Amazon and Apple: When a 30% Cut is Justified and When it Isn’t

Amazon and Apple
Some interesting news dropped yesterday with Amazon enabling Prime video rentals and purchases to now take place inside the Amazon Prime Video App. As of a few days ago, I know because I tried, you still had to go out of the Prime video app and to Amazon’s website to buy or rent a video from Amazon. This news changes that, and finally lets people seamlessly purchase premium content from Amazon and never leave the app. There are some important aspects of this to unpack.

First, we know Amazon has long held out doing this for their customers to avoid paying Apple’s 30% cut on digital purchases taking place in an iOS store. Note this applies to digital purchases that are then played on an Apple device. Oculus has long had the ability to pay for content on the Oculus iOS app but then play that content on an Oculus VR device. This pushback on Apple’s 30% cut for in-app purchases has also come from companies like Spotify and Netflix.

Apple’s comments on the matter suggest there was already an established program in place for this, but that has caused some doubt by independent developers reading through the lines.

I have no idea if Ryan is correct, but honestly, it doesn’t matter. Whether there was a program or not, or whether Apple and Amazon worked this out together, is irrelevant. What is relevant is that it exists now and that’s great for Amazon’s customers. But it is worth taking a deeper look at the reason for Apple’s 30% and why that reason has never applied to Amazon.

Apple’s 30% cut, in their minds, is justified for a few reasons. First is because the iOS store is a marketplace. Apps on that marketplace are put before customers and given an environment in which to be discovered and sell content. For the vast majority of apps, without the iOS store, they would not exist. That alone equals some value to both parties. Second, Apple is acting as the merchant/payment processor. This is important because without Apple acting as the seamless and trusted intermediary between business and customer. If the App store’s mechanism for payment through Apple did not exist, the vast number of companies collecting payments via in-app purchases or subscriptions would not be possible. The alternative would have been these companies setting up their own payment mechanisms and asking a consumer to set up an account, enter payment information and key personal details, etc., All too much friction most would never have bothered.

Not only would most consumers not bothered, most would have never heard of these companies before and never given them their payment information to begin with because they did not trust them. This is where Apple becoming the trusted intermediary for payments is crucial. If that did not exist, I am extremely confident there would not be the iOS economy there is today, processing billions of dollars annually.

If there is one company, for whom I have always believed this rule should not apply, it is Amazon. Amazon was already a dominant commerce company before the iPhone. Amazon was the pioneer of simple one-click checkout, and Amazon was already a trusted brand that already had customer accounts in the tens of millions before the App store ever launched. Amazon NEVER needed Apple for either market place assistance or payment/trust processing. All the reasons Apple felt their 30% cut of digital transactions was justified never applied to Amazon. And honestly, I think Amazon is the only company I can say this about. Feel free to debate me 😉

Yes, perhaps Netflix, but even then, I’d argue a large surge of Netflix new customers was due to this ease of payments through Apple. But Netflix will be fine using its own payment mechanism. Spotify, on the other hand, despite their lawsuits and complaining, would have had a significantly more difficult time growing to the size of the customer base they acquired without Apple’s in-app payment process. If Spotify would have asked every new customer to go sign up and give them their payment information, etc., it would have been a wall and, in reality, a wall that would have greatly benefitted Apple Music. One could argue the level playing field in ease of transactions was a significant reason Spotify could compete with Apple Music to begin with, and had they had their own payment requirements, the playing field would have actually not been even. It’s a paradox, I know.

This, now, raises a few questions.

• First, will other companies start to use their own payments to get around the Apple 30% cut. The answer is yes, and for many companies, they will fail and need to return to Apple’s in-app-payments.
• Will Amazon doing this hurt Apple’s services revenue? No. Apple was not getting any revenue from Amazon anyway on digital purchases. Therefore this will have no revenue impact on Apple’s services business.

• Will this impact Apple’s services business as new companies try this? My gut answer is no, and it is for this reason. As I pointed out, it takes a company that has reached a certain size, scale, brand, etc., even to pull this off. Amazon is that Netflix is that, and now Spotify is that Disney could do this as well. However, it behooves them to not. I’d argue that in any companies growth strategy, or as we like to call it in the business land and expand, using Apple’s payment processing for easy one-touch transactions will be essential. It is only once that company has reached a certain size of customer base when they can move to their own system, and at that point, I’d argue, their growth would have slowed. So Apple would capture a share of the revenue during their growth stage, and by the time they can pull off their own system, they won’t be adding customers nearly as fast and thus would be contributing little to Apple’s services business any longer.

Overall, this is great for Amazon customers, and one does wonder if there is some unions between Apple’s tvOS and FireTV in-store now this is worked out. It will be interesting to see what other companies move in this direction, but as I said, there is a shortlist of companies who can pull it off, and that is not going to change any time soon.