Epic expert estimates Apple's App Store profit to be nearly 80%

AppleInsider

The App Store is an extremely profitable service for Apple, testimony from an Epic Games expert witness claims, with profit margins close to 80% for the digital storefront.

Ahead of Apple's bench trial with Epic Games on May 3, details of the two companies' financial dealings and activities are coming to light before opening arguments are made by either side. In the latest revelation, it seems that one of Epic's expert witnesses reckons Apple is earning a lot from the App Store.

Testimony from financial and economics researcher Ned Barnes alleges that the App Store has very high operating margins and has done so consistently for a number of years. According to Barnes, as reported by Bloomberg, the expert uncovered documents showing an operating margin of 77.8% for the App Store in the 2019 fiscal year, and 74.9% for 2018.

The data points were said to have been obtained from documents "prepared by Apple's Corporate Financial Planning and Analysis group and produced from the files of Apple CEO Tim Cook."

The percentages may not necessarily be entirely accurate, as Barnes said that one Apple employee informed him the numbers don't show the whole picture. Barnes then made calculations for new estimates, putting the margin closer to 79.6% for both years.

Barnes also said that he had acquired documents from within Apple that showed the 2020 fiscal year profit and loss estimates. Furthermore, Apple had apparently been tracking App Store profits for many years, with statements covering 2013 to 2015 also uncovered.

It is likely that Epic will use the figures to try and convince the court that Apple is earning considerable revenues from the App Store with relatively little outlay. It is probable Epic would employ such a claim to justify cutting down Apple's 30% transaction fee for App Store purchases, an area of complaint for the company.

Apple released a statement on Saturday stating the experts' "calculations of the operating margins for the App Store are simply wrong and we look forward to refuting them in court."

Other bits of data that have surfaced pre-trial includes the claim that "Fortnite" on iOS only accounted for around 7% of Epic's total revenue, with Sony's PlayStation being a bigger revenue source at 46.8%.

It was also found that Epic agreed to work with Nvidia to get "Fortnite" onto the GeForce Now cloud gaming service in exchange for receiving all revenue from purchases. However, a similar deal with Microsoft to use xCloud didn't go through, seemingly because Microsoft didn't allow Epic to directly accept transactions on that platform.

sflocal

What's Epic's profit with Sony?  Cherry-picking?

As if it's Epic's business to decide what other platforms should be allowed to make?

beats

SO FUC*ING WHAT??

It’s none of Epic’s business how much money Apple makes from THEIR products. 

12strangers

It seems epic and Nvidia should be investigated for antitrust violations and consumer fraud issues re: the secret side deal. This is, apparently, epic’s SOP try getting a little side deal and if the other company doesn’t give in, then go public with a smear campaign.  Sony would you care to comment?

edited May 2021

chasm

So let me get this right: making a lot of profit by reselling things is bad?

Hmmm. I wonder if Epic knows anything about the fashion or jewellry industries -- or indeed any industry other than its own. Distributors and resellers routinely mark retail pricing up more than 100 percent in the real world.

Epic would only have a case if they can prove that Apple is gouging, and they can't because it isn't. The App Store operated at break-even or a loss for YEARS before it became profitable -- that's what you call "investing in a startup business," which the App Store was -- and if you are successful you reap the rewards.

To put this another way: even including all the costs involved in getting them to you, if you think a dozen roses doesn't make the flower shop AT MINIMUM 100 percent profit, you really have no idea how capitalism works and should probably sit down and keep your opinions to yourself.

beats

chasm said:

So let me get this right: making a lot of profit by reselling things is bad?

Hmmm. I wonder if Epic knows anything about the fashion or jewellry industries -- or indeed any industry other than its own. Distributors and resellers routinely mark retail pricing up more than 100 percent in the real world.

Epic would only have a case if they can prove that Apple is gouging, and they can't because it isn't. The App Store operated at break-even or a loss for YEARS before it became profitable -- that's what you call "investing in a startup business," which the App Store was -- and if you are successful you reap the rewards.

To put this another way: even including all the costs involved in getting them to you, if you think a dozen roses doesn't make the flower shop AT MINIMUM 100 percent profit, you really have no idea how capitalism works and should probably sit down and keep your opinions to yourself.

