Apple Inc. doesn’t make hot video games like Fortnite or consoles like Xbox. But with a little care, CEO Tim Cook has made the iPhone manufacturer one of the largest video game companies in the world.
Key is the App Store, its digital marketplace where the company sells and distributes thousands of games from other companies and developers, from Fortnite to Epic Games Inc. in honor of Kings of Tencent Holdings Ltd. reduce sales by 30%. That explains a lot about the tech giant’s current battle with its rivals.
Apple has made more money playing games than Xbox maker Microsoft Corp., gaming giant Nintendo Co. and Activision Blizzard Inc., and PlayStation maker Sony Corp. — together — in the 2019 fiscal year, according to an analysis by the Wall Street Journal published as part of the company’s recent lawsuit.
Apple’s operating income from gaming this year was $8.5 billion, according to a Journal analysis, surpassing the total operating income of the other four companies for the same period. The tech giant said the operating margins discussed during testing were inadequate and therefore too high.
However, Apple’s dominance is threatened. His position as a goalkeeper in the gaming economy brought him into conflict with Facebook Inc., Microsoft, and Fortnite maker Epic Games Inc. as every company prepares for the next frontier of technology: virtual reality.
A lot of digital activity – from browsing, social media, shopping to live events – could take place in-game in the years to come. Activate Inc. technology consultant. estimates that global video game industry revenues will double by 2024 from 2016 to $198 billion.
The risk for Apple is that its role as a gatekeeper between the gaming world and its more than 1 billion iPhone users, as well as the fees it collects as an intermediary, could be violated – whether by law, court order, or government action. . Epic sued the company in 2020, claiming it was stifling competition. With Epic’s lawsuit and increased scrutiny over Apple’s influence, lawmakers and regulators from Washington to Brussels are considering ways to potentially increase the company’s power, to the detriment of some competitors.
Another threat to Apple’s profits comes from China. The country’s new rules aim to reduce the number of hours young people can play games. Three of the top five most profitable mobile games on the App Store come from China, including Tencent’s “Honor of Kings” title, which according to analyst firm Sensor Tower, generated about $2.5 billion in users last year.
According to Sensor Tower, customers worldwide spent a total of $45 billion on mobile games via the App Store in fiscal 2020. Nearly 31% of this money was spent in China, 26% in the United States; Apple layoffs accounted for about $13.5 billion, or about 5 percent of Apple’s $275 billion total revenue that year. Fifty percent of Apple’s sales come from sales of iPhone hardware.
Apple does not generate revenue from the App Store; Instead, it includes businesses as part of its service category, which it claimed had $53.8 billion in sales last year. Music, iCloud, Apple TV, advertising, and extended warranty also fall into this category. It doesn’t show how profitable each of its product categories is, but rather shows the company’s total operating profit of $66.29 billion for the period.
It’s almost a coincidence that so much of Apple’s business comes from the gaming world. After launching the iPhone in 2007 and seeing developers hack into their devices, he designed the App Store to allow users to download third-party software to their phones under Apple’s control. The late Apple founder Steve Jobs and his team realized the store could be a new gold mine.
In 2008, the year the App Store was launched, there were 500 apps, many of which were games. Apple’s gaming profits have grown with the growth of the app economy. Change becomes more important to Mr. Cook as he faced stagnant iPhone sales.
Recognizing the importance of tough gamers to the company, Apple last month unveiled the new iPhone 13 Pro with in-screen enhancements designed to provide a smoother video experience. This feature is very interesting for those who use it to play games.
Apple appeals to a relatively small group. According to court documents, only 6% of App Store gaming customers accounted for 88% of all in-store game accounts for 2017. On average, they spend more than $750 a year. The largest users, who make up 1% of Apple’s gamers, make 64% of their accounts and spend an average of $2,694 per year.
Blockbusters include Honor of Kings, where users can battle historical Chinese characters and was the most profitable game on the App Store last year according to Sensor Tower. Other notable money earners include Pokemon Go, an augmented reality game based on the popular Japanese anime, and Candy Crush Saga, a puzzle game where users combine piles of jelly and acorns.
Bree Thomas, a 38-year-old human resources specialist from Dallas, likely falls into the category of middle-class consumers, who made up 3% of gamers and made up 20% of bills in 2017. On average, this group spends about $373 annually.
