Apple’s 30 percent tax invites EU Commission’s anti-trust investigations

Apple is all set to host its first online-only Worldwide Developers Conference aka WWDC on 22 June. Generally, in the run up to WWDC every year, news about speculations around probable feature announcements on Apple’s software road map start flooding the internet a week prior to WWDC day. 

This year, however, with just a week to go for WWDC and the news cycle has been dominated by news which questions some of Apple’s policies, such as the 30 percent Apple Tax.

The EU Commission has pulled up Apple and will be investigating if Apple is indulging in anti-competitive practices when it comes to locking the use of its NFC chip for only Apple Pay. The other major bone of contention is an issue that has been raised by Spotify and Rakuten regarding Apple’s tax and App Store policies.

Looks like Apple heads will have to answer a lot more questions than just those around its software road map come 22 June.

But wait, what is Apple Tax?

Well, there isn’t an official tax with that name. It’s just a developer-slang for the cut Apple takes from any in-app purchase (IAP) on apps on its iOS store if the goods and services you’re providing are digital in nature. There is a more funnier definition on Urban Dictionary as well. 

For instance, if you download any app from the App Store and then make an in-app purchase of say Rs 100, and pay through Apple’s payment infrastructure (which just lets you make one-click payment after verifying your biometric ID or Face ID), Apple gets to keep Rs 30 and the developer gets Rs 70. 

Some big name apps such as Netflix, Amazon, Spotify do not have this option of in-app purchases on the iPhone or any Apple device. If you are on your iPhone and want to buy that Kindle ebook, you will have to log on to Amazon’s web interface and make the purchase. It’s the same with Spotify, which only offers the free app on the App Store. For subscribing to its paid premium service, you will have to make the transaction on Spotify’s website. These companies either do not want to add the extra 30 percent cost to their service, or do not want to share their app’s income with Apple. 

What’s the big deal about charging apps? Apple is providing them a platform 

It’s true that Apple has a strong ecosystem of software and hardware products and a dedicated user base. App Store is a platform for app developers to reach out to this user base. It’s natural for Apple to take a cut out of the app’s earnings. But given the fact that even credit card companies charge less than 5 percent transaction cost, Apple’s 30 percent seems way higher. It may not make a huge dent for big name developers but for those who are just starting out, sharing a third of the in-app purchase is a huge amount. 

Digital media consultant, Preshit Deorukhkar, feels that 30 percent is too high a tax rate and the independent developers are the ones who are most affected.

“While Apple does take care of the payment processing, CDN (content delivery network) bandwidth, servers, security, etc, 30 percent is a high premium to pay for it. Ideally, it should be like the tax system, wherein up to a certain number (of downloads) there’s no cut, then 5 percent, the next slab at 10 percent and so on. Either way, 30 percent is just too much, especially considering devs can’t offer an alternative within the app,” says Preshit.

Furthermore, in its App Store, Apple is notorious for pushing its own apps over rivals. For instance, if you look up Spotify, Apple Music is also pushed in your face – doesn’t matter if you have it installed on the phone. When you buy Apple Music monthly service, you only pay Rs 99 and no additional tax. If music streaming service Spotify were to offer Premium service through Apple’s in-app purchasing system, you would have to pay Rs 119 (Spotify Premium price per month) out of which Apple would take 30 percent tax and Spotify would get the remainder. That additional tax eschews a level playing field.

For a moment, forget the price difference between Apple Music and Spotify Premium, let’s say both were priced at Rs 99 per month. Then even though a customer gets to choose between the similarly priced apps, the app developer, Spotify in this case, will effectively only get Rs 69 out of that. Subtract GST from Rs 69 and that’s the overall earnings which is 30-40 percent lower than the app price. See how app developers end up earning lesser than expected? Now, replace Spotify with an entry level independent app maker, and do the math for the developer who has to abide by Apple’s cut from their revenue.

This logic applies to all app purchases or in-app purchases when it comes to digital goods and services. When it comes to apps such as Uber or BookMyShow or Zomato which offer real-life services, that 30 percent tax is not applicable. 

The problem with charging an additional fee for digital services arises when Apple is also operating in the same space. A Wall Street Journal investigation had found that Apple tends to push its own apps at the top for categories such as Music, Maps, Books, etc., you get the drift.

