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Comment by paulpan | Hacker News Reader

I think Apple's stubbornness at keeping their commission ~30% underscores how critical that percentage is to their bottom line profitability - both present and future. "Services" is foundational to Tim Cook's vision to continue to grow the company and increase its revenue streams.

Based on latest Q4 earnings, Services is one of the highest growth segment of Apple at 25% YoY (others being Mac at 25%, Other Products at 13%). As the clamor for M1-based Macs subsides, monetizing its existing 500M+ users is the only major revenue-growth area. But what happens if their commission rate is cut in half to 15%? Apple doesn't break out the specific App Store revenue amount or percentage but it must be quite significant.

Hence they're willing to risk these continued lawsuits and regulatory backlash. The day that Services division no longer reports 20%+ YoY growth could well be one when Apple stock faces the reckoning like FB/Meta.

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So Apple has around one billion customers. When you look at global income distributions there are not that many more people that actually have enough income to afford their products. Practically speaking while they may grow their customer base a bit further, they cannot double it without making far cheaper products or the world’s population becoming a lot more equally distributed income-wise.

The consequence of this is that they have to lean into inequality: get their existing high income customers to pay them more money. This is why services are such a good strategy and they are so unwilling to give up on that revenue, and it is also why they are planning to launch very expensive (and therefore high profit) new product categories like vr goggles and cars targeted at their existing customer base.

Apple is so ridiculously big that it is fun to map them back onto the world economy. Their yearly revenue is 0.4% of the world economy. Their market cap is 0.6% of global wealth. But that does present a real challenge to Tim Cook to keep growing. If apple doubles again they will be 1% of the world economy. Does that make sense for what amounts to a luxury brand?

And the problem for them is as they shed the luxury brand and become mass market general computing... the antitrust regulations will just keep accumulating, increasing the pressure. A vicious cycle.

> The consequence of this is that they have to lean into inequality

They don't have to do this at all. They could decide that they have 1 billion customers which is plenty and stick with that.

> The day that Services division no longer reports 20%+ YoY growth could well be one when Apple stock faces the reckoning like FB/Meta.

Is that what happens to a piece of software after it has eaten the world?

Yes, ironically, a piece of software that becomes used by everybody, or at least everyone it ever might be used by, becomes worthless in the eyes of investors, because merely tracking with population growth would be seen as a sign of a dying business. This leads to self destructive behaviors as the product tries to monetize itself in unpleasant ways and expand into non-core competencies. Dropbox is an often sited example.

The evolution of a tech company into a utilities company.

What if you planned a complete software product lifecycle and create a pool of talented teams / organizational modes that can adopt stewardship of the software at various life stages with the goal to smoothly transition between stages without harming users or workers?

Lets say it looks like this for the sake of argument: stage - organizational mode - goals

    Idea / Proof of Concept - individual or team - prove the idea out
    Growth Software Product - startup - carve a space for the product, grow its useful user base to a target number, transition to Utility
    Utility Software Product - utility - maintain the project and optimize costs and delivered value, transition back up to Growth or down to Archived
    Archived Software Product - library / anthropology - tell the story of the project, minimize costs, make it available to a wide audience, organize its community, transition back up to Utility

The idea is to have a pool of teams and organization templates where you aim to "pass the baton" between modes depending on the lifecycle stage of the software, and individual teams and orgs are rewarded based on how they meet their objectives including delivering a seamless transition to the next stage.

That's very well thought out. Sadly feels overly aspirational when just "keeping the lights on" is often underrated and neglected in many companies. Maybe eventually a good business will have the foresight to think of their organization in terms of different lifecycle stages.

Thanks. I agree that today's profit-oriented organizations are generally unsuited to act out this kind of product-centric methodology. Maybe future nonprofits or DAOs or something could pull it off.

>merely tracking with population growth would be seen as a sign of a dying business

If this isn't a perversion within capitalism I don't know what is. Heck, a market failure of capitalism itself.

"There's nothing worse than making something everybody uses."

What about Facebook. They have over 2 billion accounts supposedly and Wall Street still invests in them (ignoring this past week).

