Apple, Its Control Over the iPhone, The Internet, And The Metaverse

Jan 19, 2023 8:01 PM

Chapter One: The Creation of Today’s Internet and the Needs of Tomorrow’s

One of the neat things about the internet is who created it, why, and how.

Throughout the 1960s to 1990s, the foundation of today’s internet was built through a variety of consortiums and informal working groups composed of government research labs, public universities and independent technologists. These typically not-for-profit collectives typically focused on establishing common standards that would help them share information from one server to another (i.e. messages or files), and in doing so, make it easier to collaborate on future technologies, projects and ideas.

The internet’s quirky provenance is responsible for many of its best modern attributes. Today, everyone can create content on the internet, everyone is technically capable of accessing everything on the internet, and every web page on the internet can connect to another without the user needing to change browser, device or client. This flexibility, interoperability and universality isn’t by decree - there’s no Head of the Internet mandating the right to create, host or access/connect to a website.

Instead, this is a byproduct of the internet’s open standards, programming, markup languages and so on. These ensure that a user doesn’t need to pay for a web browser or to load a website, nor does the owner of a website need to pay for the code used by their website. Services like Zoom also work because they leverage actively maintained standards that are free to use and designed to support any device. Every device maker needs to support these standards in order to have happy customers. Some of us now recoil against aggressive data collection, ad insertions and tracking, but this is partly because we don’t need to give these up. The use of standards, such as HTML, means that browser extensions can block ads or tracking. We may be willing to give up data for a free service, but the Internet’s makeup means we don’t have to.

The benefits here are hard to overstate. But just imagine, for example, how the internet might differ if it had been created by multinational media conglomerates in order to sell things, serve ads or harvest user data for profits. Downloading a .JPG could cost money, with a .PNG costing 50% more. Teleconferencing software might have required the use of a broadband operator’s app or portal (e.g. Welcome to your Xfinity Browser™, click here for Xfinitybook™ or XfinityCalls™ powered by Zoom™). Websites might only play in Internet Explorer or Chrome, with the user and/or site paying for annual support and/or access. Regardless of the specific differences, it’s likely internet penetration would be lower, as would usage and associated commerce.

The web’s cross-platform, standards-based and non-profit origins are inseparable from the internet’s rapid growth, the trillions of dollars in companies that have been founded over the past 30 years, and the positive societal impact of these companies (e.g. a drop in the cost and increase in the quality of communications, the reduction in gatekeeper power, lowered transaction fees, etc.).

Today’s heavily conglomerated internet giants remain mindful of the fact that open APIs, common standards, exportable data, etc., all help grow both the internet technology acceptance model and, in most cases, their own bottom lines. But these companies are less concerned with how the overall market grows than their share and control of this growth. Technology companies, almost by definition, prefer that the market build on top of or through them then have new entrants build around or in competition with them. As a result, the same companies that emerged thanks to openness tend to reject these principles where they might undermine their strategic position.

This isn’t an unusual disposition for a for-profit company, but the implications are particularly powerful in digital markets. In the offline world, free market economics enable robust competition that typically delivers the best products, variety and prices for consumers, and moderates the power of the strongest market players (if only due to diseconomies of scale). Online, incredibly powerful network effects and zero-cost marginal revenues/distribution has enabled dominant platforms to push back against the open nature of the internet, forcing consumers and creators to use them as universal intermediaries, and subduing standard market forces.

Right now, we are on the cusp of the next internet. The terms used for this future vary and the degree to which you believe in one label or vision is not particularly relevant. And the technologies to design, enable and support the fullest version of this are as far from the capabilities of 2021 as the 1990s Internet is from us today. But what matters is that a growing share of our time will be spent within virtual spaces and with virtual goods — for education, work, health, politics and leisure. Sometimes these spaces and goods will be purely virtual, other times virtual twins of physical ones, and sometimes augmented reality. For related reasons, a growing percentage of our income will be spent on virtual assets, goods, experiences — many of which we’ll be able to sell, trade, share, use or improve. And of course, enormous new industries, marketplaces and resources will emerge to enable these opportunities, with novel types of labor, skills, professions and certifications invented to serve them.

There’s no way for this future to be developed as the original internet was. The US government and public research institutions led the development of the information superhighway in part because few in private businesses understood the commercial potential of a World Wide Web, but also because these non-profits were essentially the only entities with the computational talent, resources and ambitions to build it. Conversely, all of today’s mega-tech companies are deep believers in this future internet, and are best positioned (via resources and talent) to build it.

The most important impediment today is Apple. Although no company has done more to propel the last 15 years of the internet, its policies are unlikely to produce the most prosperous overall ecosystem and do not lay a strong groundwork for the “next Internet”. Instead, Apple is inhibiting the growth of the future internet, while ensuring it’s designed around tolls, controls and technologies that prevent competition, prioritize the company's profits, and lack much of what made and still makes the open web so powerful.

Chapter Two: There’s Apple, then GAFM

Apple’s adverse effects stem from three interconnected and increasingly powerful elements.

First, Apple believes it knows better than consumers, the developer community, and the market at large. This includes which technologies should be adopted by the internet community, the role of user agency (and the extent to which users are capable of informed consent), and common business practices around user data, privacy and security.