Epic is worse. They sell digital outfits in Fortnite and even dances *facepalm* for your pre-animated characters. These characters are already capable of doing these motions but they are locked. You have to pay to allow the animated character to show you the dance it is already capable of doing.

Let’s forget the fact Epic stole original dances from black artists without paying them a penny!

lkrupp

Sarcastically, the law will not be involved here. It’s a matter of public opinion in that if you are big and wealthy you MUST be exploiting your customers. If the government is going to regulate prices and profits that's a recipe for disaster. Some here in these forums want Apple to be regulated as a public utility. Apple would have to apply for and prove the necessity of any price increase just like the power/gas/water company. Here in Illinois we have a CUB (Citizen’s Utility Board) who unfailingly opposes every single rate increase the utility companies petition for. Never once has CUB been on board with a rate increase. They always accuse the utilities of mismanagement and greed at rate hearings and demand rate decreases... every damn time.

Is this what you people want for the tech industry? 

edited May 2021

tommikele

This is gross margin not net. The net is nothing close to the number being discussed.

Almost everyone here is very technically astute. Not so much with corprate and business finance.

edited May 2021

fizzypanda

Two thoughts are:

1. It's not a crime or anti-competitive to make any size profit. The issue should never be what percentage Apple charges, businesses should be able to set their own rates and the market decides. Apple should not be forced to set a certain percentage through litigation. Market pressures either from developers not participating on the platform or consumers not buying apps should naturally force Apple to adjust their pricing to be more competitive. In the current market, Apple is pretty much in line with everyone else. Using App Store's so called profit margin as justification to force Apple to lower its rates is just plain wrong. It's not something developers should have any say in. If they don't like it, develop on Android, that's how our market works. You don't get to dictate the profit margins of other businesses just because you don't like it.
2. Not all the profits from the App Store don't go straight in the back pocket of Apple. I expect a lot of it gets reinvested to develop new hardware, software and services. Seems to be a common theme with these big developers arguing that Apple does very little to justify the profit they make on the App Store. Total rubbish, they continually develop the hardware and software the App Store runs on and that costs a lot of money.

If Epic win this it's going to set a very bad precedent for many businesses. Suddenly businesses can ignore their contracts and force other businesses to change their rates because they don't like that they make too much money.

It's crazy how many tech CEOs really have a persecution complex and feel entitled to everything.

genovelle

lkrupp said:

Sarcastically, the law will not be involved here. It’s a matter of public opinion in that if you are big and wealthy you MUST be exploiting your customers. If the government is going to regulate prices and profits that's a recipe for disaster. Some here in these forums want Apple to be regulated as a public utility. Apple would have to apply for and prove the necessity of any price increase just like the power/gas/water company. Here in Illinois we have a CUB (Citizen’s Utility Board) who unfailingly opposes every single rate increase the utility companies petition for. Never once has CUB been on board with a rate increase. They always accuse the utilities of mismanagement and greed at rate hearings and demand rate decreases... every damn time.

Is this what you people want for the tech industry? 

You comments my sound like a positive for some readers. The missing point is it is why our infrastructure is crumbling now. 

entropys

Epic is one of the barnyard animals demanding the government force the little red hen to give it bread.

entropys

Anyway while I suspect the App Store has good margins like all Apple endeavours, I bet there are a few costs conveniently left out to make a highly political headline figure. 

micdorsey

I wonder what hourly rate Epic's attorneys are charging. $500 per attorney, give or take? Well gosh, doesn't that seem a bit excessive?

The law firm would argue that their rate is driven by expertise and effort. Sort of like Apple setting its prices based on those same criteria, wouldn't you say?

crowley

chasm said:

So let me get this right: making a lot of profit by reselling things is bad?

If you're exploiting an exclusive competitive advantage that consumers are locked into, then the argument is that yes it is.  That is very much an abuse of a monopolistic position.

vanilla

entropys said:

Anyway while I suspect the App Store has good margins like all Apple endeavours, I bet there are a few costs conveniently left out to make a highly political headline figure. 

