How 30% Can Hyper Charge the Streaming Wars
The Most Important Story of the Week - 8-Sep-2021
I hope everyone had a relaxing Labor Day weekend. (Or Monday, if you aren’t in America.) Now that the summer is behind us—with lots of writers/execs taking off for August—maybe some really juicy news stories will drop. In the meantime, I had my eyes on Apple, which made some small, under-publicized, but potentially consequential moves in the streaming wars.
Most Important Story of the Week - Apple Allows Developers To Push Off-Platform Payments
Imagine you sell a simple product. Like craft beer. (Why do all my business hypotheticals involve food products? Because they’re easy to model.) Say you own Sculpin, a $14 per-six-pack IPA. If I came to you, snapped my fingers like Thanos, but instead of half of the world disappearing, your distribution costs shrank by 30% immediately.
How would you feel?
Elated? Ecstatic? Elacstatic? Is there an even bigger word for the incomprehensible joy a business leader would feel at seeing costs drop by 30%?
Of course, I can’t just snap my fingers and take the distribution costs of beer down by that much. Beer needs to be shipped to distribution centers, then shipped to stores, stocked on shelves, then sold by real world people. That costs real money. Say about 30% of the end cost.
One of the ironies of the digital revolution is the giant tech companies also have 30% distribution fees…even though often they don’t have to physically distribute anything. That just sort of became the industry standard ever since Apple set up iTunes in the first place and has been with us ever since, even as Google, Apple and Amazon have become increasingly more dominant and ubiquitous. (Food delivery and ride hailing also have 30% distribution fees, but they also employ lots and lots of workers.)
Which is why the newsthat Applewill let companies guide customers out of the app store to set up payments via “off app payments” is a big deal. (Though just how much remains to be seen.)
The dominance of Apple and Google in the app store industry has always felt a pinch egregious. Since they charge huge fees and together control 90%+ of the market, both companies have long been accused of monopolistic predatory pricing. Of course, not out loud by many companies because, again, they’re monopolies who will crush smaller firms who speak out. (And they have.) Add to the fact that the app store experience on Apple hasn’t gotten demonstrably better over time—a key feature of monopolies is stagnation, not innovation—and even legislatures are investigating the tech giant and their platforms.
Regulators have begun to take notice. And companies have begun to fight back. In particular, Epic Games sued both Apple and Google for antitrust grounds. Spotify complained to the EU as well. Regulators from South Korea to America have opened investigations. The decision to let certain publishers avoid Apple’s fees, for example, stemmed from a case brought by Japanese regulators.
In response, the last two weeks have been a strategic retreat for Apple. They see a world where one result of antitrust is a break-up—which companies reflexively don’t want—or a world where their fees go to 0%. (Or something much smaller than 30%.)
Again, this would make developers everywhere feel “elacstatic” and beyond.
Of course, these are baby steps taken by Apple. So let’s quickly explain why the app store fees are so ridiculous, speculate about how these moves could impact the audio/visual streaming wars, and then provide a HUGE caveat/point of negativity.
(I wrote about in-app fees and transactions last year when Fortnite first sued Apple, if you want another deep, deep dive into this important battlefield for the streaming wars.)
The Battle: In-App versus Off-Platform Payments
Say you want to sign up for HBO Max. So you download the app on your phone. You go to log in. Wouldn’t it be great if you could sign up through Apple’s payments? It would. But for that privilege Apple (and Google, Roku and Amazon) want to charge a transaction fee to HBO Max. Fair enough, they did build the application/operating system/platform.
But how much is that worth? Really? For Apple, it’s 30% every month for year one, and then 15% after that. But think about that: Apple sold you the phone. And now runs the operating system. So sure, it’s convenient to allow “in-app” payments, but 30% for that convenience? That seems rich. And charge it forever? That seems long.
Which is why companies want to push people “off platform” to sign-up and pay. Apple knows this, so they put all sorts of hurdles preventing companies from pushing folks off platform. (Since companies could then offer prices 30% lower.)