This disposition led Apple to limit the role of the marketplace on its device (something the company did not do for the Mac). Specifically, Apple mandates that on its devices:

  1. All applications would need to be distributed by the Apple App Store, and could not be directly downloaded from the app maker or a third party app store
  2. All applications distributed by the App Store would need to be approved by Apple, and approval would be contingent upon an extensive list of policies and requirements
  3. All applications distributed by the Apple App Store would need to conform with the App Store’s billing policies, which typically meant that Apple was the exclusive in-app biller for iOS applications

These three layers are technically different — the ability to use an operating system driver has nothing to do with the ability to distribute an app to the consumer or charge for them for a given piece of content or function. However, Apple’s iOS devices forced them together. If a developer wants to make an app, they need access to native drivers. And if a developer wants access to native drivers, their apps need to be distributed by the App Store. And if they want to use the App Store, they must adhere to Apple’s policies, which means using Apple’s billing systems.

Apple’s control and integration allowed it to offer a best-in-class mobile experience that also helped repel the most pernicious aspects of the online world; onboard and engage less technically savvy users; and develop a richly monetized app ecosystem. This, in turn, led to unprecedented success. Today, the iPhone has 66% market share in the United States, 75% of U.S. App Store revenues, and over 80% of time spent on the mobile internet (iOS’s share of physical e-commerce transactions is likely somewhere in the middle of this range). And this dominance is also growing. Eighty percent of U.S. teenagers have iPhones and the device held 90% of smartphone activations in the week after Christmas 2020.

While Apple’s closed approach is why the company’s products are so successful, it’s success is also the reason why its closed approach has become so onerous. There is no proprietary, closed system that affects more lives on a daily basis than that of iOS. Due to this fact, Apple has become a de facto regulator for the internet; a single for-profit body that wields enormous soft, hard, and even accidental power.

There are almost no large companies in the world that can live without a mobile app (these apps are sometimes available only to a company’s employees). Due to iOS’s share of users, spend and time, this means having an iOS app. And having an iOS app means complying with all of Apple’s policies and requirements.

Consider Apple’s smackdown of Travis Kalanick-era Uber. To prevent fraud and identify users even after they deleted the app, Uber had been using a technique known as fingerprinting. According to a report in The New York Times, Kalanick immediately ended this practice after being threatened by Apple CEO Tim Cook. The point is not that this is a bad outcome. Instead, it’s remarkable that Uber was brought to heel by Apple after having spent years flaunting real world regulations globally, often actively campaigning against them and even mobilizing its users to the cause.

And consider also Apple’s upcoming changes to the Identifier for Advertisers (IDFA), a tool that has enabled advertisers and app developers to identify and track a user by a unique device signifier, without the user providing any account information. In a unilateral decision, Apple announced in 2019 that it would shift its IDFA solution from “opt out” to “opt in” in 2021. Whether or not you agree with the policy, the effects will be seismic. Between 70 to 90% of users are expected to “opt out” when prompted later this year - a move estimated to reduce the 2021 revenues of Facebook and Google by between $5 billion to $20 billion. Crucially, Apple’s policy adjustment was not prompted by any real world law or push. Indeed, it's not clear legislators have either the power or inclination for such a move. Instead, it reflects part of Apple’s new privacy initiatives and distaste for ad-targeting (it’s notable that Apple collects 0% of advertising-based mobile app revenues, but substantial portions of payments).

Apple’s policies also govern how apps are designed and operated off iOS, too; although developers can partly “fork” their apps so that there’s an iOS edition and a non-iOS edition, this is technically, financially, and operationally impractical for almost all developers. And the iOS ecosystem is now so popular and lucrative that entire markets and technologies (e.g. cloud gaming, 5G, AR) have only made it once they’re embraced by Apple, which means the company also defines how they’re deployed.

Apple’s regulatory role often leads to widespread good. The company’s aforementioned efforts to suppress excessive tracking and data collection is particularly commendable and worth highlighting. And despite (and sometimes because) of its control, there are many vibrant and competitive secondary markets on top of iOS, such as those of streaming video and direct-to-consumer e-commerce.

However, Apple has a vested financial interest in its regulation, and in many cases, it makes decisions that obviously represent those interests over and at the expense of its users and/or the ecosystem at large. Section 3 enumerates these decisions, which include which technologies and standards should exist, the monetization models that should be used and the profits collected, and thus also which businesses are built and not built, and when. Collectively, this power can prevent, or at minimum confine the next generation internet — often to Apple’s benefit.

Chapter Three: The Harms from Apple’s Regulatory Power and Legislations

↪ A: Apple effectively controls whether specific products/businesses can have an app

↪ B: Apple can and does hold up entire industries and business models

↪ C: Apple can, does, and will wipe out existing businesses and technologies with little-to no-notice

↪ D: Apple’s policies result in higher consumer prices and/or lower developer profits

↪ E: Apple unilaterally controls monetization of applications, and the results are inconsistent and problematic

↪ F: Apple’s policies frequently benefits its own services and harms those of its competitors

Chapter Four: Apple’s Deficient Monopoly Defenses

Apple typically defends itself from monopoly allegations and its supposed harms using one of five arguments. But given its unprecedented power and controlling policies, our standards for these claims must be high. Apple should either be able to show that its rules are consistently and primarily aimed at the best outcome for users and developers or that users and developers can practically escape those rules. They are unable to do either.

