THE APP STORE: In 2021, the Apple App Store brought in a
total of $85 billion worth of revenue out of which Apple’s cut of is about $20 to $25 billion. This
itself is insane, but if we look at it in terms of profit, things become even crazier. Historically,
the App Store has boasted an operating margin of 78% meaning that $17.5 billion of this is pure
profit. For perspective, Apple as a whole nets $114 billion per year meaning that the App Store
alone accounts for over 15% of Apple’s entire bottom line. Apple currently boasts a valuation
of just under $3 trillion with $114 billion worth of profit. So, with $17.5 billion worth of profit,
you could argue that the App Store itself is worth roughly $460 billion. That would make the iOS App
Store the 15th largest company in the world. Even if you want to be super conservative and
cut that valuation in half, we’re still talking about a market cap of $230 billion which would
still make the App Store roughly the same size as Coca Cola or Toyota. And when you zoom out,
this is really not all that surprising given that the App Store was responsible for $1.1 trillion
worth of transactions in 2022. For perspective, even Amazon only boasts half that revenue,
but forget companies. With $1.1 trillion worth of essentially GDP value, the App Store would rank as
the 17th largest country by GDP. But it wasn’t an easy journey getting here. In fact, Apple
initially didn’t even have plans of launching such an App store, and Steve Jobs insistence of
doing everything the Apple way has caused quite a bit of trouble for Apple in regards to the App
Store. So here’s the full story of the Apple App Store and how powerful the App Store really is.
ACCIDENTIAL INVENTION: With how successful the app
store has become, you probably think that this was always part of Apple and more specifically Steve
Jobs’ grand vision for the iPhone, but that’s not actually the case. In fact, the original iPhone
didn’t even have an app store, and while Apple was working on an app store in the background,
it wasn’t meant to be something big. It was just supposed to be a place where users could
download auxiliary apps from Apple themselves. In fact, Apple had no intention of letting 3rd
party developers onto the App Store at all. Steve Jobs figured that developers could just create
web apps that could be run on Safari. This would be easier for developers to adapt their existing
platforms and easier for Apple as they wouldn’t have to police the app store. But developers
weren’t exactly a massive fan of this idea. They would protest on forums and purposefully avoid
creating mobile versions of their web apps. But, what really pushed things over the edge was the
jailbreaking community. Just a few days after the iPhone launched, developers would put together a
jailbreak for it. And just a few weeks after this, the jailbreaking community would come out with the
world’s first iPhone game called Lights Off. Lights Off was a very simple straight forward
game that never really caught on but it’s what it represented that really mattered. This game
was an assertion from the developer community that if Apple wasn’t going to directly allow for native
development, they were just gonna do it on their own, and that’s exactly what happened. In October
of 2007, the community would release an easily accessible jailbreak called AppSnapp which came
with it’s own app store called Installer.app. This would quickly evolve into Cydia which I’m sure
you’re all familiar with and it’s what finally got Steve Jobs off his high horse. The same month that
Installer.app was released, Jobs would issue an open letter to the developer community. He didn’t
quite apologize for his previous stance but he did announce that a native App Store was coming
very soon. Imagine if Jobs hadn’t relented. Cydia would’ve became magnitudes larger than it did as
a lot more developers would’ve jumped on board. Apple may have even been forced to support Cydia
at one point if it became wide spread enough, but fortunately for Apple, Jobs made the right choice
and launched their own App Store on July 10, 2008 with just over 500 apps. On paper, the launch
was a massive success. Within just the first weekend, the App Store would reach 10 million
downloads. Just 2 months later, they would reach 100 million downloads, and within just 9 months,
they would reach 1 billion downloads. But putting these insane numbers aside, Apple was actually
having quite a tough time internally because Steve had insisted on doing everything the Apple Way.
THE APPLE WAY: Despite technically giving
developers what they wanted with the app store, Apple was still receiving a bunch of backlash
from developers. Likely the biggest reason for this was that Apple was forcing developers to use
Apple tools to make apps: Xcode and UIKit. Since then, we have seen alternatives and more neutral
languages pop up like Flutter but the bread and butter of iOS development is still Xcode which a
lot of developers are still quite salty about. In fact, that’s why Xcode has a relatively low
rating of 3.1 stars. It’s not that Xcode is bad per se but simply that a lot of developers are
still pissed off that they’re forced to use it. But, this is issue with developers was the least
of Apple’s concerns when it came to the App Store. Likely their biggest issue was actually supporting
the insane scale of iOS development. With something like Windows, this was never a problem
because Microsoft doesn’t really control what can be installed on Windows machines. So, all they had
to do was create an open platform and support a broad range of implementations. Everything
else was up to developers whether it be testing or distribution or scale. The same however could not
be said about the App Store. You see, while Apple allows developers to make apps for their various
devices, iOS is still not an open platform. It’s more of a quasi open platform as every single line
of code that makes its way on to the App Store has to be manually reviewed by Apple. On one side,
this largely limits what developers can and cannot do, and that’s why jailbreaking and Cydia were so
big despite the App Store. On the other side, this ensures that everything on the App Store
is of a certain level of quality and doesn’t contain malware or viruses or anything harmful.
