Combined, Apple Inc. and Google power about 99.9% of the world’s smartphones. Even that prowess doesn’t leave them immune to a little competition.
A little competition, in this case, comes from the force behind “Fortnite”— the global videogame phenomenon that has amassed more than 200 million registered players who have generated more than $1 billion in revenue to date. Epic Games, the developer of the Battle Royale-style shooter game, is capitalizing on that popularity by launching its own app store. The company’s founder and CEO, Tim Sweeney, has long been critical of the app store business models propagated by Apple and Google, believing both companies take too large of a cut from app sales relative to the costs involved in running the stores.
Epic’s solution is to allow developers to keep 88% of the revenue their apps generate compared to the standard 70% allowed by Apple and Google. The first version of Epic’s store went live earlier this month for games designed for the PC and Mac and it has already had an impact on that end of the market. Steam, long the most popular platform for PC games, already tweaked its own fee structure in response.
Epic says it will start selling games for Android devices sometime next year. It already distributes “Fortnite” this way, bypassing Google’s Play store. No such move is possible within Apple’s ecosystem, as the company retains tight control over the apps that can be distributed to its devices. But Ben Schachter of Macquarie Capital believes that if Google reduces its own take on apps in response to competition, Apple would be pressured to follow. A case currently being deliberated at the U.S. Supreme Court could also eventually result in changes to both companies’ fee structures.
App stores make up about 5% of annual revenues for both Apple and Google-parent Alphabet Inc., according to consensus estimates from Visible Alpha. But their margin contribution is much higher, as neither company bears the costs associated with making those apps. Mr. Schachter estimates that Apple and Google could see a hit of about 14% to pretax earnings if they reduced their own app commissions to match Epic’s take.
As such, neither company is likely in a rush to make such a move. Unless Epic’s store turns out to be the company’s next blockbuster hit.
Write to Dan Gallagher at dan.gallagher@wsj.com
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