But the crazy part is Apple wants to collect these fees for doing very, very little.
The 30% Fee Is Blatantly Ridiculous and Monopolistic, and Driven By a (Deliberate) Misunderstanding of Digital Economics
The main difference between digital distribution and physical distribution is, simply, that the marginal costs for digital goods is essentially zero. This changes everything.
Take a DVD. In the heyday of DVD sales, the studios still had to make and ship an individual disc to every store they wanted to sell. Unsold items cost money. But think about the iTunes store. Once the file is uploaded, whether Apple sells a million copies or ten, for the most part the costs are the same. (Bandwidth is minimal.)
Understanding this reality is partly why a digital platform’s insistence on 30% revenue share has always been fairly disingenuous. Sure, they still have costs to maintain and run their stores, but it’s not nearly in the same ballpark as running physical stores with workers. Yet you often find “Big Tech defenders”—the ones usually emphasizing that Facebook, Google, Amazon and Apple are engines of innovation—comparing digital distribution fees to physical ones. Which makes no sense.
(The Big Tech defenders ignore this reality because they have sources at Big Tech, or in the case of some think tanks, get funding from Big Tech.)
The truth is in the pudding, meaning profits. There’s a theory promoted by one big tech strategist—who tends to semi-defend this monopolization—called the “law of attractive profits”, meaning you should design a strategy to take over the value chain where the most attractive profits lie. Well, if you looked at Big Tech, you’d say they’d figured that out: app stores.
But these aren’t just attractive profits; they’re obscenely high profits. Again, if the app stores of the world charged just 5% or lower, arguably their products would be nearly identical to what they are today. But those extra 25% in fees would either be returned to customers or the companies, who generate most of the value anyways. The delta between 5% and 25% is the price capture of platform (read monopoly/oligopoly) power.
This is how you can get a world where Spotify, Netflix and other streamers struggle to make money, but then Apple has record profits, driven partially by app store revenue/operating profit.
What Happens if Off-App Payments Becomes Much Easier or In-App Becomes Much Cheaper?
Let’s say there were significant antitrust ruling that App Stores had fees capped at somewhere between 2-5%. What would happen? First, at that point, a lot of streamers would probably be okay with Apple collecting some fee. 5% is a far cry from 30%. This would make it easier for customers to sign up for services. In other words, the consumer would benefit.
Second, either prices would go down or profits for streaming would go up. Right now, no one is making money streaming. Yeah, Netflix had a positive free cash flow last year, but all signs are that they’ll be at break even this year. Hulu was just breakeven recently, but mainly driven by ad-sales. Spotify struggles to make money every year too, which is why their founder has been so aggressive pushing back on Apple. Likely, prices would come down while streamers would make more profit, which would benefit customers too.
Third, there will probably be more streamers entering the field. If the distribution costs go down, streaming becomes more viable, which will draw more investment and entrants. This would benefit customers too with more variety to choose from.
So the likely result is that no matter how you cut it, this would benefit consumers, increasing their welfare. If your conception of antitrust is the “consumer welfare standard” in other words, Apple and Google fail that test.
The Caveat: Apple Isn’t Giving Up This Easily
To splash some cold water, let’s be clear that Apple isn’t giving up its fantastic profits that easily. All they’ve done, in a bid to stymie legislators and regulators, is let a few companies direct some customers to their own websites to sign up and pay for subscriptions. And even now it’s unclear if they can directly send them within the application, or if they have to use separate marketing channels.
If you’re looking for the least Apple could do, this was it.
And there is no promise they stick to their agreements. Sure, they did promise this to a Japanese regulator, but look to how often Facebook simply ignores US regulators to see what these agreements can mean.
So long story short, it’s a big deal for streamers, both video and music, to be able to direct new subscribers off the Apple App Store. This could start lowering their costs immediately. Long term, though, it will be fascinating how much further regulators try to go, and this will have big consequences either way in the streaming wars.
Other Contenders for the Most Important Story of the Week?