Apple does not develop Fortnite-scale video games or Xbox-scale game consoles. However, without much ado, its head Tim Cook has turned the company into one of the world’s leaders in the video game industry.
Apple’s key tool is the App Store, a platform where the company sells thousands of games, from Fortnite to Honor of Kings. At the same time, she receives a commission of 30% on each sale, and this explains a lot in the current competitive struggle of the tech giant. According to the Wall Street Journal, based on documents submitted in a recent antitrust litigation, Apple made more revenue from the gaming industry in fiscal 2019 than Microsoft (Xbox maker), Sony (PlayStation maker), Nintendo, and Activision Blizzard combined. – it amounted to $ 8.5 billion, although the company said that this official figure was too high.
The risk for Apple is that its role as an intermediary between the gaming industry and the more than 1 billion iPhone users, and therefore commissions, could be at risk – from legislation, court orders or other regulations. In 2020, Epic Games filed a lawsuit against the company, accusing it of suppressing competition. Having heeded this signal, regulators from Washington to Brussels are considering ways to curb Apple’s activity, which some politicians believe is really hurting competitors.
Another threat to Apple’s profit mechanisms comes from China. The country has adopted new regulations aimed at reducing the time that young people spend playing video games. Three of the top five most profitable mobile games on the App Store are developed in China, including Tencent’s Honor of Kings, which generated $ 2.5 billion in revenue.
According to Sensor Tower, in fiscal 2020, users from all over the world spent $ 45 billion on games in the App Store. Almost 31% of this money was spent in China, 26% in the United States. Apple’s commission was thus approximately $ 13.5 billion, or about 5% of the company’s total sales, which reached $ 275 billion during this period. Half of this money came from iPhone sales. Apple does not publish App Store revenues as a separate unit – the company includes it in the service category, and here sales volumes reached $ 53.8 billion. This category includes music streaming, iCloud, Apple TV, advertising and extended warranty.
Apple’s high profit margins from the gaming industry are almost coincidental. After releasing the iPhone in 2007 and seeing users hacking into their gadgets, the company launched the App Store to download third-party software overseen by Apple. At that time, it became clear that the app store could become a new gold mine. The service was released in 2008, at the time of launch it had 500 applications, many of which were games. As the mobile software economy grew, so did Apple’s profits. This became even more noticeable with the arrival of Tim Cook, who launched the fight against the stagnation of the iPhone.
A symbol of support for gamers is the new iPhone 13 Pro, which has a 120Hz screen – for gaming applications, it really is valuable. At the same time, the target audience here is a relatively small group of users. According to court records, only 6% of App Store game buyers accounted for 88% of purchases in 2017. On average, they spent over $ 750 a year. The most “generous” players (1% of total gamers for Apple) generated 64% of sales and spent an average of $ 2,694 per year. The biggest hit was Honor of Kings, which was the most profitable game on the App Store over the past year, according to Sensor Tower. Other hits include augmented reality-based Pokémon Go and Candy Crush Saga.
In August 2020, Epic filed a lawsuit against Apple, accusing it of creating an illegal monopoly on software distribution for its mobile devices, as well as forcing developers to use its in-app purchase system. Apple vehemently denied the allegations, citing established practices and comparing Google and Microsoft. The company believes that the commission is fair and in line with industry practice. District Judge Yvonne Gonzalez Rogers largely agreed with Apple’s arguments.
But this does not mean that the company has escaped the danger. The judge ordered the tech giant to allow developers to offer alternative payment methods within their apps with reduced fees – bypassing the App Store. This increases the likelihood that Apple could lose this source of income. However, the case lifted the curtain on the company’s gaming business. Apple, which has always valued secrecy, is hiding the impact the gaming industry has on its business. The company said that the figures presented in the court were grossly overstated, and Mr. Cook assured that Apple did not conduct such an analysis at all. But the judge read Apple’s sealed documents and denied these claims. As she noted, Epic’s claims are correct.
Mobile app sales may seem small compared to Apple’s total revenues, but given the court filings, the business is almost net profit for Apple. In fiscal 2019, Apple’s App Store revenues were $ 15.9 billion, according to analyst firm Sensor Tower, with 69% of that coming from games. By some estimates, App Store operating income this year was $ 12.3 billion, or nearly one in five dollars of the company’s total operating income.
Last Friday, Apple said the estimates were miscalculated and the figures were too high. Answering a question from a company representative during the court hearing, Tim Cook said that Apple had never tried to determine the profitability of the App Store as a separate unit, so he could not give estimates in this area. This practice dates back to the days of Steve Jobs, who sought to foster collaboration between the various divisions of the company. And the internal document with the given indicators was simply “One-time presentation”… Nevertheless, according to Mr. Cook, the App Store is still a profitable division, even without accurate calculations. He also confirmed that most of the store’s revenue comes from games.
The judge ruled that Apple is not a monopoly, since the mobile games market is developing very quickly, and now cloud gaming is also emerging. Similar to Netflix’s subscription model, native gaming solutions are offered by Microsoft and NVIDIA, and they are available from the iPhone bypassing the App Store. But with Apple’s gaming economy, there is still no clarity. Epic will appeal the judge’s decision, and Apple, according to some reports, is going to appeal the ruling allowing developers to accept payment in alternative ways.