Rather watch than read? Just hit play on the video above.

March 14, 2019: Apple responds to Spotify

Apple has put out a press release pushing back strongly not only on Spotify's contentions but their characterization of the App Store, how much revenue they actually share, and suggesting this is all part of a bigger plan to gouge not only Apple but artists in order to line Spotify's own pockets. Yeah, ouch.

From Apple's Newsroom:

Just this week, Spotify sued music creators after a decision by the US Copyright Royalty Board required Spotify to increase its royalty payments. This isn't just wrong, it represents a real, meaningful and damaging step backwards for the music industry.

Apple's approach has always been to grow the pie. By creating new marketplaces, we can create more opportunities not just for our business, but for artists, creators, entrepreneurs and every "crazy one" with a big idea. That's in our DNA, it's the right model to grow the next big app ideas and, ultimately, it's better for customers.

We're proud of the work we've done to help Spotify build a successful business reaching hundreds of millions of music lovers, and we wish them continued success — after all, that was the whole point of creating the App Store in the first place.

Yeah, ouch.

Spotify files against Apple with the European Commission

From Daniel EK, CEO of Spotify

My goal for Spotify is and has always been to reimagine the audio experience by giving consumers the best creativity and innovation we have to offer. For that to be a reality, it is my firm belief that companies like ours must operate in an ecosystem in which fair competition is not only encouraged, but guaranteed.

It's why, after careful consideration, Spotify has filed a complaint against Apple with the European Commission (EC), the regulatory body responsible for keeping competition fair and nondiscriminatory. 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.

Here's what Spotify wants:

  • First, apps should be able to compete fairly on the merits, and not based on who owns the App Store. We should all be subject to the same fair set of rules and restrictions—including Apple Music.
  • Second, consumers should have a real choice of payment systems, and not be "locked in" or forced to use systems with discriminatory tariffs such as Apple's.
  • Finally, app stores should not be allowed to control the communications between services and users, including placing unfair restrictions on marketing and promotions that benefit consumers.

Spotify also put together a purposefully adorable website and video for the YouTube generation to better explain and, yes, spin their points. Because this is as much a public relations play as it is a legal one, even more so.

Apple Tax vs. Free Loading

Now, you can take two different, very extreme views on this.

  1. Apple is abusing its platform ownership of the App Store and engaging in anti-competitive practices by forcing vendors to pay a 30% (or 15% in some cases) rent-like fee to operate there, forbidding outside payment systems, without any other than a web app to deploy on the iPhone or iPad, without access to the same level of integration for default status and Siri control. And that this is wrong and should be stopped willingly by Apple or through regulation by the E.U, the U.S., and other bodies.

  2. that Apple built the App Store, a place that grants access to potentially a billion customers who trust the platform and are willing to spend money on it like no other platform ever in existence, and that Spotify wants a free ride on the back of a system Apple implemented, grew, staffs, certifies as safe, maintains, handles all transactions and fulfillment, provides everything for free to truly free apps, and manages down to a bitcode level, without having to contribute anything back to the well-being of the platform.

Both extremes are, of course, wrong. Not surprisingly, it's all a lot more complex, nuanced, and varied than any knee-jerk hot take.

Ben Thompson of Stratechery posted one this morning, coming down strongly on the side of Spotify:

The percentage of the population in the European Union that uses iOS is considerably lower — between 25-30%. This will probably form the basis of Apple's defense: the company will seek to frame the question around smartphone marketshare and claim it does not have a dominant position, and is thus free to act more exclusionary than it would be able to were it determined to have a dominant position.

My suspicion is that it won't work, in large part because of the nature of Spotify's complaint. As I recounted in that article, in a follow-up, and earlier this week, I believe Apple's App Store policies are per se illegal tying — specifically, iOS to App Store in-app purchase. Spotify, though, has a stronger case than anyone, because it is not only subject to Apple's App Store policies but also competing directly with Apple Music. It will be very difficult for Apple to argue that it is not attempting to extend its position in smartphones into a dominant position in digital goods when that extension is rather concretely framed as a direct benefit to Apple's own offering.

That noted, I am not certain that all of Spotify's complaints will hold up: points one (about the 30% fee) and three (about the inability to link to Spotify's website) are very strong, but the points about contacting users, Spotify updates, and apps for Siri, HomePod, and Apple Watch are more questionable. That's ok though: I suspect Spotify has the "shoot for the stars and at least you will hit a streetlight" perspective; probably the least intrusive remedy the European Commission could impose on Apple is mandating that apps be allowed to link to web pages for payment processing, which would be momentous enough — and, from my perspective, sorely welcome.

The "if you don't like App Store terms, you can just sell through the web or Google Play Store", which a lot of people are going to respond with, is the Walmart to Target argument, which is poorly fitting at best. So, let's break things down further, looking at exactly what Spotify is proffering.

Spin vs. Facts

First, Spotify keeps referring to the harm Apple is doing as targeted towards us, the customers, not Spotify, the company. I totally get why Spotify is phrasing things this way, and why they're doing it throughout this campaign. And yeah, it's an ad campaign, make no mistake. But there's a risk to it coming off as manipulative and insincere.