Tomorrow if Apple had its own ride-hailing app then in the App Store search results Apple’s ride hailing app would likely show above Uber or Ola, for instance. Apple had denied the WSJ report findings, stating that Apple apps showing on top of Apple Store search results was because they were popular among its users. When it comes to Music, one can still give Apple the benefit of doubt as Apple Music is a popular product. But for ‘Maps’ related search, Apple Maps showing before Google Maps and Waze and for ebooks, Apple Books showing before Kindle? Give me a break.  

“First, a large corporation such as Apple competing against indie developers is wrong on so many levels. If I’m looking for an app, the fact that Apple can insert its own apps into the same ad space means an indie dev loses that chance. Moreover, it’s preposterous because Apple’s own apps don’t play by their own App Store rules,” says Preshit, adding that Apple’s own apps blatantly flout guidelines that the company enforces on other apps.

EU Commission pulls up Apple

Last year, Spotify became the first company to file a complaint with the European Commission over Apple’s 30 percent tax on in-app purchases, citing that it stifles competition.

“In recent years, Apple has introduced rules to the App Store that purposely limit choice and stifle innovation at the expense of the user experience—essentially acting as both a player and referee to deliberately disadvantage other app developers. After trying unsuccessfully to resolve the issues directly with Apple, we’re now requesting that the EC take action to ensure fair competition,” Spotify founder and CEO, Daniel Ek had said in his complaint last year.

This was followed by three demands, which come across as fair for any app developer:

  1. There should be same rules for Apple’s own apps/services and other third party apps
  2. No lock-in for consumers when it comes to payments (If they want to avoid Apple Tax they should be able to purchase a service from the web)
  3. App Store shouldn’t restrict communication between apps and its customers because IAP wasn’t allowed on it (Effectively means, if you want to subscribe to Spotify Premium, the onus shouldn’t be on YOU to know that it can be done via the Spotify website. As it stands, Spotify cannot send you a mail with a link to that purchase page on its website.) 

On 16 June, European Commission opened a formal investigation to assess if Apple’s App Store violated any EU competition rules when it comes to distribution of third party apps. 

In addition to Spotify, ebook and audiobook distributor Rakuten had also filed a complaint against Apple’s IAP charges on 5 March. Just today, there was yet another instance where Apple showed who’s the boss when it threatened to take an email service app, called Hey, off the App Store if it didn’t allow consumers to buy its $99 per year service, through Apple’s IAP.   

Margrethe Vestager, the executive VP in charge of competition policy said, “Apple sets the rules for the distribution of apps to users of iPhones and iPads. It appears that Apple obtained a “gatekeeper” role when it comes to the distribution of apps and content to users of Apple’s popular devices. We need to ensure that Apple’s rules do not distort competition in markets where Apple is competing with other app developers, for example with its music streaming service Apple Music or with Apple Books. I have therefore decided to take a close look at Apple’s App Store rules and their compliance with EU competition rules.”  

To give a bit of a background, Vestager is the same commissioner who has been the brains behind many fines levied on Silicon Valley’s Big Tech royalty. If Vestager is looking into an antitrust matter, you better have bullet proof defence. Google has repeatedly faced the music from Vestager; it’s a different matter that Google has managed to avoid paying a large part of the penalties. Apple is already fighting off a $14 bn tax fee that was levied on it by the EU Commission. 

With the WWDC keynote to take place next Monday, it was surprising to see Apple release a number-heavy news piece on 15 June, focussing, not surprisingly, on one particular aspect. 

Apple announces App Store facilitated $519 bn worth of billing and sales 

Based on analysis by an economic consulting firm Analysis Group, the App Store facilitated the sale of both digital and physical goods and services amounting to $519 billion in all of 2019. This is surely a number that would generally make up a few slides at the start of the WWDC keynote, where Apple CEO Tim Cook generally runs through some massive numbers pertaining to Apple to get all the attendees hyped up about the upcoming announcements. 

The report stated that the “highest value categories were mobile commerce (m-commerce) apps, digital goods and services apps, and in-app advertising.”

Out of this, around $61 bn is the collection of in-app purchases of which 30 percent cut is pocketed by Apple and 15 percent if the app has long term subscriptions. The majority of this pie ($413 bn) comprises physical goods and services for which Apple does not charge its 30 percent tax. 