He says he usually spends up to $50 a month. The convenience of having your iPhone in your pocket means it’s easy to spend money to access special bonuses on mobile games like Empires and Puzzles, the puzzle game.
“Very comfortable,” said Ms. Thomas. “It’s very easy to get carried away.”
According to Cook, he is not a gamer. He said this while appearing before an antitrust judge that has caught Apple’s attention for most of the past year.
In August 2020, “Fortnite” maker Epic filed a lawsuit against Apple alleging that the company had an illegal monopoly over the distribution of software on its mobile devices and had forced developers to use an in-app purchase system. They went to court in May.
Apple vehemently denies the accusations, citing everything from Google devices to the XBox as alternative ways for consumers to play games, arguing that the fees are industry-friendly and fair. US District Judge Yvonne Gonzalez Rodgers largely agreed with Apple in the decision in early September.
That doesn’t mean Apple is out of harm’s way. The judge ordered the tech giant to let developers advertise cheaper alternative payment methods in their existing apps outside of Apple’s App Store. This allows game developers to deny Apple funding for these games.
The case lifts the curtain on Apple’s gaming business. The company, which has long valued the price of secrecy to attract consumers to new products and services, has kept secret the extent to which gaming is at the core of its profits and business.
Apple said records presented during the trial that allegedly demonstrated the profitability of digital storage were incorrect, and Mr Cook testified in court that the company did not conduct such an analysis. But Judge Gonzalez Rodgers, who examined Apple’s press release, disagreed with that assessment.
He wrote that Epic’s claim that Apple had an operating margin of more than 75% of the app store was actually true and characterized it as “very high”.
App sales may be small compared to total revenue, but court documents show it’s almost a net profit for Apple. As part of the lawsuit, Apple turned over millions of internal documents to Epic. Using these materials, an Epic expert named Ned Barnes, a chartered accountant, estimated that Apple’s App Store achieved an operating margin of 79.6% in 2018 and 2019 – a profitability measure that subtracts costs from sales.
Late opening of internal reports to Mr. Cook confirmed this assessment. According to court records, the report includes the company’s own calculations for business operating margins of 74.9% and 77.8% for the 2018 and 2019 fiscal years, respectively.
“Mr Barnes made reasonable adjustments based on sound business principles to arrive at his conclusions,” the judge wrote. Keep it as part of their normal business operations.”
Another take on how much Apple collects from its app store – and from games – comes from Sensor Tower, the analytics company. It is estimated that Apple generated $15.9 billion in revenue from the App Store in fiscal 2019, with 69% of that amount coming from games. Using Apple’s operating margin calculations described in court records, the company’s App Store posted an estimated $12.3 billion operating profit that year – or nearly one in $5 of the company’s total operating profit.
According to the journal’s analysis, games alone would generate $8.5 billion. That’s $2 billion more than the sector’s 12-month operating profit from gaming giants Sony, Activision, Nintendo and Microsoft, according to the company’s top 3 and analyst estimates for Microsoft.
Apple said on Friday that its controversial operating margin stemmed from an analysis that did not cover much of the App Store’s total costs, resulting in a margin it described as too high because it includes all revenue but only a portion of costs. During the trial, Apple categorically denied its accuracy, and during testimony in public court, Mr Cook also denied the margins.
When asked by an Apple attorney, he said the company had never tried to define the specific profitability of the app store as a stand-alone business and he couldn’t give an exact number of how profitable it would be. The practice of not tracking business unit profitability stems from Mr Jobs’ desire to encourage collaboration across the company’s various business units. The internal operating margin calculation document that has not been released is a “one-time presentation”, he said.
However, Cook said he believes the App Store is profitable even without counting. “We didn’t, but I have a hunch – if you will,” said Mr. Cook. During interrogation by the judge, Mr Cook said that most of the app store’s revenue comes from games.
The judge ruled that Apple did not have a monopoly in part because the mobile gaming market was growing so rapidly, including the emerging game streaming services. Similar to Netflix Inc., Movies, Microsoft, chip maker Nvidia Corp. and others encourage game subscription services that can be accessed via the website on the iPhone. This allows them to bypass the app store.
As for Apple’s gaming economy, it’s unclear what will happen next. Epic plans to appeal the judge’s decision, and several legal observers have announced that Apple will appeal the order to stop banning developers from announcing cheaper alternatives to the App Store. The company said it was considering the case.