Spotify takes aim at Apple's slice of digital sales

Spotify founder Daniel Ek. Photo / Getty Images

Load up the website of SoundCloud, a music streaming company, and you can purchase a monthly subscription to its on-demand service for £9.99 ($19.42). But to do the same thing on the SoundCloud iPhone app, and the fee rises to £12.99.

No extra feature or exclusive material explains that three pound difference; the two services are identical.

The higher price on the app comes down to something invisible to consumers: the so-called "Apple tax".

Since it first launched the App Store in 2008, Apple has levied a commission of up to 30 per cent on all purchases of digital items made through apps on its devices. That ranges from power-ups in a game such as Candy Crush Saga to membership of the latest meditation app.

Revenues from the App Store are becoming lucrative to Apple: last year, it is believed to have made more than US$10 billion ($14.5b) from these fees.

That revenue is set to become an increasingly core part of Apple's business as iPhone sales flatline and the company hunts for growth.

Apple has pledged that by 2020, its services business - its non-hardware division that includes the App Store, iTunes and iCloud - will be double the size it was in 2017.

Apple is expected to announce its long-rumoured television streaming and news subscription services later this month. Details are scarce, but Jefferies analyst Tim O'Shea predicts that the streaming service will cost US$15 per month, more than rivals such as Netflix, Hulu and Prime Video.

The company has been working to secure films and TV shows to offer alongside its own original videos.

But as Apple shifts to a subscriptions model through apps, films and music, the company is being challenged by a wave of rival companies frustrated by the cost of reaching Apple customers.

On Wednesday, the Swedish music streaming giant Spotify announced that it had filed a formal complaint against Apple with the European Commission. Daniel Ek, its chief executive, argues that the company unfairly exploits its gatekeeper role over the iPhone to charge exorbitant fees.

At the same time, he said, the policies give an unfair advantage to Apple's own music streaming service.

Spotify complaints against Apple were yesterday backed by two other streaming sites: Deezer and Anghami.

Ek said the situation in which Apple Music competes with Spotify, as well as controlling the iPhone, amounts to the US company acting as both a player and referee.

"Apps should be able to compete fairly on the merits, and not based on who owns the App Store," he said.

Margrethe Vestager, Europe's competition commissioner, watched Ek lay out his argument at a competition conference in Berlin yesterday, and later suggested she would investigate the matter.

"We have to examine the role of Apple and Apple's App Store," she told a German newspaper. "If we conclude that they have a market-dominating position, then the case would be comparable to our proceedings against Google."

Spotify's complaints are not new; the company has often grumbled in private about the Apple tax for years.

In 2016, in protest at the fees, it removed the ability to buy Spotify subscriptions through its iPhone app.

Many other app developers are happy to swallow the cost. Giant companies have been built on games such as Clash of Clans and Pokemon Go, which would not exist without the App Store. But in other cases, Apple's fees seem more than a little rich.

The extra fees charged by SoundCloud via the app, which effectively pass on the cost of Apple's cut to consumers, are also charged by streaming apps such as Tidal and YouTube Music.

Carolina Milanesi, an analyst at Creative Strategies, draws a distinction that Apple does not, between apps such as games that are worth something in their own right, and media apps, which are a conduit to content such as music or video.

"For [something like] a game the value is in the app itself, but when you're talking about a subscription around content I think it's harder to argue how much the [App] Store, and therefore Apple, does for the content provider," says Milanesi.

Opposition to the fees is growing. Last year Netflix, the App Store's highest-earning app, stopped offering subscriptions through Apple, a move estimated to cut off hundreds of millions of dollars of revenues.

Epic Games, the developer of the smash hit video game Fortnite, has bypassed the Google Play Store, the Android equivalent of the App Store, by asking players to download the game from its own website.

But some app developers have found themselves walking a tightrope if they refuse to pay Apple's fees. App Store rules forbid directing users to buy subscriptions elsewhere, and apps face being banned if they try.

Being banned from the App Store would be catastrophic for a company like Spotify, since the majority of its listening is done on smartphones. But Ek has some powerful allies. Last week the US politician Elizabeth Warren, one of the contenders for the Democratic presidential nomination, revealed a plan to break up Silicon Valley's biggest technology companies.

The App Store, and Ek's gripe, is a central plank of that plan: Warren says that her White House would force Apple to spin off the App Store.

And the European Commission, where Spotify has filed its official complaint, has been a thorn in Silicon Valley's side. It has fined Google billions of dollars for anti-competitive activities, including one penalty last year that was partially related to the dominance of Google's own app store on Android phones.

Apple has not escaped the sights of Europe's competition chief Vestager either: in 2016 she demanded that Ireland recoup €13b ($21.5b)) from the company for unpaid taxes.

But it is the harsh realities of business, rather than a political tide, that may have triggered Spotify's latest intervention.

Apple's own music streaming service was launched in 2015, nine years after Spotify, but is rapidly gaining ground.

In the US, figures suggest more people now subscribe to Apple Music than its Swedish rival. Spotify is far more restricted on newer Apple devices such as its smartwatch and its HomePod speaker than on the iPhone, nor is it compatible with the Siri voice assistant.

"Either [Spotify] is trying to jump on the competition bandwagon or they're starting to feel the pressure," says Milanesi.

Notably, Spotify has not complained to the Commission about Google and its Android operating system, where a similar fee structure is in place for apps but where the Swedish company faces no serious competition.

Apple is likely to defend its control of the App Store, and the fees it levies, to the hilt. The company argues that hosting apps, processing payments and moderating the App Store does not come for free.

As Apple prepares to expand its media business beyond music, it is likely to come up against further opposition. Spotify's complaint may not be the last.