Travel apps, including Expedia and United, accounted for $57 billion. Ride-hailing apps, including Uber and Lyft, comprised $40 billion in sales, and food delivery apps, including DoorDash and Grubhub, made up $31 billion.

Apple Newsroom

Apple hasn’t said it out loud, but it sure looks like its wants to portray to regulators that a major chunk of revenues made from its App Store isn’t taxed by Apple. In my many years as a tech scribe, I haven’t seen Apple just randomly release such big numbers unless they’re spoken of at some keynote or as part of its quarterly results. 

Given Apple’s pivot to services and plateauing of iPhone sales numbers, it is difficult to say that Apple will voluntarily discount the 30 percent in-app purchase fee. It owns the ecosystem and it will make the rules.

Big players such as Netflix, Amazon, Spotify and others can have their apps on the App Store even if they don’t allow IAP. The argument in this case is that these are considered to be ‘Reader apps’ ie. users of these apps have already subscribed to these services and iPhone is just another platform to use these apps. Sure, it comes at some cost to these big name apps as Spotify mentioned in its letter to the EU Commission – it is not allowed to reach out to its subscribers on iPhone. Spotify was also for the longest time, not available as a service on Apple’s smart speaker – the HomePod.

A smaller app developer does not have the option to challenge Apple. For them, it’s either toe Apple’s line or forget releasing an iOS version of their app. Unless the EU Commission finds Apple guilty of anti-competitive practices, things will most likely carry on as before. But hats off to the EU Commission for getting the timing right.

It will be interesting to see if Apple will indeed address this elephant in the EU at the WWDC Keynote next week. 

‘Wartime CEO’ Mark Zuckerberg’s decision to leave Trump’s Facebook post untouched isn’t surprising at all

Facebook CEO Mark Zuckerberg, in a meeting with his employees on 2 June, stated that his decision to leave posts by US President Donald Trump untouched, was final and thoroughly thought through. 

According to a New York Times report, this meeting which was scheduled to take place on 4 June, was preponed to 2 June, following the virtual walk out by employees on 1 June. The employee walkout was triggered by Facebook’s decision to give Trump a free pass on making controversial statements pertaining to the protests following the death of George Floyd. 

You may think what’s new in that? Trump has been known to rant on social media. Well, he still does that. But one of his social media tools of choice, Twitter, has started labelling any false claims Trump makes with a sticker. On 26 May, a tweet from Trump was slapped with a warning label with a link to the fact-checked news. This naturally irritated Trump. While Twitter CEO Jack Dorsey stood by his platform’s decision to fact-check Trump, Zuckerberg was quick to go on TV and state that he would never do that on Facebook.

A recent Trump tweet, seen to be inciting violence, got this treatment:

Following the brutal death of George Floyd—yet another instance of a white police officer using excessive force against a black man leading to his death—protests erupted across the US. There was one right outside the White House.

Many Silicon Valley tech giants have condemned the attacks. Facebook employees, in an unprecedented move, even staged a virtual walkout on Monday (virtual walkout as most of the employees are working from home). The reason for the virtual walkout was Facebook’s hands-off approach on Trump posts. 

“I disagree strongly with how the President spoke about this, but I believe people should be able to see this for themselves, because ultimately accountability for those in positions of power can only happen when their speech is scrutinized out in the open,” said Zuckerberg justifying why Trump’s post was up and how it didn’t violate any Facebook policy. Zuckerberg claimed that he had even got a call from President Trump, where he made his displeasure known to him.

Wartime CEO Mark Zuckerberg 

I am not an expert on Facebook’s finer policies on hate speech. But Zuckerberg’s response to this incident is not in the least surprising. In fact, he had made his operational style quite evident in November 2018, where he got together 50 of his close lieutenants and announced that going forward he would be a ‘wartime CEO’. 

Ben Horowitz, the co-founder of venture capital firm Andreessen Horowitz, had explained the concept of peacetime CEO and wartime CEO quite nicely in a 2011 blog post. According to Horowitz: 

In peacetime, leaders must maximise and broaden the current opportunity. As a result, peacetime leaders employ techniques to encourage broad-based creativity and contribution across a diverse set of possible objectives. In wartime, by contrast, the company typically has a single bullet in the chamber and must, at all costs, hit the target. The company’s survival in wartime depends upon strict adherence and alignment to the mission.