> (ignoring this past week)

How can you ignore this past week when this past week is _directly related_ to their account growth falling off a cliff because of the exact over-saturation of the market we're discussing here?

Yes, they're not valued on making $10 billion per year. That P/E means it would take 24 years to make your money back. They're valued so highly because they're growing and it's expected that in ten years, it'll $30 billion per year, cutting your return time. If growth ends, then this overvaluation corrects itself.

24 years to earn your money back works out to a 2.9% annual rate of return, which is a little bit above both the 20 and 30 year treasury yields (~2.23%), reflecting a small but positive risk premium for a big blue-chip company that is generally seen as a low-risk investment.

This looks like another example of how low interest rates cause stock valuations to run up until their long-term yields end up only slightly higher than bond yields. Investors expecting that rapid growth to continue might be disappointed.

Zero-Interest rate policy explains the world

https://www.readmargins.com/p/zirp-explains-the-world

When companies aren't growing explosively they're worth (looks at INTC) 10 P/E. If AAPL hit their ceiling they'd be overpriced by 2.8X. (Hand-waving away dividend and buyback differences)

Ironically, this 30% and the pivot to "Service" is why iOS devices get updates after 3 years while Android phones just become paperweights.

Android OEM are incentivized to sell as many phones as they can. They only make money on new hardware. Apple on the other hand still makes money on older hardware as long as the user still buy from the ecosystem. So it makes sense for them to keep the products working longer.

>Ironically, this 30% and the pivot to "Service" is why iOS devices get updates after 3 years while Android phones just become paperweights.

Apple's support window advantage long predates their services initiative.

Every flagship iPhone since the iPhone 4s in 2011 has gotten at least five years of OS and security updates.

If you count years where you only get a security update, but not an OS update the way the Android ecosystem does, they have devices that have gotten eight years of support.

App Store has been a >$1B business for at least a decade.

If it's just a question of revenue, Google can certainly afford to update it's Pixel devices for more than three years. Heck, they can afford to offer customer service and technical support hotlines the way Apple does as well.

However, the claim made was that Apple only started offering a longer update period after they started calling out service growth. This simply isn't true.

They can except... They don't control the SoC! Qualcomm decides if a SoC gets to boot a newer Android or not. And it’s in Qualcomm’s interest to sell more chips, since they get no revenues post sales; only maintenance costs.

That claim doesn't hold water. If people doing unpaid community support can produce custom ROMs for older devices that are no longer supported, Google can support older devices too.

Not to mention the ability of any company to make demands of their suppliers. If Google can demand device makers not use a fork of Android, they can demand suppliers offer support for their products.

Google simply doesn't care, because the customers they care about are the advertisers, not device purchasers.

Great point. Apple is lauded for their 5-6 year of iOS updates but it's not an altruistic move - the updates enable users to keep using their apps/services.

Also there's an upper-bound on price for an iPhone Apple is able to charge and if I can speculate, the "Pro" lineup does not outsell the "base" iPhone significantly. For one, there isn't enough product differentiation for an average consumer to pay the $300/40% price premium.

So in the world of 3-4 year iPhone cycles, keeping up the walled garden and monetizing those within is the surest path to revenue growth.

> but it's not an altruistic move - the updates enable users to keep using their apps/services.

What is altruistic in this world? Government welfare? parental love? I don't know of anything that is truly altruistic.

Google figured out the game better than that. After a few years there's no ongoing costs for those devices, but they still take their vig if users continue to use them.

Apple's approach is even simpler from a technical point of view. The oldest supported iPhone is the second generation of 64 bit processor. There were almost certainly problems with the first generation (of anything). The oldest supported Watch was the first with (a now mature) 64 bit processor. They made it mandatory for apps in the store to be 64 bit.

Android meanwhile supports 32 and 64 bit, multiple instruction sets, multiple (incompatible) SOCs etc. That is a lot more challenging.

>The oldest supported iPhone is the second generation of 64 bit processor. There were almost certainly problems with the first generation (of anything)

The iPhone with the oldest version of a 64 bit processor (the A7 used in the 2013 iPhone 5s) fell out of support after six years because it no longer had enough RAM for the new version of the OS.

Please don't attack services in general. There's nothing wrong with selling your OWN services.

