Life after the Apple App Store

For all the fuss over the App Store and how competitors have lobbied governments to force Apple to open up that side of its business, one question that never seems to get answered is what is a reasonable profit margin for a company to make from its enterprise?

It is really strange it isn’t asked, as it seems a really appropriate question when so much coverage of what has always obviously been a put-up attack against the company has focused on the (up to 30%) “Apple Tax’”Cupertino puts on sales through the App Store. Competitors and regulators seem deaf to arguments that the only ones paying that much in commission were the larger software companies moving more than $1 million dollars in apps.

That implies government regulators weren’t much interested in the smaller companies, and only really wanted to listen to the big ones.

Tell me what you want, what you really, really want

What did those big firms want? Margins, of course. In this case, they want to be able to sell their software — which they know is highly profitable — outside of the App Store, not because they want to make it cheaper for consumers (which they won’t), but because they see Apple’s 30% margin and want to keep that bit of cash for themselves. 

The problem is that once that cash is removed from App Store economics, Apple will need to recoup that money somehow, which will likely translate into higher developer fees and increased costs for developers that choose to stay in the store.

Apple’s largely progressive system, in which those with the broadest shoulders carried the load, has been rejected. So, what is a reasonable profit martin for companies to make? 

Aswath Damodaran, professor of finance at the Stern School of Business at New York University, is widely regarded as the world’s leading expert on corporate financial data. He keeps a regularly updated database tracking all kinds of values, including industry specific margins. His data tells us that Apple’s 30% App Store margin is tiny in comparison to the massive profitability of the large software companies that don’t want to pay their share. In fact, the margin on Software (System and Application) sits at 72.38%. 

If you want my future, forget my past

That latter figure is astonishingly high and indicates how much of your tax dollars are subsidizing software companies. (How much does your local or national government pay in software licensing costs at roughly 70% margins?) It certainly helps Microsoft maintain its own 43.79% margin across its business — and presumably means larger software firms have been able to lavishly lobby governments and regulators to force the App Store to open up. 

The only sectors higher than software are retail REITS (shopping centers, office rentals, etc) at 77.48% and Big Pharma (70.3%), closely followed by financial services (ie. the people who gave us the financial crisis) at 68.37%. Even now, tobacco is also a high-margin industry at 61.96%.

So, if tobacco, pharmaceuticals, financial services, and software can operate at those margins, who is taxing whom here? Apple, with its own overall 31.57% margin, or its competitors in the App Store space, striving to protect and grow their 70% slice of the pie?

Taking is too easy, but that’s the way it is

Well, for that 70% you get the software you need. So, what does Apple’s existing App Store model add to that? Take a look at Apple’s system and here’s a few things to get you started:

Universal distribution and global reach.

Malware and virus protection.

Developer tools and support, including verification of every developer.

Customer tools and support, including verification of every customer.

Fraud protection, with $2 billion in fraud blocked last year.

Payment processing through a trusted provider.

Consistent price structures.

Vetted software that works and does not contain malware or adware.

Open privacy disclosures.

Easy to get hold of tech support.

Accountability, including against accidental purchases by children.

And more…

This seems to be a huge amount of value. What should the margin be on that? 

Wind it all around

Apple’s take seems pretty slim in comparison to the software sector’s margins. What’s clear is that the real money here isn’t in running the App Store but in selling the software sold on the store. That store absolutely revolutionized software sales, enabling big developers to keep even more revenue from each sale by eliminating the cost of physical distribution. They did, but prices didn’t really decline; that’s how the software industry enjoys that obscenely high margin. 

But Apple’s enemies want to keep it all, and will no doubt introduce their own App Stores to distribute their software free of Apple’s restrictions against fraud, malware, privacy erosion.  They will not emulate everything that made the App Store great because they don’t need to; and they will have their own take on the ideal consumer experience. (It almost certainly won’t aim for anything as high as Apple has always delivered. (That is why people choose Apple in the first place.)

You probably won’t get privacy disclosures, probably won’t be able to purchase some essential software at the App Store, and won’t enjoy the same after-sales support as before. But none of that matters to these people. 

All they want is to keep those margins as high as they possibly can without a word about just what a reasonably profit margin should be. 

As I see it, these people argue for the red and for the blue — on the one hand they’ll say business is based on whatever people are happy to pay, while on the other they’ll demand government interference when they find people are happy to pay more than they want them to. In the end, it’s about the green.

Get with my friends

Because rather than continue to reinvent their own business to optimize efficiency and revenue, they want to keep things exactly the same — all aided and abetted by our current crop of imagination-free governments, shoring up anemic economies by charging you more for less than you already have. Or, to paraphrase Charlie Munger in All the President’s Men, “Show me the compensation model and I’ll show you the outcome.” 

It’s really not the Apple Tax you should be fighting — it’s the prioritization of profit over customer experience that matters. And customers aren’t winning.

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