When Steve Jobs returned to Apple, the company was weeks away from bankruptcy—a classic wartime scenario. He needed everyone to move with precision and follow his exact plan; there was no room for individual creativity outside of the core mission. In stark contrast, as Google achieved dominance in the search market, Google’s management fostered peacetime innovation by enabling and even requiring every employee to spend 20 percent of their time on their own new projects.

Ben Horowitz, Peacetime CEO/Wartime CEO

2018 was a crucial year in Facebook’s history. It was just about dealing with the aftermath of the 2016 US Presidential elections and had successfully distanced itself from it, when in March 2018 data consultant Christopher Wylie blew the whistle on the Cambridge Analytica data scandal.

Facebook was caught with its pants down as its partnership had led to the data hoovering of over 87 million of its users. A large majority of these users in the US were probably used for influencing voters before the 2016 US Presidential elections. Zuckerberg even had to appear before the US Congress for a couple of hours, answering questions pertaining to the data harvesting of US voters among many other things. 

Despite these scandals, Facebook’s stock has never shown a massive decline quarter over quarter. Quite the contrary. 

Source: Statista

While Zuckerberg may have officially made it clear as to what type of CEO he was going to be in November, we had already begun to see a glimpse of that earlier that year. In September 2018, Instagram co-founders Kevin Systrom and Mike Krieger, had left the company. In May 2018, the second co-founder of WhatsApp, Jan Koum, had also departed. Oculus co-founders also left Facebook in 2018. It almost felt like Zuckerberg was done with letting these individual founders have their way, and was ready to take over.

Not long after all these departures, in March 2019, Zuckerberg announced his vision for a privacy-first messaging platform which would integrate Instagram, WhatsApp and Messenger. All these products were now headed by Zuckerberg’s chosen lieutenants and had no resistance from its actual founders. 

In Steven Levy’s Facebook: The Inside Story, on being questioned why Facebook was treating conservatives with kid gloves Zuckerberg says:

If you have a company which is 99 percent liberal – that’s probably the makeup of the Bay Area – I do think you have some responsibility to make sure that you go out of your way and build systems to make sure that you are not unintentionally building bias in.
 

Is Zuckerberg’s current stand on the matter his “going out of the way” to let Trump have his way? If it isn’t, then I don’t know what is.

But unlike earlier instances when Facebook employees were generally on the fence about issues outside their work-related KRAs, this time many are protesting. So far, two employees have quit

Of course, two employees quitting wouldn’t mean much for Facebook as there will be many more waiting to be hired in their places. But something that Facebook was known for—unquestioned support for its CEO—is on shaky grounds now.

Will that force Zuckerberg to take a policy stand against Trump? I really doubt that. As Horowitz notes:

Peacetime CEO strives for broad based buy in. Wartime CEO neither indulges consensus-building nor tolerates disagreements.

With Joe Rogan Experience under its belt, Spotify is aggressively building its podcast empire

Last week, a mail from the channel ‘JRE Clips‘ made it to my inbox.

It was Joe Rogan announcing that his podcast, The Joe Rogan Experience (JRE), would be moving to Spotify exclusively from 1 September.

The podcast is currently not available on Spotify. All JRE episodes, both the podcast and the videos associated with them, would be moving to Spotify from 1 September (while also being available on other podcasting platforms). But after 2020, everything will be exclusively available on Spotify. While the podcast will be free, you will have to log on to Spotify to listen to it.

The Wall Street Journal puts the deal price at $100 mn.

Who is Joe Rogan?

Joe Rogan, for the uninitiated, is a former TV-show host (Fear Factor on AXN India anyone?), MMA commentator, stand up comedian and a popular podcaster. He is a controversial figure as he interviews a range of people on his podcasts, across the left and right. He has also been accused of making sexist, racist and transphobic comments in his podcast. Some even call him an enabler of fringe voices who aren’t challenged enough about their ideas.

