(Bloomberg) — Apple Inc.’s top executive in charge of the App Store floated the idea of cutting its fees a decade ago when the store reached $1 billion in profitability, according to evidence presented by Epic Games Inc. in its trial with the iPhone maker.
Phil Schiller, who runs the App Store and was previously Apple’s marketing chief, in 2011 asked Eddy Cue, the head of services, whether “we think our 70/30 split will last forever?” The question refers to the 30% cut Apple takes from developers for paid app downloads, in-app purchases, and subscriptions bought on apps within the store. In a July 2011 email, Schiller said he was a “staunch supporter” of the fee, but didn’t believe it would remain “unchanged forever.”
The 30% fee and the rules regarding in-app purchases are two of the central issues to Epic’s lawsuit against Apple, alleging the iPhone maker’s actions are anticompetitive and unfairly deprive Epic of revenue. The fight blew up in August when Epic added its own payment system to the popular game Fortnite for in-app purchases, circumventing Apple’s system and, therefore, its fees. Apple then removed the game app, cutting off access for more than 1 billion iPhone and iPad customers.
Schiller, in the email, suggested that if Apple were to eventually make a change to its fee structure, it should do so from a position of strength. “One thought,” he said, would be to adjust the fees once the App Store reached $1 billion per year in profit. He suggested a 25% or 20% fee if that would still generate the $1 billion in annual profit.
“I know that this is controversial, I just tee it up as another way to look at the size of the business, what we want to achieve, and how we stay competitive,” Schiller wrote in the email presented Monday during the trial.
Apple, responding to the email, said Schiller didn’t say in 2011 whether the App Store made $1 billion in profit and and there is no indication the fee structure is tied to the profit produced by the App Store.
Apple tweaked its App Store fees in 2016, reducing its commission from 30% to 15% for the second year of users who subscribe to a service. Late last year, Apple started a program to cut fees from 30% to 15% for developers who generated $1 million or less in the previous calendar year. Still, the 30% level remains in some cases, including for developers like Epic who make more than $1 million a year.
The App Store is considered profitable at a rate of well over $1 billion per year. An Epic expert witness calculated that Apple’s profit margin is about 80% for the App Store. Analyst Sensor Tower estimates the App Store generated $22 billion in commissions last year for Apple before its profit margin.
The case is Epic Games Inc. v. Apple Inc., 20-cv-05640, U.S. District Court, Northern District of California (Oakland).