Yahoo Finance Apple Overhauls App Store, iPhone Features in EU to Appease Regulators
(Bloomberg) -- Apple Inc. is embarking on a historic overhaul of its iOS, Safari and App Store offerings in the European Union, aiming to placate regulators set to impose tough new antitrust rules.
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The revamp will allow customers to download software from outside the App Store for the first time, the company said Thursday. They’ll also be able to use alternative payment systems and more easily choose a new default web browser — addressing two frequent complaints of developers and lawmakers.
The sweeping changes — coming in March as part of Apple’s iOS 17.4 operating system — is a direct response to the EU’s new Digital Markets Act, which imposes rigid restrictions on the largest tech firms and boosts the EU commission’s powers as the region’s antitrust enforcer. Still, Apple is mounting a legal challenge against the regulations through the EU courts.
The announcement is a big moment for both Apple and the EU. The closed design of the App Store was a founding principle of the technology — aimed at ensuring security, safeguarding the user experience and boosting revenue. For the EU, Apple’s changes are the biggest test yet of whether it can force meaningful reforms in how the world’s largest tech companies operate.
The announcement jarred investors, who sent the shares negative after earlier gains. As of 2:08 p.m. in New York, the stock was down less than 1% at $193.83.
Apple executives cautioned on Thursday that the changes do threaten to undercut the company’s long-held emphasis on user security.
“Apple is having to create technology to allow an app to install other apps, and inherent in that is risk,” Phil Schiller, a longtime Apple marketing chief who now runs the App Store, said in an interview Thursday. “That could be a big threat vector for the privacy, security and integrity of your device. So Apple is putting in place technologies and policies to try and minimize that risk.”
Schiller added that in a big year for elections worldwide — with the associated threats of malware and malicious technologies circulating — there may be “new risks for users” from downloading apps from alternative app marketplaces that don’t share Apple’s security standards. The company will not extend its content-related guidelines to a third-party marketplace.
As part of the overhaul, developers will be able to create tap-to-pay apps using the iPhone’s payment chip, as well as browsers with third-party engines and extensive game streaming services. They’ll also be able to request deeper access to iPhone hardware and software features.
The new approach jettisons the up-to-30% commission that Apple has imposed on developers since its App Store launched in 2008. They’ll now pay the company a cut of 17% on app sales, and that declines to 10% for most developers and subscriptions after their first year. The company isn’t changing its commission structure outside of the EU.
Still, there are new costs for software makers. The company has introduced two additional fees: a 3% payment processing charge for apps that use Apple’s in-app purchase system, and a €0.50 fee per app install — via Apple’s store or third-party marketplaces — for software installed more than 1 million times in a 12-month period.
More than 99% of developers in the EU will see their payments to Apple decrease or stay the same, and fewer than 1% will need to pay the app install fee, the company said. The move also means that apps sold outside the App Store won’t require any commission beyond the €0.50 fee.
The shift could hurt Apple’s services revenue, a key area of growth for the tech giant in recent years. That category now accounts for more than 20% of the company’s sales, up from less than 10% a decade ago.
Apple’s in-app purchase system won’t apply to software downloaded outside the App Store — a process known as sideloading. When developers distribute their software in that way, the only fee to Apple is the €0.50. But the apps will still need to be notarized and checked by Apple for security threats, the company said.
Additional adjustments include new developer tools for third parties to create their own app download stores and web browsers without using WebKit — the standard Apple has required since the beginning of the App Store.
Third-party app stores will only be able to be installed from a developer’s website. Several software makers have already said they intend to launch their own stores to take advantage of the changes.
For the first time, banks and other financial services will be able to compete with Apple Pay on the iPhone and create tap-to-pay apps. Apple customers can set up a third-party payment app or app store as their default choice in their settings as well. In another concession, users will be prompted to choose a default web browser the first time they open Apple’s Safari on iOS 17.4.
Bloomberg News reported on Apple’s plans in December 2022.
Apple is also responding to longtime complaints by allowing developers like Microsoft Corp. and Nvidia Corp. to create an application that can stream an unlimited number of games within the single app. That change will be available globally.
The Digital Markets Act, or DMA, also makes it illegal for certain platforms to favor their own services over those of rivals. Companies are barred from combining personal data across their different services or using information they collect from third-party merchants to compete against them.
In a related matter, Apple faces a potentially huge fine from EU antitrust regulators over how its App Store rules allegedly thwart music-streaming rivals from offering alternative, cheaper subscription options. That investigation was sparked by European music streaming giant Spotify Technology SA. The fine could be as much as 10% of Apple’s annual sales — although EU penalties seldom reach that level.
Across the Atlantic, there has also been an antitrust focus on App Store abuses. In mid-January, the US Supreme Court declined to hear appeals by Apple and Fortnite maker Epic Games Inc. related to an antitrust suit over the App Store, bringing the case to a conclusion.
The trial judge in that case found Apple’s App Store rules didn’t violate federal antitrust law. However, she ruled that the company’s limits on developer communications flouted California’s state antitrust law.
Tim Sweeney, the chief executive officer of Epic Games, responded to Apple’s new policies, saying the plan was a case of “malicious compliance.”
“They are forcing developers to choose between App Store exclusivity and the store terms, which will be illegal under DMA, or accept a new also-illegal anticompetitive scheme rife with new Junk Fees on downloads and new Apple taxes on payments they don’t process,” Sweeney wrote on X, formerly Twitter.
Nonetheless, the game maker pledged to bring back Fortnite and launch its own app store for the iPhone. “Fortnite will return to iOS in Europe in 2024, distributed by the upcoming Epic Games Store for iOS,” the company wrote on X, adding that it will “continue to argue to the courts and regulators that Apple is breaking the law.”
In anticipation of the Apple announcement, Spotify said earlier this week that it would distribute companion apps to its main service via the web and enable in-app purchases inside its iPhone software.
Margrethe Vestager, the EU’s antitrust chief, said Thursday that the main question with Apple’s changes will be whether they are an attempt to follow the new rules or go around them.
“That’s what will be our test of it,” she said during a briefing with journalists. “Is this a way to circumvent the intention of the legislation?”
--With assistance from Sanne Wass.
(Updates with Epic bringing back Fortnite in the fourth-to-last paragraph.)
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