So…looking at this article:
It’s being claimed that Apple has a 78% “operating margin” for the App Store.
Even if Apple charged developers 30% across the board, wouldn’t that make Apple’s maximum theoretical operating margin something more like…erm…30%?
Or are they not required to factor in that out of a $100 app sale, Apple writes a $70 check to the developer and only pockets $30?
Is there something I’m missing?
Depends on the definition of “operating margin”.
Usually: Operating Income/Revenue
Operating Income=Revenue-Expenses (EBIT is also often used).
So in that case of a $100 app sale, the $100 would be “revenue”, “expenses” would be $70 (and a bit extra for server costs and such), so “operating income” would be $30. And “operating margin” would be $30/$100, or 30%…correct?
Is there an accepted definition where that’s not how it would be figured?
Correct, textbook answer. I am trying to wrap my head where the 78% could come from.
I guess: They are just considering the sale AFTER deducting the payment to the developer as “revenue”, then deducting depreciation, overhead, other stuff… No idea how they could be in the ~80% ballpark otherwise.
Seems deceptive to me, although it’s an interesting way to sidestep one of Apple’s central claims.
The “economic engine” argument from Apple is one of their core claims, and probably one of the most (IMHO) compelling justifications for their margin.
If you count the payments to developers in the equation (giving a maximum revenue of 30%), I’m guessing that at least another 5-10% disappears for payment, support, hosting costs, etc. But I obviously don’t have any numbers to back that up, other than the fact that pretty much everybody concedes that credit card fees eat 2-3% of sales on average. 
Yes, when doing this accounting for a marketplace, the payments that pass through are not counted in revenue, just the fees.
As an extreme example, VISA only counts the small fee they receive; they don’t register a $10 purchase as revenue and then record $9.50 (for example) of expenses to the merchant.
So…if we take this method of calculating, that effectively means that 22% *of Apple’s cut (100% - 78%) is spent on expenses?
Meaning that if we assume a 30% cut for Apple (which we don’t necessarily know, but it feels like a safe starting point) Apple’s current cost is somewhere in the neighborhood of 6-7% of each sale.
I wonder how much of that 6-7% cost Apple would still be incurring if they allowed Epic to run their own “store” solution?
Yes, exactly. I wonder the same thing. It also makes me wonder how well a smaller store like Epic can handle 12% since they shouldn’t have access to quite the same economies of scale.
Could be that the vast, vast majority of Epic’s sales are probably going to be their digital currency / in-game redemption stuff.
So even if it costs them the full 12% to run their store, they’d effectively be getting an 18% revenue boost for their own stuff.
I read once that Amazon was willing to take losses on individual items and make it up by essentially dollar-cost-averaging over a category by volume. The “$9.99 NYT bestsellers” thing they used to do would occasionally have a book that cost them over $9.99, but then there’d also be ones they could get for (let’s say) $8. So as long as total sales of all NYT bestsellers were profitable, even if an individual sale wasn’t profitable, they were fine with it.
Interesting way to look at things.
The thing that drives me crazy about these arguments is that before the app store, the market for software was much smaller. Apple expanded the market and made it easier for small, 1-person shops to sell their software. Epic just takes that all for granted and claims “unfair”, Apple is taking too much money. So why didn’t Epic create a smartphone and app store? Was there something preventing them from doing that? Or is that a non-trivial undertaking that takes a lot of up front investment that they didn’t want to do?
There is a missing piece big piece of the pie here (sales to Apple products and Subscriptions). Those are pure revenue to Apple. I do not think that will make the figure jump to 78%, but consider iCloud sales, Apple One subscriptions, and probably Apple Music, I think they all roll into Apple iTunes/App Store revenues.
Disclaimer: I did not read the article, just read the replies here. So I might be missing something.
Does Google have similar margins for their own storefront?
I’m not an expert in business finance (actually, I hated it and I still think bookkeeping is illogical), but the 78% operation margin feels like a strong case against Apple. Not from a financial point of view, but more from a ‘moral’ perspective.
As I understand it, Apple makes a 78¢ pure profit on every $1 they take from an Appstore sales. The $1 being the 30% cut they take. Fot that 78¢ they have to do absolutely nothing. Since they keep the Appstore up and running for the other 22¢ out of that $1 they ‘take’.
The difficult question is: what would be a reasonable margin for Apple? Or better, what would others feel is acceptable? Would that be 50 cents? 2 cents?
From what I know – and again I’m by no means an expert on this topic – it’s usually high volume, low margin. But Apple seems to take a different approach: high volume and high margin. That’s clever! 
