The Finance Team Lost One

Need a sign that this week’s Apple ruling was both necessary and absolutely overdue? Take one good look at Patreon.

Last summer, I wrote a piece suggested that Patreon needed to fight back against Apple’s attempt to strong-arm its creator-friendly business model. Patreon seemed quick to acquiesce to Apple’s demands that even individual creators were on the hook for a 30% fee.

It was, to me, a sign that Apple had gone too far and had honestly lost the plot when it came to its realistic role as a middleman. Patreon isn’t perfect, but if anyone gets a cut for facilitating a subscription that goes to a creator, it should be them.

Yesterday, Patreon announced that it was going to put out an update bypassing the Apple cut. Furthermore, it was pausing its unpopular decision to end per-creation memberships.

Patreon wasn’t alone in correcting its model in response to an Apple-shaped boulder getting pushed aside. So is Spotify. And Proton, which promised to pass the cost savings directly to consumers.

Worst of all for Apple, Stripe is now offering a direct integration with iOS apps, a move that effectively cuts a 30% markup to something closer to 4% if you decide to cut out the middleman and build your own checkout method.

Reminder that Apple used this imagery to highlight its benefits to consumers just a year ago.

The result feels like we’re watching an app industry finally get a breath in after 17 long years of holding it. Some argue that Apple deserves a cut from the apps that take part in its ecosystem. Yes, they probably do. But that cut is not 30%, a number that always felt arbitrary and now is subject to a legal decision that highlights just how arbitrary it actually is. As Yvonne Gonzalez Rogers’ court ruling puts it:

Apple’s lack of adequate justification, knowledge of the economic non-viability of its compliance program, motive to protect its illegal revenue stream and institute a new de facto anticompetitive structure, and then create a reverse-engineered justification to proffer to the Court cannot, in any universe, real or virtual, be viewed as product of good faith or a reasonable interpretation of the Court’s orders.

Rogers, a judge in the U.S. District Court of the Northern District of California who often finds herself knee-deep in cases similar to this, did not hold back. That stands out, given that her prior opinion was pretty much an Apple win.

The surprising part of this to me is that Phil Schiller, as strong an acolyte to the brand as Apple has, turns out to have been the voice of reason, arguing against putting a fee on links at all. Problem is, Tim Cook sided with the finance team, which was most concerned about its bottom line. It chose 27% seemingly to discourage linkouts entirely:

Despite Mr. Schiller’s concerns, the June 20, 2023 presentation forged ahead and identified benefits to several different commission/fee options, one of which was a 27% commission on transactions made within 24 hours of a customer’s link-out. For that option, the presentation identified that the proposal “[r]educes financial risk versus no-fee option,” which simply refers to the fact that Apple would generate more revenue under this option than a no-commission option.

In fact, documents revealed that not only would Apple generate more revenue, it would lose minimal to none: as Apple’s earlier financial modeling had indicated, because developers’ external costs will exceed 3% when utilizing linked-out transactions, Apple’s 27% commission on linked-out transactions renders every linked-out transaction more expensive to a developer than an IAP transaction at 30% commission.

The result is that Apple turned a case it basically won in most meaningful ways into perhaps the biggest legal loss in the company’s 49-year history.

There’s something about services revenue that can be deeply corrupting if you are not careful about it. The tendency to optimize for financial gain is very much there, and it’s something you can see from many of the services that offer these subscription services. Spotify, a direct beneficiary of this, is an excellent example: Last year, the company went through layoffs so significant that founder Daniel Ek said they harmed the company more than anticipated. As a Business Insider piece from this week highlights, the layoffs even affected the overall quality of the company’s playlists.

Apple is not the kind of company that will cost-optimize by cutting quality. But as a hardware manufacturer, it is known for its clockwork-like supply chain, which Tim Cook built. The best supply chains are optimized for minimizing costs and maximizing profit. No wonder he favored the structure that best protected the status quo.

Money is a corrupting force, and you have to work hard to not let it corrupt your thinking or your ideas. Apple is quite good at making money in relatively uncorrupted fashion. The iPod is an excellent example of this. But under the Tim Cook era, the company always finds ways to let the finance people win the discussion. Every single controversial decision the company has made in recent years—the company’s tendency to discourage upgradeability, its slow-rolling of USB-C on iPhones, the blue bubbles—seemingly has roots in the finance team winning the discussion.

It is notable that the finance team lost one. Perhaps if we want an Apple we like to thrive for generations to come, it needs to lose a few more.