A Chinese pebble in Apple's shoe could hobble app riches: Gadfly

Apple's China revenues have stalled, falling for a fifth straight quarter in January-March, when sales grew in every other region. — Reuters

If Apple Inc is lucky, a 10-page complaint posted on social media by a Chinese law firm might be a minor annoyance resulting in little more than some bad press.

Lessons from partner-cum-foe Qualcomm Inc, however, should serve as a warning that Apple's app store business model may be in danger.

The lawyers represent around 20 app developers who are alleging that Apple abuses its dominant position, and they've filed complaints to two key regulators, according to a post on WeChat.

One grievance is that the US company failed to provide a full Chinese version of its app store terms and conditions. While perhaps not spurious, Apple can easily rectify this problem and may even face a rap-on-the-knuckles fine.

Far more serious is the developers' claim that Apple's 30% cut of in-app transactions is excessive.

Apple's revenue from services last quarter

Services brought in US$7.3bil (RM31.3bil) in revenue for Apple in the three months through July 1, posting double-digit growth for a ninth quarter. The app store was a major driver of that growth, CEO Tim Cook told investors last week, expounding on the division's importance:

"Our Services business has become the size of a Fortune 100 company, a milestone we've reached even sooner than we had expected."

Apple's “tax” – where it takes a cut not only on sales of apps themselves but on purchases made within the software – is fundamental to the business model. Cook himself boasts that the company garners twice the revenue of the Google Play store, despite iOS having around one-sixth the global share.

Qualcomm's business model isn't dissimilar. The US chipmaker charges clients not only for the components it sells, but a percentage of the total cost of all parts that go into a device – regardless of whether Qualcomm actually supplied those pieces.

Chinese regulators didn't like this tax, and after a drawn-out legal battle they agreed on a fine. The bullet-dodging moment in that case, however, was when regulators decided not to rule Qualcomm's fee structure illegal – and in doing so, tacitly affirmed the legitimacy of the royalty model.

Had the Qualcomm tax been judged unlawful in China, it's likely that customers and jurisdictions around the world would have jumped on the bandwagon and forced the chipmaker to forgo one of the most lucrative revenue models in modern times.

It's arguable that Apple's current suit against Qualcomm was emboldened by that Chinese case, however, as the rest of the industry decides it no long wants to pay the tax and regulators elsewhere continue to probe the practice.

Which brings us back, ironically, to Apple facing a similar test in China. Should regulators there decide that a 30% cut – especially on lucrative in-app purchases – is excessive or unlawful, then the implications may be felt globally.

If it wants to protect its new Fortune 100 business, Apple needs to be sure this annoyance in China disappears quietly. — Bloomberg