That’s why all iOS apps have certain aura about them when it comes to UI and completeness. But,
this also means that Apple has to manually review every single version of every single app. Yeah,
I think you can see why that would be rather hard to manage, and Apple doesn’t take these
reviews lightly either. Of course, you’ll hear about something that slipped through the cracks
here and there. For example, they once accidently approved an app that would straight up let users
jailbreak their iPhone, but for the most part, Apple’s review system is very robust. In fact,
40% of App Store submissions are rejected largely due to nitpicky things. For example,
a keyboard might’ve been partially covering up a textfield which made the UI not as pristine.
Sometimes Apple will even reject an app on the basis that they don’t think its valuable to
users. But not only does Apple pride themselves in picking out the smallest of mistakes but they
aim to do it within 24-48 hours. Yeah, I don’t think you’d be surprised to hear that Apple has
500 people working full time to review iOS apps. But not only is the App Store labor intensive,
it’s also capital intensive. Going back to Windows for example, if you wanna download Photoshop, you
would head to Adobe’s website, and it would be up to Adobe to ensure that their website and servers
can scale to the demand. With the App Store, however, it’s all up to Apple. Aka, they currently
have to support 142 billion downloads every single year. With the average iOS app being 34 MB, we’re
talking about 4.8 exabytes of data or 4.8 million terabytes worth of downloads every single year.
Clearly, following the Apple way with the App Store has cost Apple quite a bit, but fortunately
there was gold at the end of the rainbow which brings us into the economics of the App Store.
THE APPLE TAX: Apple has a few ways of monetizing the App
Store starting with directly charging developers. Every year, each developer has to pay Apple $100.
Technically, there is a free tier that you could use to mess around with coding iOS apps, but if
you actually want your app to end up on the App Store, you gotta have the paid tier. As of 2022,
Apple had a total of 34 million registered developers. How many of these developers
are on the paid tier is unclear, but it’s very possible that this fee alone generates over a
billion dollars in annual revenue for Apple. Given how much Apple makes off the App Store though,
this pales in comparison which brings us into Apple’s main mode of monetization: the Apple tax.
For apps that generate less than $1 million per year, developers have to pay 15% to Apple. And for
apps that generate more than $1 million per year, developers have to pay 30%. Recently, these fees
have gotten a lot of criticism as being the 30% Apple tax that’s applied to all revenue that goes
through the App Store, but that’s not quite how it works. I mean think about it, $1.1 trillion worth
of revenue goes through the App Store. If Apple charged 30% on all of that, that itself would be
$330 billion worth of revenue or a wholenother $3 trillion company. While the App Store is extremely
lucrative, it’s no where near that lucrative. In reality, Apple actually only makes $20 to $25
billion per year from the App Store. So, in terms of percentages, they’re only earning 2 to 2.5% of
the revenue that passes through the App Store. And this is how Apple largely defends their 30% fee,
but that’s not to say that the fee is small like Apple claims either. The reality is that
Apple’s fee is quite large but not to the people that you might think. Take Amazon, for example.
They don’t release official revenue stats for their desktop website vs their mobile app, but
according to sellers, it’s usually about a 60/40 split with the majority coming from mobile. Aka,
Amazon pulls in nearly $300 billion every year thanks to their iOS and Android apps. But,
it’s not like they’re paying $100 billion to Apple and Google who by the way has nearly an identical
pricing model with the Play Store. How do you they avoid this massive fee you ask? Well, it’s not due
to some sort of secret background deal though they do have that as well. The real secret is
simply that Amazon has the authority to directly charge customers. Almost everyone has their credit
card directly linked with Amazon, so Amazon has virtually no need Apple’s payment infrastructure
which is where the Apple tax actually applies. It’s basically the same case with every other
big company or financial platform. These guys can charge you directly, so they don’t have
to deal with the Apple tax. The only notable exception to this rule is streaming services.
People often subscribe to streaming services out of impulse, and these streaming giants don’t want
to lose out on customers by slowing down the process and asking for credit card details. So,
they’ll often just use Apple’s double click to pay stuff. With that being said, you should be careful
when subscribing to these services through Apple because it’s often more expensive. YouTube Premium
for example normally costs $14 per month. But, if you buy it through the app using Apple’s payment
infrastructure, it’s $19 per month to account for the 30% tax. So, all of the big companies that
account for the vast majority of the $1 trillion going through the App Store don’t even have to pay
Apple a dime if they don’t want to. The people who actually end up paying Apple boat load is smaller
developers who are solely dependent on Apple’s payment infrastructure which is usually game
developers. People like RobTop from Geometry Dash, Supercell from Clash of Clans and Clash Royale,
or Nintendo who have been trying to fight the Apple tax for years. It seems that
Microsoft has also joined this fight which is not surprising given their recent gaming acquisitions,
but the Apple tax still stands. Even if the Apple tax eventually comes down though, while it would
be a nice break for smaller developers, it doesn’t really matter for Apple because in the end,
it doesn’t really change how powerful the Apple App Store really is. With historically
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