And I guess we all would love to make our money that way. But if it’s fair…?
I would find it bizarre if all that lumped into the App Store revenue category, but yes - if they did, that would massively bump the App Store revenue. 
If you don’t count the cost of the apps themselves in the total, and that’s the generally accepted way to account for such things, it’s not a horrible argument.
That said, there are multiple questions - the first and foremost being one of whether or not the numbers are being calculated correctly and completely. I’m sure there are things that aren’t reflected in that number (being ridiculous for a minute, a percentage of Tim Cook’s salary is logically a “cost” for that business division).
I know that probably wouldn’t knock down the 78% all that much, but I’d need to know more about how money flows around internally in order to judge how reasonable the number feels.
And that’s really the (quite literally) million dollar question. Is it the government’s job to decide whether a profit margin is fair?
I can’t say “yes” to that. If the government wanted to come up with some sort of “utility” rate in order to allow other “app store” platforms (i.e. “you can have your app store, but you need to cut Apple in at 3% to cover their costs”) that would be one thing. They effectively did this sort of thing with the telco deregulation in the late 90s / early 2000s.
But I think that putting the government in charge of determining what a reasonable profit margin looks like gets to be sketchy territory. Especially when - from what I’ve heard - Apple’s rates aren’t out of line at all with what (for example) video game platforms charge for software distribution.
after reading the article (which does not go too deep in the matter, I’d say), it’s important to note that the 78% figure statement is made by an Epic witness expert, and the “78% is not true” statement is made by an Apple witness expert, so…
For everybody with doubts about the 78%… Those billions of profit must come from somewhere, isn’t it? It won’t be just from the Appstore, that’s for sure, but it does add up. We definitely don’t have to feel sorry for the fruit company.
If the Epic trial and the others that are bound to follow turn out to be as revealing as Microsoft vs DOJ it’s likely we will learn a lot more about Apple’s operations than they would prefer.
One thing for certain, while “Apple’s business is not structured that way that allows a person to push a button and obtain an App Store” profit and loss statement” I guarantee you that Tim Cook knows the profitability of every single operation in the corporation. He’s too good a CEO not too.
Well, the U.S. government wants to decide how much money an individual can make, so why not how much Apple can make?
If I was a betting man, I’d wager that Apple will be making some changes in the way they do business. Whether they want to or not.
I don’t think it’s about “feeling sorry” as much as it is about incentives in general. Companies that are more profitable tend to take bigger risks and “swing for the fences” more often. If somebody was sitting over Apple and doing a line-item-veto on their profit percentages it’s entirely possible that some products we’ve seen wouldn’t have come to market.
The question for me isn’t whether a company has money, but whether they’re doing things with their money that I appreciate. I think Apple is doing pretty well in that regard.
In the US, are there caps on individual income? We have a price floor, but I’m not aware of any price ceiling.
I would wager Cook’s comment, if we take it at face value, has more to do with the idea that business units’ profits are pooled to fund the company rather than weighed individually and silo’d off. R&D on the iPhone / iPad / etc., for example, might be funded out of the surplus from the App Store. And they might strategically take a lower margin than they would otherwise go after somewhere else because they can cover the shortfall from the App Store.
Not saying whether any of this is good or bad, but it’s possible that they’re making internal tradeoffs that would make analyzing individual business units more tricky.
It’ll be interesting to see how it all shakes out. That said, I would wager that if it’s determined that Apple has to take a lesser percentage, video game companies’ e-shops are next. Nailing Apple to the wall over the App Store is the sort of thing I can see having ripple effects.
There seems to be a misunderstanding of “operating margin” here. Operating Margin is the percentage difference between the revenue made (pre-tax) from the service and the operating cost of providing that service. A 78% operating margin implies that for every $100 that the App Store makes in revenue (i.e. at 30% commission, every $333.33 of Apps and other digital goods sold), it costs Apple $22 to run the store.
It is hard to know whether the figure of 78% is right, but if it is it is PREPOSTEROUSLY HIGH. Many businesses run on sub-20% operating margins, indicating (as Epic would like to demonstrate) that Apple is rent seeking, could substantially reduce its commission and still be as profitable as most business could ever hope to be.
That said, what the operating margin very much depends upon how you allocate costs. Someone pays for iOS development, which iI would guess is far more expensive than running even the large website and server farm etc. behind the App store. Should that cost be borne solely by iPad/ iPhone sales, or by App sales or in part by both? Apple don’t breakdown their figures sufficiently to know for sure (which is not to say they can’t be subpoena’d, very interesting …)