At the heart of Epic Games’ case against Apple is the company’s 30% App Store commission and its iron rule over in-app purchases. We now know, thanks to internal documents unearthed through the Epic’s lawsuit, that Phil Schiller, the top executive in charge of App Store, had floated the idea of cutting its infamous Apple tax to as low as 20% way back in 2011.
“Do we think our 70/30 split will last forever?” Schiller wrote in an email to then CEO Steve Jobs and Eddy Cue, Apple’s senior vice president of internet software and services. The email was included as part of Epic Games’ evidence against Apple on Monday and was first reported by Bloomberg. “While I am a staunch supporter of the 70/30 split … I don’t think that 70/30 will last that unchanged forever.”
Schiller goes on to say that he believed that Apple would eventually face competition from rivals, but that any change to Apple’s commission would have to come “from a position of strength rather than weakness.” He then suggested that such a change could happen once Apple began making over a $US1 ($1.3) billion annual profit from the App Store. So long as Apple could potentially maintain that $US1 ($1.3) billion profit, Schiller then suggested possibly cutting the so-called Apple tax to 25% or even 20%. Also included in the email is a link to a 2011 Wall Street Journal article, which focuses on how developers could potentially use HTML5 to avoid in-app transactions in the App Store.
“I know that this is controversial,” Schiller concludes. “I just tee it up as another way to look at the size of the business, what we want to achieve, and how we stay competitive.”
For its part, Apple told Bloomberg that Schiller didn’t actually say the App Store was making $US1 ($1.3) billion in 2011, and that there’s no indication that “the fee structure is tied to the profit produced by the App Store.” The report also cites Epic’s expert witness as estimating the App Store’s profit margin at roughly 80%. A separate Bloomberg report noted that analytics firm Sensor Tower had estimated the App Store made $US22 ($28) billion from commissions last year. It does not take a mathematical genius to suss that number is well over the $US1 ($1.3) billion Schiller suggested a decade ago.
The email isn’t quite a smoking gun, but it does show that at least Schiller had mulled the idea of reducing rates to be competitive. It also indicates Apple was aware that its commission rate wasn’t tenable in the long run — and technically speaking, Apple has tweaked how much it actually charges developers. The 30% commission rate is still the standard, but in 2016, Apple lowered its cut to 15% after the first year for app developers with long-term paid subscribers. (This is part of Apple’s defence against Spotify.) Then in November, Apple again announced it would reduce commissions from 30% to 15% for developers who earned less than $US1 ($1.3) million the previous calendar year. Unsurprisingly, the move was not appreciated by Apple’s critics — especially larger developers with profits well above the $US1 ($1.3) million thresholds.
Epic Games’ legal beef with Apple has been dramatic from the get-go, and that hasn’t changed now that the trial has officially kicked off. The first day of hearings was a technical disaster, and the whole thing is expected to last roughly three weeks. Each company is expected to bring a stacked list of experts to plead their case, and both Epic CEO Tim Sweeny and Apple CEO Tim Cook will also testify. This email is likely just one of the first among many salvos, so buckle up. It’s about to get messy.