On the other hand, he has interviewed some influential names such as Elon Musk, Bernie Sanders, Edward Snowden, Richard Dawkins, Anthony Bourdain, Ed Norton and many more. And here’s the thing: the interviews on JRE aren’t short. The first interview with Elon Musk, yes THAT interview where Musk smoked a blunt and saw Tesla’s share prices fall, went on for over 2.5 hours. That’s pretty much the standard fare on JRE. And it’s great to listen to domain experts speaking without time limitations, something you rarely get to see otherwise.

Bottom line: Whether or not you like JRE, it is an influential podcast. Don’t take my word for it, look up the most popular or featured podcast on any podcast aggregator and you’re bound to find JRE in the list.

Why is Spotify buying JRE a big deal?

Spotify has been on a shopping spree when it comes to its podcasting arm from last year onwards.

Here are some of its podcasting-related acquisitions:

  • Podcast network Gimlet Media acquired for $195 mn
  • Podcast creation app Anchor acquired for $154 mn
  • Podcast network Parcast acquired for $55 mn
  • Podcast network The Ringer acquired for $196 mn

So far, it hadn’t signed an exclusivity deal with any individual podcaster. With the $100 mn deal with JRE, that could lead the way for others.

Spotify acquiring JRE is huge because it is getting a dedicated base of the JRE listeners over to their service along with an 11-year archive of podcasts. Yes, the podcast will be free to access, but JRE has as much as 190 million downloads a month and the PowerfulJRE YouTube channel is almost touching 8.5 mn subscribers. That’s a huge chunk of listeners to get from one podcast. Translation: More time spent on Spotify which means more ads to serve to listeners.

According to Tom Gray, the director of royalties, music copyright and licensing society, PRS for Music:

Joe Rogan just got paid the equivalent value of over 26 billion streams for a podcast license

First and foremost, Spotify is a music streaming service. The push towards making it a platform for podcasts has been on the rise from 2019. In a way, it makes sense. Every time you stream a song on Spotify, the company has to pay the artist some tiny amount. With a podcast or a podcast network under its wings, while the one-time upfront payment may seem high, it will pay off in the long run.

For free Spotify listeners, there will be ads. But even if you are a Spotify Premium user, there are in-podcast ads and Spotify is sure to get a cut. Just to give the example of JRE, the podcast begins with at least 5 mins of just shoutouts to the show’s sponsors. Now, do the math per 1000 listens for a podcast that has an estimated 190 million downloads per month.

The Joe Rogan Experience podcast is live on Spotify but for now only has the announcement of the deal

Applying its music recommendation algorithms to podcast recommendations also gives Spotify a chance to run its Streaming Ad Insertion tech, which lets Spotify play ads as podcasts are being streamed. It also gives podcast advertisers more insight on who listens to their ads. If it wasn’t obvious yet, you’ve to forget data privacy on Spotify. Given the range of topics covered in the JRE archive, it gives Spotify enough content to capitalise on their ad insertion tech.

While the YouTube stream of the podcast will cease once JRE moves to Spotify, it would be counter-productive to remove JRE Clipschannel, which is bits and pieces from the larger podcast. It’s a great touchpoint for YouTube audience to get on to the podcast.

Podcasting enthusiasts are divided over the move

Opinions are divided among the podcast enthusiasts.

While some claim that Joe Rogan will eventually have to let go of his creative freedom and toe Spotify’s line when it comes to business decisions, others are not liking this creation of a walled garden around podcasts.

Then again, there are some who feel Rogan moving to Spotify to make a statement against YouTube’s censorship measures, whereas others fear Rogan may have to censor his content on Spotify.

All said and done, it’s an interesting development in the podcasting industry. Spotify diversifying into podcasts is encouraging for the industry as a whole. But will these exclusive podcast deals be a trend going forward? Is this really the start of the “Netflix of podcasting“? What do you think?

Facebook Shops to be a new unified online shopping destination for Facebook

Facebook announced a new product called Facebook Shops last night, its latest online shopping feature which lets small businesses set up an online shop.