Yes, very astute. The cost that they are conveniently leaving out is ... the payments to app developers.

Apple retains only 30% of App Store revenue for purchases and 15% for subs over one year. Even if it cost them nothing to run the App Store, and nobody ever subscribed to anything, that would mean that an ABSOLUTE CEILING on their profits would be ... 30% !! How can they make 75% profit if more than 70% of revenue is immediately returned to developers?

Take into account subscriptions, costs to run the App Store including the costs to host, transfer and support apps (including free apps which Apple gets nothing for) and the likely true App Store profit is going to be somewhere around 20% and possibly lower.

crowley

Vanilla said:

entropys said:

Anyway while I suspect the App Store has good margins like all Apple endeavours, I bet there are a few costs conveniently left out to make a highly political headline figure. 

Yes, very astute. The cost that they are conveniently leaving out is ... the payments to app developers.

Apple retains only 30% of App Store revenue for purchases and 15% for subs over one year. Even if it cost them nothing to run the App Store, and nobody ever subscribed to anything, that would mean that an ABSOLUTE CEILING on their profits would be ... 30% !! How can they make 75% profit if more than 70% of revenue is immediately returned to developers?

The margin will be Apple's (revenue-costs)/revenue.  Payments to app developers will not be considered part of that equation, as it's neither Apple's revenue or cost, it's just developer revenue that Apple are handling and passing along.  

Apple's App Store margin is (Apple's take of app revenue - cost of running the App Store) / Apple's take of app revenue.

edited May 2021

acejax805

I remember a time when companies would be proud to have 80% profit margins on anything, and other companies would be jealous and envious. 

Nowadays, it's used as a weapon to embarrass a company. Weird times we live in. 

genovelle

They are clearly trying to pick a fight with Apple. The percentage they pay with Sony and Microsoft is much higher, so where is the problem there? They can charge more to access Apple’s customer base or find their own customers and pay nothing to Apple. Companies cannot use Target’s marketing to sell products on target’s website and then have a link on the product page to sell them directly at a cheaper price and cut Target out of the sale. It will not happen. 

applguy

And the profit on V-bucks after paying store fees I estimate to be 90%. (Full disclosure I pulled that number out of the air but it’s probably close.)

avon b7

chasm said:

So let me get this right: making a lot of profit by reselling things is bad?

Hmmm. I wonder if Epic knows anything about the fashion or jewellry industries -- or indeed any industry other than its own. Distributors and resellers routinely mark retail pricing up more than 100 percent in the real world.

Epic would only have a case if they can prove that Apple is gouging, and they can't because it isn't. The App Store operated at break-even or a loss for YEARS before it became profitable -- that's what you call "investing in a startup business," which the App Store was -- and if you are successful you reap the rewards.

To put this another way: even including all the costs involved in getting them to you, if you think a dozen roses doesn't make the flower shop AT MINIMUM 100 percent profit, you really have no idea how capitalism works and should probably sit down and keep your opinions to yourself.

I'm not sure how you managed to reach the conclusion of your opening paragraph.

The core issue is competition, not profit.

Of course, if Apple fires back with 'well, it costs us money to provide our services', that will get challenged as a matter of course, hence Epic's attempt to contextualise the claim in this way.

Of course, that isn't the core issue here, though.

And to answer your opening statement: it depends.

Where I live, if you try to make a lot of profit through quick resale of a property for example, it is generally considered bad. So bad that you will whacked in taxes if you try it.

Why? Because the bigger issue of property speculation can have deep and negative effects on the wider economy.

If you try to make a killing off of some new advanced pharmaceutical product it will also been seen as bad and you might run into problems. This happened with sofosbuvir.

In other cases there are not really any issues with making a lot of profit in the resale of products.

However, if you are deemed to have a monopoly over the resale of products you should understand why you might end up standing on thin ice. 

larryjw

crowley said:

chasm said:

So let me get this right: making a lot of profit by reselling things is bad?

If you're exploiting an exclusive competitive advantage that consumers are locked into, then the argument is that yes it is.  That is very much an abuse of a monopolistic position.

Epic is not a consumer. Your statement doesn’t apply in this case.