Apple TV+ and Apple Arcade are examples of good services where Apple are commissioning and paying content producers. The services are good value, good quality and have competition on a level playing field (e.g. Netflix directly compete against both and don't have to pay a commission to Apple despite both their games and video services appearing on the App Store).

Other services from Apple like cloud storage, Apple News and Apple Music are more debatable value but they have competition so if you don't like them, use something else.

The App Store is different because you don't have an alternative. It is a parasitic system where where 70% of revenue (not a guess, that's the real number according to emails in the Epic lawsuit) comes from loot box grifting in games and there's literally no alternative to Apple's 30% tax. It is a poison chalice from top to bottom.

It comes down to the monopoly.

I honestly prefer to use Apple payments and Apple "Hide My Email" as I'm sure a non-trivial number of users do. If they could just refocus on making developers prioritize that flow for users over outside payment systems (e.g. create a flow requiring users to agree to disclose their private information to the app maker and third parties in order to use an outside payment system) then they'd keep most of their customers in the Apple ecosystem and keep the payment processing.

The fact they are trying to keep a stranglehold on this revenue seems penny wise and dollar foolish. Clearly regulators are gunning for them and it's not long before they lose this and don't get to set the standard.

If Apple had confidence in the superiority of their service they would not be afraid of someone undercutting them.

> I honestly prefer to use Apple payments and Apple "Hide My Email" as I'm sure a non-trivial number of users do. If they could just refocus on making developers prioritize that flow for users over outside payment systems (e.g. create a flow requiring users to agree to disclose their private information to the app maker and third parties in order to use an outside payment system) then they'd keep most of their customers in the Apple ecosystem and keep the payment processing.

It's pretty good stuff.

But they seem to be admitting that the payment processing is only worth a 3% cut. And you wouldn't charge apps for the email hiding.

They’re charging the apps for distribution, which is a lot of infrastructure and a lot of human-driven process that doesn’t come for free. There are good platform reasons for not allowing alternate distribution methods.

There are no wholesale prices for digital goods so they get tacked on as fees. All Apple is really doing is asking developers to give their customers an all-in price that they’ll display. You as a developer are free to raise your prices 30% on iOS, and many in fact do.

Every segment of every market does not need to be relentlessly competitive. Apple’s App Store rules are obvious, and if you don’t like them, you’re free not to develop for their platform (which itself is the product they sell to their consumers; not your app and of which the iPhone is only one component).

You are not entitled to be profitable any way you want; you have to find a niche in the market that’s profitable and if you can’t make money on iOS, the market solution is to just do something else. Countries — especially relatively small ones — that try to legislate around this are just as likely to be seen as more trouble for Apple than they’re worth to have an official presence in.

> They’re charging the apps for distribution, which is a lot of infrastructure and a lot of human-driven process that doesn’t come for free.

Yes but they're overcharging.

> Every segment of every market does not need to be relentlessly competitive.

It's significantly better for consumers if a 27% distribution fee faces competition.

Alternate app stores are a poor way to achieve this, but that doesn't mean the status quo is good.

> You are not entitled to be profitable any way you want

Same to apple. They want to control things they shouldn't have this much control over.

> Countries — especially relatively small ones — that try to legislate around this are just as likely to be seen as more trouble for Apple than they’re worth to have an official presence in.

If they get that aggressive, then thank goodness for the EU.

> Same to apple. They want to control things they shouldn't have this much control over.

I think that’s their right as a platform owner. They have no responsibility to sellers setting up shop in their walled garden. If the App Store was the busiest shopping mall in the world, they’re not obligated to make rent cheap; if your business model doesn’t work, apples rules are not new and you knew them before rolling the dice on an iOS app.

Under US law there is no guarantee it’s possible to craft a law that would stand up in court anyway.

> If the App Store was the busiest shopping mall in the world, they’re not obligated

If there were only 2 major places in the entire world to buy things from, and Apple had 57% of that shopping revenue, then yes, absolutely they would be obligated to do a lot of things.

Maybe they should provide some actual services instead of just trying to collect a 30% tax on everything that happens on a iPhone.

How long until they sell phones at a loss?

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