A: Developers and Users Can Always Leverage the “Open Web”

Apple correctly argues that developers do not need to make an app to reach iPhone users. Instead, they can create websites accessible via the iPhone’s Apple Safari browser, or one developed by a third party, such as Google Chrome. In either of these latter two cases, Apple does not review, approve, or deny the content of these websites, nor does it require the use of the App Store for payment. However, this argument is misleading.

Websites are at a deep disadvantage on the iPhone. Because apps use native device drivers, they typically run much better and more efficiently than web pages and web apps, which “heavier” code that isn’t optimized for the user’s specific device and instead require a “translator” to leverage the device’s capabilities.

In addition, the iPhone UX is intentionally designed around apps and not websites. Note, for example, how much easier it is to navigate, manage and sort apps than browser tabs (and even if you bookmark a site or progressive web app to the homescreen, they open into your browser and then get lost or duplicated in tabs). Clearing your web history, cache or cookies means logging out of all your browser experiences and deleting login credentials, but not those of your apps. Crucially, this is a design choice. Other OSes, most notably Palm’s WebOS, were conceived to facilitate Web apps.

These two reasons - one technical, the other experiential - explain why users download Netflix apps versus access the service via browser, and why Apple tells developers that their businesses will be more successful via app.

There is no open web on the iPhone, either — only the “iPhone web.” Five years after the launch of the iPhone, Apple revised its App Store policy to allow for third party browsers such as Google’s Chrome and Mozilla Firefox. But this was only a surface level compromise: Apple does not truly allow for alternative browsers. To quote Apple expert John Gruber, the iOS version of Chrome “does not use the Chrome rendering or JavaScript engines - the App Store rules forbid that. It's the iOS system version of [Safari] WebKit wrapped in Google's own browser UI.” In other words, Chrome on iOS is simply a variant of iOS Safari that syncs to a user’s Google/non-iOS Chrome accounts and usage. And notably, Apple forces third party browsers to use older, and thus slower and less capable, versions of WebKit than iOS Safari.

This approach also means Apple’s technical decisions for Safari affect the open web for iOS users. For example, Safari doesn’t support much of WebGL, a JavaScript API that allows for complex browser-based 2D and 3G rendering via local processing and without plug-ins. Safari also doesn’t allow websites or progressive web apps to perform background data sync, access the camera (thus no FaceID login, AR-experiences, light sensor usage, etc.), access many BlueTooth devices and functions, pay with NFC, etc. And because Safari opts against these capabilities for web-based experiences, they’re strictly off limits to iPhone developers and owners, no matter the browser

Many of these policies decisions are intended to protect users. Allowing browsers unlimited access to device drivers and folders poses a security risk, for example. However many seem specifically designed to protect Apple’s App Store and billing - especially for games, which drive 75% of App Store revenues.

WebGL, for example, might not run as well as device-specific code, but today’s hyper-powerful iPhones are capable of running a large number of WebGL games without crashing or disappointing the user. Battery is still a challenge, but that’s true when playing Call of Duty Mobile or PUBG anyway (both of which Apple frequently promotes in its App Store). Remember, too, that Apple doesn’t require developers to use the “best” tech for its games, nor the most efficient code. So it’s just a policy being enforced in this context. And even when a user manually saves PWA to their home screen, these web apps are prohibited from sending push notifications or performing background sync. This doesn’t “protect” the user, but it does effectively prohibit a game that is deeply reliant on friend notifications. Plainly put, Apple’s blocking of rich WebGL of stymying of cloud game streaming has ensured that its App Store is the only way a developer can distribute a premium game on iOS, and the only way an iOS user can access one.

The rejection of web-based NFC, meanwhile, helps drive mobile payments through apps distributed by the App Store, and its security could be bolstered through any number of secondary requirements (e.g. thumbprint verification or FaceID).

Ultimately, Apple cannot reasonably argue developers and users can freely leverage the open web when Apple distributes the browsers used to access it, determines which standards and capabilities these browsers afford, and how a web app can interact with the user. Especially given the ways in which it unnecessarily limits the “open web”.

Let’s apply Steve Jobs’ own definition of openness:

“Adobe claims… that Flash is open, but in fact the opposite is true. Let me explain. Adobe’s Flash products are 100% proprietary. They are only available from Adobe, and Adobe has sole authority as to their future enhancement, pricing, etc. While Adobe’s Flash products are widely available, this does not mean they are open, since they are controlled entirely by Adobe and available only from Adobe. By almost any definition, Flash is a closed system.”

By almost any definition, but especially Jobs’, the iPhone web is a closed system. As a result, the vast majority of the US mobile internet is “closed” and subject to Apple’s decisions. In truth, this feels less like a defence (Section 4) and more like an additional harm (Section 3)

B: Consumers Can Buy Other Phones and/or Developers Can Flee To Other Devices

For the foreseeable future, iOS will be the dominant access pathway, passport, monetizer and platform for not just digital life, but virtual ones. Apple holds this role because it makes best-in-class hardware, offers the best apps, and operates the most lucrative app store. This is a reflection of its success in the competitive mobile phone marketplace for close to 15 years and under a broadly consistent playbook.