Facebook Shops at a glance

  • Businesses can create a Facebook Shop for free
  • Businesses can have collections based on the type of products they sell
  • The look and feel of the shop is customisable by the businesses
  • Touchpoints for Facebook Shops could be the business’ Facebook Page or Instagram profile and can also be discovered by Stories or Ads on Facebook platforms.
  • You can save products you’re interested in, place an order and checkout (provided sellers have enabled Instagram Checkout and Facebook Pay) all within the app.
  • WhatsApp, Messenger and Instagram Direct to be customer care platforms for businesses. Future updates will even let you shop on these messaging platforms.
  • Live Shopping feature to be added soon to Facebook Live and Instagram Live – sellers or influencers can tag products before going Live.
  • Loyalty Programs to be connected to Shops in the future.

But wait, Facebook already had Marketplace, so what’s new here?

Well, unlike Marketplace which was only on the Facebook platform (and Instagram, which has its own version of e-commerce outlet called Shop), Facebook Shops has ambitions to be a one-stop shopping interface, across all its platforms such as Facebook and Instagram. You can set up a Shop on Facebook and Instagram simultaneously, although Instagram Shop is expected to debut in a few months.

“We are seeing that many of the small businesses are moving online. We want to make it easier for them to do that too. So Facebook Shops allows a small business to easily set up a shop inside our apps. It will be a very fast experience for people to discover their products and be able to buy things directly,” said Mark Zuckerberg in an interaction.

Privacy measures upfront

It is rare to see Facebook announce a new product and at the same time release a privacy-focused article around it at the same time.

Having burned its reputation by displaying user shopping history on their profile page in the past (we all know THAT engagement ring purchase story), Facebook said it will not let your friends know what you have bought on Facebook Shops. If you choose to share it, then it will be allowed.

Facebook says it will only share aggregated data with the business to give it an idea of the traffic its Shop is getting. While this may sound great, remember Facebook is still monitoring your Shops behaviour and it will influence what shows up in your personalised ads or even the other way round. Your Facebook and Instagram behaviour could determine what Shops are presented to you in ads. At the end of the day, Facebook is still getting insights to improve its adtech platform.

“Our business model here is ads, so rather than charge businesses for Shops, we know that if Shops are valuable for businesses they’re going to in general want to bid more for ads,” Zuckerberg had said in a livestream post the launch. Not to mention, if anyone uses Facebook’s Checkout feature, Facebook gets a cut of the transaction.

User information will only be known to the business once you purchase an item on the Shop “using Facebook Pay on Facebook or checkout on Instagram.” Both of these features aren’t available in India, yet. The shopping tab on Instagram takes you to the website from where you make purchases. In India, Facebook is pushing for WhatsApp Pay to be official. Who knows, that could be a check out option too for Shops in India, whenever Shops and WhatsApp Pay debut here.

Capitalising on the pandemic?

In her book, The Shock Doctrine, author Naomi Klein talks about how crises are exploited to establish controversial practices, while the population is emotionally and physically distracted to really fathom any response.

In its blog post, Facebook has referred to a State of Small Businesses Report, and the job losses and small businesses shutting down due to Covid 19, as one of the major reasons for creating this platform. Having covered Facebook all these years, there’s no way this integrated Shops platform wasn’t in the works. The lockdown just gave Facebook the opportunity to double down on the development cycle and a perfect time to launch it.

Marketplace on Facebook and Messenger; Shops in Instagram; WhatsApp Business are three separate shopping experiences. Given Facebook’s ambition to integrate all the messaging apps in the future to have a unified privacy-first messaging interface, this integrated Shops announcement also has all the hallmarks of a Facebook-focused product in the making.

With an emotional peg such as ‘we are helping small businesses get back on track, by having this unified approach across our platform’, will policymakers be as aggressive to ask Facebook to break up?

Facebook’s ad platform is among the best out there. Already many small businesses operate on Instagram, Facebook, WhatsApp Business. Will they be forced to also open a Shop interface or will they be seamlessly transitioned? Every third or fourth post on Instagram is an ad. Will Instagram Shops intensify those ads. Will Shops-related ads get more priority over mere Sponsored posts?

Closer home, Reliance’s Jio Mart app is going to be integrated into WhatsApp Business to power 3 crore small Indian kirana shops, enabling digital transactions. Given that WhatsApp Business already has a well-oiled headstart in peer to peer transactions, will it remain a separate product or will see a future integration with Facebook Shops?

At launch, Facebook Shops looks like a US-centric product. It will be interesting to see if it launches any time soon in India, especially now that Jio Mart has promised a WhatsApp-powered business proposition.