Spotify has a real chance on the facts, at least on the core counts. The EU views anti-trust as a way to ensure competition, up to and including ridiculous things like forcing Microsoft to include browser ballots.

But instead of being candid about that, and the general policies Spotify sees as unfair, and about the harm it believes those policies do to its business, they kinda play the victim card in a way that seeks to conflate or distort their harm onto us, which just comes off as, I don't know, smarmy.

And it comes off in tone of the language as much as it does the art direction of the video and webpage to a degree that it blunts the seriousness of the action and the focus of the alleged harm.

"Apple Tax" is another example. It's so cliche it comes off as a blatant attempt to manipulate emotion even at the risk of undercutting its sincerity. Spotify knows it's not a tax. I know it's not a tax. Spotify knows that I know it's not a tax. So does Spotify assume I'm just too stupid not to fall for it anyway?

Let's step back a minute.

The advent of App Store

When the App Store began, software could still cost hundreds of dollars, and you could still buy it in boxes, at big boxes, where retailers typically took 55% — the traditional wholesale model. The other choice was hosting a website, signing up for a merchant account, and handling all transactions — and transactional security, which was really hard back then, all by yourself.

And, it wasn't considered in the least bit abnormal to pay a platform access fee or percentage. Amazon's could be huge, depending on what you sold, and they could change the price not only without your permission but without telling you. eBay took a cut of auctions. Handango, one of the original online software stores for mobile apps took a cut of anything you sold through them as well.

Which is why, when Apple announced the 30% Agency model back in 2008, a lot of developers were super happy with the terms and with what they were getting for their money.

Also, back around the advent of the App Store, software could still be hugely profitable. Office was a license to print money. That's because developers big and small wrote once, which was still a big investment in terms of time and effort but could then copy and sell repeatedly at very little additional cost and effort, especially as things moved from physical boxes to digital packets. The first copy of an app could cost tens of thousands or more to make. The second, the second, the tenth, the millionth? Next to nothing.

And part of what Apple offered at launch was having that App Store on every device, and chance to be featured in front of millions then, close to a billion now customers. That's something no brick and mortar or web shop could ever have offered.

Literally why it was seen as a gold rush.

But Spotify isn't just an app in that sense, whole and complete unto itself, like Office or Photoshop or PCalc or Pac Man.

It's developed, absolutely. Lovingly crafted, no doubt. By it's also quote unquote just a container. It's, at least so far, a delivery system for other people's content.

Getting in the middle of margins

Think about it this way: Spotify music is really just a nicely packaged re-sale of other people's songs. And Spotify has to pay for those songs. Yes, there's a lot of controversy going on around that right now and yes, Spotify is buying Gimlet and Anchor to start getting into original content, but just I'm just focusing on what Spotify is selling for now, it's nothing original.

And here's where it gets a tad ironic: The same is true for Apple. Forget Apple Music. The App Store is really just a nicely packaged re-sale of other people's apps.

This is exactly where the tension lies. Spotify wants to take other people's music, sell it, and keep some of the profit. Apple wants to take other people's apps, sell them, and keep some of the profit, and there's just not enough profit, not enough margin, for them both. At least not in a way that's making either of them happy.

When Spotify sells directly, that's fine. When Apple sells regular apps, also fine. When Spotify tries to sell through Apple and Apple tries to sell Spotify, everything breaks down.

There simply isn't room enough for both to in the middle of those margins.

Spotify also points out that Uber, for example, doesn't have to follow these same rules. But does it in a way to suggest Apple is playing favorites rather than factually pointing out physical goods have never been subject to revenue sharing, like if you order a toy or t-shirt from Amazon, but digital goods always have been.

The physical world has lots of differences. For example, if you order food from a restaurant that does deliveries, you may not pay a delivery fee. You may, but lots of them don't charge for it. If you use Uber Eats, you are absolutely paying a delivery fee. Is that a tax? Does that upset the restaurants quote unquote fans? Should Uber Eats get to the restaurant to pay instead of the customer so the restaurant doesn't have an unfair advantage? Of course not. The physical world is different.

Same, interestingly, when you look at companies that both offer and own their own content, the discussion around percentages and platform access fees changes considerably.

Percentage vs. profit

Peter Kafka, writing for Recode, on February 13, 2019, addressing the general internet outrage over rumors Apple was asking news companies for a 50% revenue share:

So what is Apple thinking now?

Here's the short answer, which I've cobbled together by talking to industry sources: Apple has already signed many publishers to deals where they'll get 50 percent of the revenue Apple generates through subscriptions to its news service, which is currently called Texture and will be relaunched as a premium version of Apple News this spring.

And some publishers are happy to do it, because they think Apple will sign up many millions of people to the new service. And they'd rather have a smaller percentage of a bigger number than a bigger chunk of a smaller number.

In the words of a publishing executive who is optimistic about Apple's plans: "It's the absolute dollars paid out that matters, not the percentage."