And while consumers can buy other phones, it’s incredibly difficult to imagine a substantial re-platforming. The number two operating system, Android, is supported by nearly every other smartphone manufacturer, Google previously bought one of the leading OEMs (Motorola) in order to better compete with Apple, and continues to make its own proprietary “iPhone killers” to little success. There is no real third competitor, and more broadly, it’s not clear what could convince an iPhone user to leave for Android or this mythical runner-up to the runner-up.

Part of the problem here is how, exactly, a competing smartphone can successfully differentiate from the iPhone given its lucrative customer base. For example, Android or a third mobile OS could try to attract mobile developers through better policies and permissions. But there are almost no companies on earth that could leave iOS outright as this would mean leaving behind two thirds of their users and 75% of revenues. Even Google typically prioritizes the iOS builds/releases of it’s apps, rather than those of Android, because it fears losing users of its iOS-based apps. As a result, it’s impossible to imagine developer decampment forcing iOS to change its policies or leading enough iPhone users to switch platforms (which requires hundreds of dollars of spend and years).

Alternatively, a competing OS or device manufacturer could seek out technical differentiation. However, almost all innovation today comes not from the hardware itself, but how it’s used to produce differentiated software and services. It doesn’t matter what a phone can do, but how these capabilities are used by developers. In this case, we run back into the iOS-first developer problem: Apple’s dominance is such that new technology (e.g. 5G or AR) isn’t really a “thing” until it comes to Apple devices.

One indication of Apple's control over developers is the fact they stay despite their many complaints. Returning to Benedict Evans, he notes that Apple’s inconsistent App Store policies/approvals have “done real damage to Apple’s brand amongst developers.” But this obviously has not led to boycotts or resistance; it’s not clear they would work, at least on any timeline that a major developer could endure. Contrast this with the example of Facebook. The social giant's history of changing API and monetization policies in the late 2000s/early 2010s left it without a developer ecosystem.

The iOS ecosystem is also becoming stronger, more tightly controlled, and competitively exclusionary. The Mac, which has historically been an open platform, is now locking down by pushing users to the Mac App Store and standardizing its chipsets and policies with those of iOS. In the coming decade, many analysts and technologists believe the iPhones will take on the role of “edge servers” for local computation. This would mean even more of the world around us will run off, be powered by and governed through the iPhone (e.g. our glasses, television, bikes). This also reduces the likelihood of iOS being supplanted by a “new OS” (as iOS displaced Windows).

In addition, Apple continues to launch more Apple-only software and services (e.g. Family iCloud Sync, Apple Fitness, iOS Apps for Mac) which build both service-level and family-based lock-in. Over the past five years, the number of Apple devices owned by an iPhone user has grown from 1.45 to 1.7. And since 2020, Apple has required every iOS app that uses cross-platform accounts log-ins such as Facebook, Twitter, or Google, to use Apple IDs. Users don’t need to use their Apple IDs, of course, but many will. And it’s much harder to leave a hardware and services ecosystem when one of these services (i.e. identity) is your passport to the web.

C: The iPhone is Apple’s Phone

This is the first time consumer rights and laws enter the discussion, and where the answers become less clear and more path dependent.

One the hand, a purchased iPhone is the physical and personal property of the purchaser. In most cases, this gives the purchaser the right to use this product in any way, shape, or form they please (as long as laws aren’t broken). The same is technically true with the iPhone, but the operating system that runs it remains Apple’s and is needed to run the phone. Accordingly, it’s helpful to look to analogy and consider what’s societally desirable, acceptable, and tolerable.

The Ford Motor Company could mandate which types of tires are used on the F150. It could also take a cut of the tires sold for all F150s, place controls around what sorts of roads an F150 drive down and the speed that could be used, while also requiring all car-related purchases (e.g. gas or drive through coffee and food) use a Ford payment service. No one would accept these limitations today, obviously, but it’s only recently technologically possible. Had this model been available in the early 20th century, it’s doubtlessly true that Ford (and later, others) would have tried it. And this would certainly have increased consumer prices, even if this integration led to a better running car and prevented users from reckless behaviour.

But while the technology required to create such a bundle has emerged over the past 20 years, a number of laws designed to curb these sorts of controls have emerged. For example, the Motor Vehicle Owners' Right to Repair Act, which is now used in all 50 states, required automotive manufacturers to provide the same information to independent repair shops as they do for dealer shops. This was particularly important as onboard computer systems began to track more complex performance and diagnostic data. Many of these acts also prohibited automakers from invalidating car warranties if an independent dealer was used.

In this regard, we should ask what rights the consumer should have, rather than which rights Apple might prefer and be owed under current laws.

D: Apple Can’t Have a Monopoly On Its Own Product

Apple’s strongest defence is that of precedent. Decades of case laws suggests (1) a product cannot itself be a market (i.e. trucks are a market, not Ford F150s); and (2) a company cannot have a monopoly over its own product.

It’s irrelevant that Apple has 100% market share of iPhones; the iPhone isn’t a market but instead a product in the mobile device category. Here, Apple’s share is a still-impressive 66% in the US (25% globally). Apple correctly notes there are many other competing devices, some of which are far cheaper and/or have superior specifications. What’s more, smartphones are typically replaced every 2-4 years, which means Apple must consistently win these customers (unlike, say, railroads, telephone poles, or electric grids). It is also difficult to prove that Apple forces current iPhone customers to remain iPhone customers.

