power to impose them? Isn’t it time we were all given a break from the Apple tax?

Apple’s tax is a great boon to its bottom line. It is a costly drag for the users who spend enormous sums on its products and for developers looking to create apps to add tricks to your iPhone. And it can no longer be defended with a straight face.

The present federal case came about last summer, when Epic Games, which makes the blockbuster video game Fortnite, sued Apple over the strict control the company maintains over software on iPhones and iPads. Unlike personal computers, which let users download software from anywhere online, Apple’s mobile devices allow only a single source for apps: Apple’s built-in App Store. (Google’s app store on its Android phones has similar rules and fees; Epic has filed a separate suit over those.)

Apple says its restrictions are crucial to the iPhone’s safe, hassle-free appeal. Apple vets all the apps in its store for security, privacy and suitability; for instance, the company prohibits apps containing pornography.

The catch is that in exchange for access to iPhone users, the company exacts a heavy toll from software developers. Almost any time you pay an app maker through Apple’s devices, the company takes a big cut of the transaction. Thus if you play Fortnite on your iPhone and decide to outfit your avatar with a $15 digital hamburger suit, Apple will happily bank $4.50 to send you pixels of beef, leaving $10.50 for Epic. There is an even more pernicious rule: Developers are not allowed to mention anywhere in their apps that users can pay through some other, often cheaper, non-Apple payment service.

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Epic, one of the biggest companies in the video game industry, says that in requiring developers to sell through its App Store and use its payment system, Apple “imposes unreasonable and unlawful restraints to completely monopolize” the market for mobile apps and digital payments within apps.

Although the trial came to a conclusion on Monday, its true climax was late last week, when Gonzalez Rogers — who is not expected to render her verdict for months, peppered Cook with a series of pointed queries about Apple’s golden-goose business model.

Apple has long maintained that it wants to empower users with control over their digital lives. So if it cares so deeply about users’ agency, the judge asked Cook, why not allow people to have a choice in how they pay for digital goods?

The question seemed to catch the CEO off guard, and he answered with unusual frankness. If Apple allowed app developers to link to alternative payment methods, he said, “we would in essence give up our total return on our” intellectual property. Apple spends a lot of money building and maintaining the App Store, Cook said, and it’s also giving app developers access to a lot of customers. That’s worth the 30% cut, he suggested.

The judge kept pushing. Even if Apple brings iPhone users to Epic’s yard, after that first interaction, isn’t Apple effectively just collecting an ongoing profit by virtue of its position as a middleman?

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Here’s where things get tricky. Apple argues that it isn’t really a restrictive monopolist because Fortnite can be downloaded on lots of different systems — Android phones, video game consoles and personal computers. Some of those platforms also charge developers a cut of purchases. For instance, gaming systems like Microsoft’s Xbox and Sony’s PlayStation take a 30% cut on purchases of digital games, though unlike Apple, they tend to sell their hardware at a loss.

Apple makes a hefty profit on its hardware and in recent years has even raised its prices. In some ways, the problem with Apple’s App Store rules isn’t that they’re uniquely onerous; it’s that the store is so huge, its harms are more widespread. The App Store’s revenue in 2020 was $72 billion, according to Sensor Tower, an app analytics firm, nearly twice that of Google’s app store.

Gonzalez Rogers also pointed out the various ways Apple seems inured to competition. It has maintained the 30% fee almost unchanged since the App Store’s launch in 2008. Only late last year did it offer a price break for small-time developers. But “that really wasn’t the result of competition,” the judge said. “That seemed to be a result of the pressure that you’re feeling from investigations, from lawsuits — not competition.”

Other evidence in the case underlined the thesis that Apple acts with impunity in the app market, as if it has little to fear from competitors. In 2018, when Netflix was considering disallowing users to subscribe to its service from their iPhones, one Apple manager floated imposing “punitive measures” on Netflix for its temerity in looking to escape the Apple tax. (Netflix and other streaming services did eventually prevent users from subscribing through their iPhone apps.)

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And it’s not just the Epic case that ought to worry iPhone users. Rivals have accused Apple of imposing technical roadblocks that give its apps a leg up on competitors. European regulators have said Apple favours its music app over rivals like Spotify. Tile, a company that creates beacons that let you find your misplaced possessions, worries that Apple has given its own new finder device, AirTags, a technical advantage in working with iPhones. “We think it is entirely appropriate for Congress to take a closer look at Apple’s business practices,” CJ Prober, Tile’s chief executive, told The Times in April.

I agree. Apple is one of the most creative companies in the world, and in general I think it watches out for its users’ privacy, security and well-being better than many of its rivals. (Well, other than its users in China, where Apple has become uncomfortably deferential to the government’s controls on freedom.) But the controls and fees it imposes on apps are indefensible.

Apple has clear market power in the app business, and because its software tends to lock users into its ecosystem — once you choose an iPhone, going to some other kind of phone is arduous — there is effectively little competition in the market for smartphones. That power must be policed. If the courts fail to do it, lawmakers ought to step in.