The way they see it, making 50% off hundreds of millions is way better than making 90%+ off hundreds of dozens. Because, math.

Now, that won't appeal to the New York Times or Washington Post or any already super successful paper, the same way the App Store doesn't appeal to Netflix or Epic the way it once did. But it does show that these things, the costs and benefits, aren't black and white.

Spotify's problems, not our problems

Spotify also claims Apple locks us into its own payment system. Here again, Spotify can make a factual argument but instead spins it to the point of me doubting their intentions.

Apple lets me pay any way I want. I can tie my account to pretty much any credit card I want, I can use cash to buy gift cards and feed it that way, in many places I can PayPal or even carrier bill. I'm fine.

It's Spotify that can't charge any way it wants. It's not my problem. It's Spotify's problem. And maybe I'm hugely sympathetic to that problem and even want to see it addressed, but by trying to manipulate me this way, it casts doubt over their entire argument. Needlessly.

I get that it might be an attempt to oversimplify, and that an argument could easily be made that by reducing the vendor's options, like Spotify, the customer's options, I.e. mine, inevitably get limited. But then make that argument.

Spotify also claims Apple won't let it develop apps or integrate with services, but in a way that comes off as sounding its only Spotify being limited in this way. Like Spotify is being deliberately singled out when the same applies to every developer, and claiming they're being deliberately denied things that simply don't exist, and just arguing emotion and playing the victim when the facts would serve them not just as well but better, but, ahhhhh… enough.

A lot of the stuff here is wildly inaccurate at best, utter bullshit at worst. But, here's the thing. I'm in 100% agreement with the stuff that isn't.

But... Yes, this.

All apps should absolutely have access to default status and to the Siri system.

I should be able to set not just any music player but any mail client or web browser as default. Where's not just SiriKit for media — including video, podcasts, audiobooks, and yes, music — but Continuity for media so that I can get from my Mac, walk out with my iPhone, and have my playlist just keep on playing. Or decide I'm done with my Apple TV, head towards my room, and have Brooklyn Nine Nine just shift right to my iPad.

I should be able to use Siri to tell Overcast to play Script Notes, Audible to continue Dune, and, sure, Spotify to amp up my Awesome Mix.

I get that implementing all of that is non-trivial, and there may be some licensing deals to work out to make content truly hand-off-able (is too a word), but that's Apple's job.

Anything else is bad for the customer. And I'll go further than that: It's bad for Apple. Being forced to compete for default and Siri status will only make Apple's apps better.

Even from a purely selfish and self-serving PR standpoint. If Apple Music was objective 10x better than Spotify, how many people would even be talking about this right now? How many would even notice?

Free ride

So, here's the question: Should Spotify expect a free ride on a platform that cost Apple years and billions of dollars and accrued customer loyalty and trust to build?

A platform that Apple also uses to provide truly free, not free as in in-app-purchase or free as in subscription, but truly free apps for free.

Maybe they should. I'm totally open to that argument. If someone wants to say that building the App Store and hosting all apps, for free, regardless of how much they make from Apple's platform, is the fair thing to do, and that Apple should only benefit from it by the value it adds to the iPhone and iPad, and the increased hardware sales that come from that value. Sure, fine. Make that argument.

But again (again, again?) Spotify doesn't do that here. They don't offer any alternative to Apple's 30% agency model — for example, would they find 10% fair, 5%? What should they contribute to help maintain and improve the platform they benefit from? And so, I'm left to wonder, do they feel entitled to everything for free? App Store as charity?

I mean, I don't think so? Maybe? I don't know. They keep squandering my attention with victim plays, not the arguments I need to make an informed decision about all this stuff.

Now, the App Store contributes massive amounts towards Apple's services review, which the company has pledged to grow over the next few year. So lowering or eliminating that App Store cut hurts Apple's service narrative. A lot.

It's probably not Spotify or even Netflix contributing most of that money. It's the damn free to play games that suck all that smurf berry poke coin clan of Fortnite clash cash out of so many people so always. But we've already seen Epic and Fortnite push back against rev share as well.

But, how far does that go? If Apple should wave fees for the App Store, should Nintendo and Xbox wave fees for their gaming consoles? Should Walmart and Target lower the 55% wholesale take for non-house brands?

What value comes from being in a store and how much value should be shared for being in that store and in front of those customers.

To be continued

And, ultimately, that's where I'm left with this right now.

I think Spotify raises some excellent points, even if I think the way they chose to do it is all shades of dodgy and risky, and I think Apple has to be careful, if not in the courts of the EU than in the courts of public opinion, to which Spotify certainly seems to be pandering.

The App Store has come a long way since it debuted in 2008, and while lost of issues and gripes remain, Apple has addressed most of the big ones, especially over the last few years.

So, I wouldn't be surprised to see them continue to address the remaining ones. Maybe not in a way that makes Spotify dance to its own songs, but in a way that is fairer for everyone on the platform, including the companies that want to beat Spotify.

This is likely to be a long, drawn out, EU-style messy process. So, while we watch it all play out like world's slowest Zamboni crash, let me know what you think.