But this is where analysis gets tricky. It’s wrong to call the iPhone a product. The iPhone is a platform. It’s also a bundle of hardware + an operating system + distribution system + payment solution + services.

To use a simple analogy, the Phone is not a product, like a Ford F150, or even a market, such as the truck market. Instead, the iPhone (or more appropriately, iOS) operates a lot more like the US Interstate Highway System. The IHS is not a dominant share of highways (30%) and especially not all roads (1.7%), but it dominates the largest and most important roads and is the backbone of US commerce and trade. And in this specific case, it would be as though the IHS also had its own proprietary cars and on-platform credit card program, license plate system and passport, owned and rented all the land along the highway to private businesses (which, from time to time, it decided to compete with), and operated its own police. And because of its importance and popularity, the iOS Interstate’s technical decisions also informed the construction of all competing highways and roads, as well as the products, business models, and architecture of all road-based businesses (e.g. gas stations, drive throughs, etc.). The analogy obviously isn’t perfect, but it sounds more like government than a market, let alone a product.

Apple is hardly the only company that insists on total control over its user experience; the above descriptor fits Disneyland just as well (if not better). What’s more, Apple’s tight, end-to-end control is part of why consumers buy Apple’s devices.

However, we (i.e. society) recognize the importance of interrogating how economies operate, what they prioritize, and how they benefit consumers, sustain competition, and drive innovation. It is clear that the digital/virtual economy is only going to grow in importance. As a result, we need to watch for default outcomes and drive to the ones we aspire towards. iOS is far more consequential than Disneyland and Apple intends for it to be ‘the’ platform of the digital economy.

E: Apple’s Policies Are Designed to Protect Its Users

Apple argues its control over app distribution, the policies of the app store, and payments are required to protect user data, avoid viruses, preserve safety of child measures and services like screentime, and ensure their devices run properly. There’s some truth here. Curation, store guidelines, and installation controls do help limit malware, spyware, and other shady practices - fewer apps are downloaded, fewer permissions are allowed, disclosures are increased, and developers face enormous downsides (i.e. bans) if they trick Apple or users. And Apple’s control of app distribution also enables it to control web browsers; there may not be an open web on the iPhone, but Apple’s policies throttle malcontents.

Security is important because of how important our devices are to day-to-day life and what we store on them, but Apple's arguments include ample exaggeration. For example, corporations are allowed to operate their own private app stores on iOS devices and manage all app submissions, updates, and approvals without Apple. There is no evidence that this destroys the user experience or puts their privacy at risk (and notably, this corporate data should be far more valuable and thus sought out). Apple also allows developers to distribute beta versions of their apps via TestFlight, rather than the App Store, and without any direct approvals or oversight from Apple. TestFlight reaches only a fraction of iOS users, most of whom are sophisticated users, but there’s no evidence of harm here either.

Apple has also used the argument of security when denying apps such as Microsoft’s Xbox Game Pass, a service that bundles 100+ Xbox games into a single Netflix-like service. Specifically, Apple argued that these bundles meant Apple could not individually review each game (and update) to ensure its content, quality, and data practices are above board. This is a flimsy rationale. As specific examples, Microsoft and Google are unlikely to include inappropriate data harvesting games, and if they did, Apple could then remove the services. After all, Apple doesn’t mandate flawless moderation, just robust efforts. Apple has also given policy exemptions to a number of major telecoms and technology companies.

This safety argument also ignores the fact that many of the App Store’s approved games, such as Minecraft, already contain inappropriate UGC content (e.g. phallus-shaped buildings with fountains on the top) and suffer from targeted harassment via audio chat. In addition, Apple does not apply this “individual approval” policy to other content bundles. Netflix, for example, need not submit all of its titles for approval, nor does the Fox News App (or Roblox, which is effectively a game bundle). There’s also no evidence that security explains Safari’s refusal of rich WebGL-based gaming.

Lastly, it’s notable that while MacOS does not have iOS’s restrictions on software/app installations, it remains secure and safe to use. This is because the majority of security is held at the kernel/OS-level. To this end, malicious apps (and updates) have lengthy history of making it through the App Store review. This is inevitable given the volume of submissions, time spent reviewing code, and human error rates, but crucially, these bad actor apps don’t destroy the device or devour private files (as is often the case with Windows malware). This is because of iOS’s system and API-level security, which is a stronger and more scalable solution - and one that offers consumers more choice and developers more capabilities.

Chapter Five: The Importance of Prioritizing Overall Prosperity

Why does this matter? How much should we really care about how apps are made and who gets paid for them? Or the platforms that are used or allowed? Or who can advantage which identity solution, service, or standard? The answer is that we have to care. In 2021, almost every company is a digital company, and the scope, significance, and complexity of the digital/virtual world continues to expand.

To prosper, new winners must be able to emerge at every layer of the “new economy” and without being constrained by what a single company envisions or wants. The current situation isn’t terrible — great things are happening in terms of users, creators, and innovation. But the very decisions that have made Apple so successful today also limit the number of creators that participate in the virtual economy, handicap the creativity of their products and business models, and make every transaction more expensive. Most important, it is blocking the organic evolution of the overall Internet.

