iPhone sales are falling, and Apple’s app fees might be next

Apple shares have plunged 25 per cent from their peak in early October

This March 19, 2018, file photo shows Apple’s App Store app in Baltimore. As its iPhone sales slip, Apple has been touting its growing digital-services business as the engine that will keep profits up. But there may be a catch. Apple currently pockets a generous commission on all subscriptions and other purchases made on iPhone apps. But a brewing backlash against the company‚ cut, which ranges from 15 to 30 percent, could undercut the app store‚ profitability just as Apple is counting on it most. (AP Photo/Patrick Semansky, File)

As iPhone sales slip , Apple has been positioning its booming digital-services business as its new profit engine. But there could be a snag in that plan.

A brewing backlash against the rich commissions Apple earns from all purchases and subscriptions made via iPhone apps could undercut the app store, which generates about a third of the company’s services revenue.

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Late last year, Netflix rebelled against Apple’s fees, which can range from 15 per cent to 30 per cent. Analysts fear other companies may follow. And attorneys representing consumers in a pending Supreme Court case charge that Apple is an unfair monopolist in the market for iPhone apps. An adverse decision in that case could open a legal door that might eventually force Apple to cut its generous commissions.

Apple shares have plunged 25 per cent from their peak in early October thanks to concern over iPhone sales. Investors are now hanging onto Apple services as a “life preserver in the choppy seas” just as it’s about to float away, Macquarie Securities analyst Benjamin Schachter concluded after the Netflix move.

These app-store fees mostly hit app developers themselves, although some pass along the costs to users of their iPhone apps. Spotify, for instance, used to tack $3 onto the cost of its $10-a-month paid service — but only for users who signed up via its iPhone or iPad app.

Apple has doubled down on digital services as consumers cling to older iPhone models, hurting sales. Apple’s iPhone revenue this year is expected to drop by 15 per cent from last year $141 billion, according to analysts surveyed by FactSet.

Services, by contrast, are expected to generate about $46 billion in revenue this year, according to the same survey. Schachter estimates the app store will account for $16 billion of the services revenue. By those estimates, both services and app store revenue will have doubled in just three years.

Apple didn’t respond to the AP’s inquiries about its app fees. It has previously defended the system as reasonable compensation for reviewing all apps and ensuring its store remains a safe and secure place for e-commerce. Google charges similar fees in its own app store, although its overall business isn’t as dependent on them.

Besides the app fees, Apple’s services division includes revenue from its Apple Music streaming service, iCloud storage, Apple Care, Apple Pay and ad commissions that Google pays to be the iPhone’s built-in search engine. Apple is also expected to roll out its own streaming-video service this spring, although few details are available.

The potential streaming competition from Apple may have triggered Netflix decision’s to stop allowing customers to pay for new video subscriptions through its iPhone app. Instead, it directs users to its website, thus avoiding the extra fees. (Netflix did likewise with Google’s app store last year.)

Netflix alone won’t put a significant dent in Apple’s finances, even though it paid Apple more money last year than any other non-gaming app, according to App Annie, a firm that tracks the app market. That sum came to about $110 million, accounting for just 0.3 per cent of the services division revenue, based on disclosures made in Apple’s earnings calls last year. More than 30,000 third-party apps now accept subscriptions through Apple’s store.

Michael Liedtke, The Associated Press

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