Why Europe’s Efforts to Open Up the iPhone Won’t Hurt Apple Too Much

The EU's Digital Markets Act is challenging Apple's revenue

When reporters or analysts ask Apple CEO Tim Cook, on a thorny, controversial overseas issue facing the iPhone maker, often says Apple follows the laws in every country where it operates.

Now Apple is reportedly working to comply with a law that could force major changes to the iPhone and disrupt Apple’s lucrative app distribution model.

According to Bloomberg News, Apple is developing software to meet new European Union requirements due to come into effect in 2024. Nothing is final, but Apple is considering changes, including allowing third-party browser engines, allowing wallet apps to run on the phone’s NFC chip, and switching the charging port to USB-C from the phone’s proprietary Lightning connector, according to the report, according to the report company.

These changes would address long-standing consumer complaints and give third-party apps – including mobile wallets PayPal‘s Venmo and mobile browsers such as Google Chrome – a better chance to compete with Apple’s built-in apps. Switching USB-C chargers would mean most people could pack a charger for their phone and laptop.

But the biggest reported change is that Apple is working to allow direct downloads, or “sideloading,” of apps from the web, including potential third-party app stores, to iPhones.

Currently, the iPhone’s App Store is the only way to download software on iPhones.

At first glance, this appears to be the biggest antitrust complaint Apple has faced in the past decade. Apple makes a huge profit from its App Store, which deducts up to 30% of the digital sales made through each app it distributes.

Many companies including coin baseepic games, Fit, Meta, Microsoft, Spotify Spirit Twitter, have complained about Apple’s fees and the fact that Apple can delay updates or remove an app for violating App Store policies. Match and Spotify stocks jumped in Tuesday’s report.

But developers will have to wait to check the fine print in an official announcement before celebrating.

According to Bloomberg News, the changes could initially only take effect in Europe.

It’s not a tiny market, but Europeans spend less on iPhone apps than Americans. Of the estimated $85 billion the Apple App Store has taken in so far this year, spending on iOS apps in the EU is about $6 billion, according to an estimate by Data.ai, a company , which tracks app downloads and spend. By the same estimate, the US business was responsible for about $29 billion.

In the very unlikely worst-case scenario for Apple, if alternative app stores in Europe resulted in a total loss of app store sales in the region, this would only hurt Apple’s services business by about 4% and its overall revenue by about 1%. affect. and its earnings per share fell 2.5%, according to a Morgan Stanley estimate released on Wednesday.

Apple reported total revenue of $394 billion for fiscal 2022, which ended in September, of which $78 billion came from services.

The US has proposed similar legislation, the Open App Markets Act, which is currently being debated in Congress.

How Apple could still make money with apps

Even if EU law forces Apple to break the App Store’s distribution freeze, the company could still find a way to charge for apps that are distributed by other means.

In a court case with Epic Games last year over App Store policies, Apple officials argued that App Store fees cover intellectual property — the software tools developers use to create iPhone apps — and not just for be paid for distribution. Apps distributed over the web would likely continue to use Apple’s programming interfaces.

Apple has also argued that the App Store is important for customer safety, since software Apple hasn’t verified could steal personal information or payment information. So when Apple opens up the iPhone to third-party apps or app stores, there are likely to be security requirements for developers.

For example, Apple might require developers who wish to distribute apps outside of the App Store to apply for programs to gain access to the specific programming interfaces that make this possible, or to certify that they meet certain security requirements. These app makers may also be required to display a warning popup if their apps are not distributed through Apple.

Apple CEO Tim Cook speaks during Apple’s annual Worldwide Developers Conference in San Jose, California June 6, 2022.

Peter Dasilva | Reuters

A revealing example is Apple’s actions in South Korea. Earlier this year, a court ruling forced Apple to allow apps distributed through the App Store to bill their customers directly instead of using Apple’s own payment system.

But Apple still found a way to collect fees there. Apple required apps using the new policy to pay a 26% commission, only a small discount off the standard 30%.

Apple did this by requiring app makers to provide a spreadsheet format report detailing every in-app transaction during the month, and then collecting a deduction from those purchases. Apple reserves the right to review developer books.

Apple was able to enforce its system because it still controlled the App Store for distribution, and developers had to agree to its terms of service to even get distribution. In this case, app makers had to apply to Apple for “permission” to host their own payment processing, and agree to the spreadsheet and billing system that Apple developed. (South Korea is investigating Apple to see if its system violates its new law.)

Apple also required apps using this policy to display a message stating “This app does not support the App Store’s private and secure payment system.”

If Apple uses similar tactics in Europe, it could lead European consumers to believe the App Store is the safest and best place to get iPhone software. Or developers might decide that looking for alternatives is too much of a hassle.

“Apple customers have long prioritized the security, centralization and convenience that the App Store brings,” Morgan Stanley’s Erik Woodring wrote in a statement on Wednesday.

The details of how Apple will ultimately implement these changes depend on how its attorneys interpret the Digital Markets Act. According to Morgan Stanley’s announcement, Apple also typically pursues all available legal remedies when it comes to challenges to its app store model, including appeals.

Apple declined to comment.

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