Apple’s store fees are a clear example. We need businesses to be rewarded for the creation of value and able to invest accordingly. However, average profit margins in the US are between 10-15%. Apple’s 15-30% cut of revenue therefore means Apple collects more profit from the creation of a new digital business or digital sale than those who invested and took risk to build it. As Apple is the most valuable company in history, generates more operating cash flow than any company in history, and operates the most successful product in history, Apple’s uncontested toll system is probably not an ideal outcome.

Apple’s fees are particularly steep for businesses that focus on virtual experiences — a group which is quickly growing in strategic importance and commercial value. As analyst Ben Thompson notes, Apple’s “current organizing principle is digital versus analog; anything that is digital has to have in-app purchase, while anything that is analog — i.e. connected to the real world — can monetize however it pleases. That is why Amazon or Uber can ask for your credit card, and Airbnb can do the same for rooms but not for digital experiences (according to Apple).” This is a terrible system that conflates iOS’s control of the smartphone audience with its role creating all smartphone-based markets, and penalizes the very businesses that are most in need of investment: new ones.

If Nike decides to build a ‘virtual sneaker’ store in 2021, is iOS responsible for this opportunity? Why should Apple take 30% of these transactions but 0% if Nike builds a new physical sneaker brand that can only be purchased via app? Apple’s role (and investment) here is indistinguishable, but its take is (literally) infinitely higher and non-negotiable. And while Nike might have the legacy cashflows to fund this nascent business, a start-up faces a more challenged environment. In addition, Apple consistently affords its biggest partners (e.g. Amazon or Vivendi) exceptions to its otherwise standard payment terms. In this case, $170-billion Nike Inc., might get a discount but $0 NewCo would not.

Apple’s byzantine rules are based on its bargaining power from a decade ago, which differentiated between extant businesses (in which Apple had limited leverage), nascent ones (in which Apple was a key growth partner) and those yet-to-be-created (in which Apple was a gatekeeper). Today, these principles are maintained by Apple’s influence — nearly every business is now a digital one, and there can be no scaled Western business that doesn’t go through the iPhone. And given Apple’s overall competitive position, its rules are essentially uncontestable.

The prosperity of the virtual world is similarly impeded by Apple’s control over which new businesses, business models and technologies exist and when. Cloud gaming is a clear example, as is WebGL and browser support. The best example, though, is Roblox, which encapsulates many of the key issues with the App Store and is explicitly pioneering our virtual future.

Bloxing In Roblox

Although Roblox is typically described as a game, it’s better described as a platform that operates an unlimited number of user-generated worlds that are accessible and integrated across all platforms, supported by an identity and payment system, and which grows through an economy of trading, creation, and scarcity. No one seems to know why this company, which is valued at more than $30 billion and has over 150 million monthly users, is allowed on the App Store.

It’s also notable that Roblox highlights policy changes at the App Store as its sixth biggest risk factor, writing: “The owners and operators of these mobile application platforms… have approval authority over our platform’s deployment on their systems and offer consumers products that compete with ours… [It also has] broad discretion to change and interpret its terms of service and policies... If we were to violate, or an operating system provider or application store believes that we have violated, its terms of service or policies, [it] could limit or discontinue our access... In some cases these requirements may not be clear or our interpretation of the requirements may not align with [its] interpretation... which could lead to inconsistent enforcement of these terms of service or policies against us, and could also result… [in] limiting or discontinuing [our] access…”. Roblox also mentions that these policy risks span “data collection and privacy practices, business models, operations, practices, advertising activities [and] application content.”

This may seem alarmist, but Apple’s recent decision to deprecate IDFA is estimated to cost Facebook and Google - two of Apple’s three FAANG competitors — billions each in 2021 revenues. If Apple can so easily harm the largest companies in the world, it’s also no surprise that while analysts such as Thompson have spoken to dozens of developers with valid App Store grievances, none of which “were willing to go on the record for fear of angering Apple.” And while Roblox slipped through Apple’s approval policies, its growth is nevertheless limited by the App Store’s lack of direct competition for payment.

Roblox’s platform is full of happy users and talented creators. But few of these creators are making money. Although Roblox has $2 billion in revenues, three billion monthly hours of playtime and more than 160 million users, only 29 developers (i.e. companies) netted over $1 million in 2019 and three crossed $10 million. This is bad; more developer revenue means more developer investment and better products. But revenue through Roblox is limited by the company’s paltry payment rates of just 24.5% of every dollar spent on their games, assets, or items. While this makes Apple’s rates 70-85% payout rates seem generous, the reverse is true.

Consider the illustrative $100 in iOS Roblox revenue. $30 goes to Apple off the top, while $31 is consumed by Roblox’s core infrastructure and safety costs, and another $11 is taken up by overhead. This leaves a total of $28 in pre-tax gross margin dollars for Roblox to reinvest in its platform. This reinvestment spans three categories: research and development (which makes the platform better for users and developers), user acquisition (which grows network effects, value for the individual player, and revenues for developers), and developer payments (which leads to the creation of better games on Roblox). Today, Roblox reinvests 23% of revenues in R&D, 7% on sales and marketing, and the aforementioned 24.5% on developer payments. As a result, it currently operates at a roughly -25% margin.

Roblox has doubtlessly enriched the digital world and led to hundreds of thousands of new digital creators. But for every $100 it creates, it loses $25, developers collect $24.5 in net revenue (i.e. before all of their development costs), and Apple collects roughly $30 in pure profits despite putting nothing at risk. The only way for Roblox to increase developer revenues today is to deepen its losses or halt its R&D, which would in turn harm both Roblox and its developers over the long-term.

