I’m back, and in awe of the great job that my colleagues Louise and Kate did on Plaintext for the past two weeks. By the way, this newsletter, whether written by me or brilliant stand-ins, will soon be limited to subscribers only. Avoid a brownout by subscribing here.
The Plain View
Normally, when your company becomes the most valuable firm in history, it is an occasion for unalloyed joy. Last week Apple Inc. passed the 2 trillion-dollar barrier, something no American company has done before. The only other 2 trillion company in the world has been Aramco—and Apple zipped past it, proving that silicon really is the new oil. But I suspect that Apple CEO Tim Cook’s socially distanced celebration might have been more fun if the company had not been simultaneously engaged in a high-wire confrontation with the game company Epic.
Being a double trillionaire is not an advantage in this flap.
First, let’s recap the situation. Apple takes 30 percent of the revenue generated by companies that use its App Store to distribute their software. Epic, which makes the mega-hit game Fortnite, thinks that is too high a tariff. So Epic began selling in-game currency at a discount to players if they used “Epic direct payment,” which bypassed the App Store and avoided Apple’s fees. Apple claimed this practice violated its rules, and banished Fortnite from the App Store. (Epic pulled the same trick with Google, which also charges 30 percent and also yanked Fortnite from its Play store—but in the case of Android, users can still install Fortnite directly from Epic, an option not available to iPhone users.)
Epic’s move seemed intentionally positioned to call out Apple’s huge market power. In fact, Epic had correctly anticipated the ban from the App store and had a lawsuit charging Apple with monopolistic malpractice ready to go. It also readied a video that echoed the famous Apple 1984 commercial introducing the Macintosh. The original ad portrayed Apple as a feisty underdog, freeing users from the evil giant IBM. Now Apple is the one depicted as the evil giant.
Does Epic have a point? Is Apple justified in taking almost a third of all the money that developers make from the iPhone and iPad?
When Apple first launched the iPhone in June 2007, only a few native apps were preinstalled on the phone (“native” apps being those that access the device’s hardware directly, enabling faster performance and special features like geo-location and motion detection). CEO Steve Jobs said it was a matter of safety—allowing developers to get to the innards of the phone might affect the network. But it quickly became clear that a profusion of apps would make the iPhone much more valuable. So, in 2008, Apple launched the App Store. To maintain security, Apple would be the sole gatekeeper, giving every app the once-over before allowing its distribution. For its trouble—hosting, curating, and covering credit card fees—Apple would take 30 percent of the money an app brought in. When Jobs originally outlined the arrangement, he crowed, “This is the best deal going.” (This point was recently made by Stratechery’s Ben Thompson, who includes the clip in his essay here.)
The thing about the App Store is that even if Apple had charged nothing, it would have still been a boon to the company—because all of those apps made the iPhone so much more useful and helped Apple sell so many of them. The fee didn’t seem like such a big deal in July 2008, when the iPhone was approaching 10 million users and Apple was worth a measly $150 billion or so. In 2020, however, Apple’s iPhone ecosystem is something quite different. Now the iPhone has over a billion users. And, of course, Apple is worth 2 trillion.
In light of this, maybe we should refer to Apple as T2 (at least until we have to start calling it T3). T2, you may recall, is also the shorthand for the long-awaited 1991 sequel to James Cameron’s original Terminator movie. In Terminator 2: Judgement Day, we meet a more advanced Terminator robot, who has the ability to morph into any shape, and for much of the film, he seems indestructible.
If you think about it, Apple is kind of like that T2 robot. (Note to movie nerds: Yeah, yeah, I know the robot’s official name is T-1000. OK?) Apple has transmogrified from a hardware company into an applications software company (maps, mail, movie-making), a music distributor, a movie studio, a payment company, and—as Epic knows—a game company. Each of those enterprises puts it in competition with some of the app developers who want to use its store. Those developers have no choice but to pay Apple a cut of revenues (which totaled about $19 billion in the last year). They have to follow Apple’s rules to stay in the store. Though Apple strongly denies it, some have alleged that the company uses its rules, or even the App Store search engine, to stifle competitors.
That’s where that T2 power comes into play. I’m not a lawyer, but I understand that while bigness is not illegal, leveraging that bigness can put you in the antitrust zone. Especially if you are exercising market power in an area where your customers have no other choice. In an open marketplace, developers might say, “Nope, 30 percent is too high,” and go somewhere else. Maybe to a venue where they are not enriching their competitor. Or you might devise a workaround to avoid paying the fee. But if you try that with T2, you risk losing access to a billion customers. Steve Jobs may or may not have been correct when he said that 30 percent was a fantastic deal. The problem is that it’s the only deal, at least for one of the two major mobile platforms.
Lawsuits move slowly, and antitrust regulation takes forever. But perception matters too. Any argument Apple makes in its own defense will be colored by its lofty market cap. No one feels sorry for T2.
Right after his keynote on January 9, 2007, Steve Jobs explained to me why he wasn’t going to allow developers to write native apps. He said that because the iPhone ran a version of the Mac OS, there wasn’t any need for it:
You don’t want your phone to be an open platform. You need it to work when you need it to work. You don’t want it to not work because one of the three apps you loaded that morning screwed it up … This thing is more like an iPod than it is a computer in that sense. You need it to be protected to be sure it always works. And so it’s not an open platform.
Ask Me One Thing
Sharon writes, “I was watching Democracy Now! the other day, and the interview was with Amy Goodman and Scott Galloway. Galloway mentioned during this interview that Trump would be getting a commission if in fact Microsoft acquires TikTok. Is this fake news?”
Thanks for asking, Sharon. I don’t blame you for being confused, as Bill Gates himself was baffled at the idea that the buyer of TikTok should pay a kickback to the government, just because the president ordered the sale. (Gates called the order to sell “singly strange,” and the idea of a finder’s fee “doubly strange.”) It’s not really clear where the money would go and whether it would be legal, and though the president might well think that it should go into his bank account, I didn’t hear that specifically. It is true, however, that US companies like Google and Facebook, if they are allowed to operate at all in China, currently must do it through local partnerships. In theory, the explosive success of TikTok could provide some leverage for our government to negotiate that long-standing ban. The goal would be encouraging open markets, letting everyone compete anywhere. If the government—or Donald Trump—not only forces a sale but demands a piece of the action, it’s yielding the high ground, and venturing into a very dark ground-floor alley. I’ll give Galloway the last word: “This feels like it’s governance by id, as opposed to any strategy or consistency or the law as a guide.”
You can submit questions to email@example.com. Write ASK LEVY in the subject line.
End Times Chronicle
Two words: Fire tornado.
Last but Not Least
The second edition of Plaintext, sent to your inboxes on February 7, mused on the counterintuitive drawbacks of being a trillion-dollar company. I hadn’t suspected that six months later, I’d be describing the consequences of being a 2 trillion-dollar company. Of course, there were a lot of other upcoming events I didn’t anticipate on February 7.