Roblox’s economics should improve with scale. Overhead, sales and marketing should grow more slowly than revenues. However, this would unlock only a few percentage points to cover significant losses or marginally increase developer revenue shares. R&D should offer some scale-related margin improvements, too, but fast-growing companies shouldn’t be achieving profitability through R&D operating leverage. The company’s two largest costs, which comprise roughly 61% of revenues, are essentially fixed. Infrastructure, which largely scales with usage and will become more expensive as the platforms expands its concurrency capacity and expands into VR. And Roblox doesn’t control store fees; that’s exclusively up to the platform.

No Platforms on my Platform

This (i.e. word 12,775 - lol) is where we get to the crux of the problem: the Roblox situation is a feature, not a bug. Apple's default position is that all the products created in and on platforms that are distributed by iOS should be instead individual 'apps' that can be purchased on its App Store. As a result, Apple is always the platform a consumer uses to access an app and that a developer uses to build, distribute and monetize their apps. Consider, for example, “professional” game developers like EA, rather than independent Roblox hobbyists. EA would never make a game on Roblox, where they can collect only 25% of consumer spending, when they can instead make an iOS game and collect 70%.

To return to Jobs’ 2010 “Thoughts on Flash” memo:

We know from painful experience that letting a third party layer of software come between the platform and the developer ultimately results in sub-standard apps and hinders the enhancement and progress of the platform. If developers grow dependent on third party development, libraries and tools, they can only take advantage of platform enhancements if and when the third party chooses to adopt the new features. We cannot be at the mercy of a third party deciding if and when they will make our enhancements available to our developers. This becomes even worse if the third party is supplying a cross-platform development tool. The third party may not adopt enhancements from one platform unless they are available on all of their supported platforms. Hence developers only have access to the lowest common denominator set of features. Again, we cannot accept an outcome where developers are blocked from using our innovations and enhancements because they are not available on our competitor’s platforms.Flash is a cross-platform development tool. It is not Adobe’s goal to help developers write the best iPhone, iPod and iPad apps. It is their goal to help developers write cross-platform apps. And Adobe has been painfully slow to adopt enhancements to Apple’s platforms. Our motivation is simple — we want to provide the most advanced and innovative platform to our developers, and we want them to stand directly on the shoulders of this platform and create the best apps the world has ever seen. We want to continually enhance the platform so developers can create even more amazing, powerful, fun and useful applications. Everyone wins — we sell more devices because we have the best apps, developers reach a wider and wider audience and customer base, and users are continually delighted by the best and broadest selection of apps on any platform.Jobs is very clear: developers should not use cross-platform development tools, but instead iOS tools. They should make the best iOS apps, not the best apps. And this will be better for users, and thus better for the developers. This logic doesn’t just apply to Flash, Unreal or Unity, but also Roblox Studio, Fortnite Creative Mode, and Minecraft. When common web standards exist, Jobs says to use the ones Apple creates and operates: “Apple even creates open standards for the web. For example, Apple began with a small open source project and created WebKit, a complete open-source HTML5 rendering engine that is the heart of the Safari web browser used in all our products. WebKit has been widely adopted. By making its WebKit technology open, Apple has set the standard for mobile web browsers.”

This position is a kind of circuitous monopoly logic. The only way developers are better off developing only for Apple is if Apple’s OS runs all relevant devices, its standards power all experiences, and the company successfully develops the devices or services for every possible category.

This isn’t true and won’t be true. And the mobile gaming ecosystem on iOS is massively bigger because developers use Unity, even when iOS drives the majority of their revenues. This is because Unity, as a cross-platform engine, allows a developer to easily reach the entire global market with their game, rather than just iOS users. With more users comes more revenues and a better game, which in turn benefits both App Store revenues and iOS users. And because Unity and Unreal are focused on being the best possible cross-platform game engines and in turn, benefit from a wide range of customer innovations, the entire game industry benefits from lower prices and better capabilities. In addition, cross-platform games like Fortnite, Roblox and Call of Duty are so powerful because they connect players across every device, rather than just the devices Apple makes.

The success of cross-platform tools and experiences may suggest Apple’s control isn’t a problem. But this assessment ignores Apple’s attempt to ban Unreal, its success stymying web-based rendering engines and cloud games, the fact no one knows if Roblox is actually allowed on iOS or just a grandfathered accident, and how Apple’s commissions constrain platform-like apps such as Roblox and Snapchat (which doesn’t offer a store for this very reason). In effect, the only way a Roblox developer could a substantially greater share of their game revenues would be if (1) Apple built its own Roblox-like platform; (2) all eligible users had and only wanted to use their iOS devices to play Appleblox; and (3) Apple operated Appleblox at break-even (which the App Store was intended to do but doesn’t) or didn’t pay fees to the Apple App Store (which all Apple services do).

Apple’s efforts to avoid platform intermediation are wide-ranging and ever-growing. In 2020, the company revised its App Store policy such that (with a few exceptions) any iOS app that used third party identity systems (e.g. log-in using your Facebook or Gmail account) would also need to support the Apple account system. In order words, Apple announced that “if you want your apps on iOS, and your apps support the account networks of our competitors, you must also deploy our account solution”. Every other account provider must earn (or purchase) this business; Apple, meanwhile, legislates it. And in doing so, it is able to occlude its horizontal platform competitors.

Peace, Prosperity and Good Governance

The worst part of the ‘Apple Problem’ is that everyone knows Apple’s policies are a bottleneck to business creation, new business models and new products — and the dominant response is just to wait for them to change. Everyone knew, for example, that Apple was unnecessarily holding up the cloud gaming industry and would need to revamp its rules. And thus nine years after the first service emerged, and some two months after declaring the services were security risks, Apple allowed for cloud gaming apps. Yet everyone still considers these policies unsatisfactory, so the industry has returned to waiting. Similarly, everyone knows Apple won’t be able to keep charging its store fees to services they compete with, such as Spotify; the question is when they’ll crack. Even a few more months of +15%, or exclusivity in game bundling, can produce billions of cash and elongate first mover advantages.

Benedict Evans offers a more benign assessment of the App Store’s issues, writing its “problems are infuriating but they’re not rent-seeking or necessarily market abuse — they’re an execution failure.” Every company suffers from execution failure, but none hold up the future as Apple’s do, nor are they so powerful. After Apple revised its cloud gaming policies, The Verge wrote “Arguing over whether Apple’s guidelines did or didn’t include a thing is kind of pointless, though, because Apple has ultimate authority. The company can interpret the guidelines however it chooses, enforce them when it wants, and change them at will.” This is not the right foundation for the future. And accordingly, we should look to regulatory remedies rather than just hope for unpredictable and sudden platform disruption.

Chapter Six: Solving the Apple Problem

It’s likely that a combination of accumulating policy contradictions and mounting legal pressure will push Apple to make important concessions in the coming quarters and years. And every single significant opening will lead to new products, companies and perhaps even a new mainstream platform.

At the same time, we should also recognize that the core design principles that underpin the iOS/App Store platform are nearly twenty years old and grew out of a store for songs, and then for simple apps. And despite the enormous change in the digital world over this time - including the addition of billions of new Internet users, millions of new digital-only businesses and scores of new technologies and ideas - Apple’s principles have never been comprehensively overhauled. Accordingly, the company’s concessions are likely to be overly complex, onerous, and insufficient. And given the importance and influence of the iOS economy we should not rely only on slow-to-cook pressures or voluntary concessions.

Apple has the right to run its own store, offer its own standards, and develop services that are exclusive to its hardware. The problems arise from Apple’s forced bundling of hardware, an operating system, distribution system, payment solution and services. As a result, there is a straightforward remedy — forcing Apple into competition in app distribution and payments. Specifically, regulators should require Apple to:

  1. Allow iOS users to download apps from any source (as they do on Windows and Mac computers), including direct from the software maker
  2. Allow iOS users to use third-party app stores on iOS devices
  3. Allow developers to use payment solutions other than those of Apple’s App Store, whenever they choose and even when distributed via Apple’s App Store

This partial unbundling would benefit even those who continued to download their apps exclusively from Apple, and pay for them via Apple’s billing system whenever possible. This is because the App Store would need to compete directly for the business of every app user and app developer, rather than win this business via its iOS devices and then control it via iOS policies.

This doesn’t mean Apple wouldn’t be able to charge higher prices to consumers, or collect above-average fees from developers. But just like any retailer, it would need to earn these consumer via their brand, curation, ease of use, reliability, safety.

Apple would still have near-hegemonic advantages, too, such as its pre-installation on iOS devices, its 13+ year head start, world-class catalogue, and most of all, unmatched user loyalty. Furthermore, the company would likely replicate the software installation policy it deploys on the Mac — i.e. telling users it has not signed for apps downloaded from outside the Mac App Store. This would help it maintain market share and dissuade a substantial portion of its users from considering alternatives.

But given the chance, many developers would begin distributing and monetizing their apps directly, and/or through third party stores. This pathway would offer consumers net lower prices, while also maintaining net unit revenues for developers and likely leading to greater unit sales too. Or it would enable developers to increase their gross profit under existing prices. This, in turn, would put pressure on Apple to lower and standardize its store fees in order to retain app users and developers.

More broadly, the ability to opt-out of Apple’s App Store would mean that Apple’s control over industry technology and standards would slightly decline, and hopefully, encourage the company to prove which of its limitations are truly for “security”. Businesses such as Spotify, Prime Video, and Game Pass would also be able to match the gross margins of Apple Music, Apple TV+, and Apple Arcade. That doesn’t seem like a bad thing.

It may feel unfair to force Apple to loosen the controls that led it to such unprecedented success and adoption. Yet problems arising from Apple’s controls are becoming larger every day, as is the company’s unprecedented strength. The future of the global economy is digital and virtual. Broad prosperity depends on platforms that compete to create value for developers and users, and that give birth to new platforms that do the same. Apple is not meeting the moment. The defenses it provides for the controls it demands are not convincing. They neither demonstrate that its policies primarily benefit customers, nor that these benefits outweigh their downsides or anti-competitive side-effects.

And this is where Apple is distinct from the many other hardware platforms that operate under similar store rules, such as PlayStation. The iPhone is not a gaming device, but a global computing standard. One that also happens to operate the world’s most valuable gaming business – and many, many others.

Matthew Ball (@ballmatthew)