Pushback by Tokyo and Seoul against tech group show Beijing the way forward
By Vivian Toh
After losing major regulatory battles in the European Union, Japan and South Korea, Apple is now taking heat from global regulators to lower its stiff 30% App Store fees. The focus is now shifting to China, the tech group’s second largest market.
App Store fees, known as the “Apple Tax,” are the commission fees Apple charges for the use of its App Store and in-app payment system.
Japan’s parliament on June 12 passed the Act on Promotion of Competition for Specified Smartphone Software, inspired by the EU’s Digital Markets Act (DMA). This legislation aims to slash Apple’s iOS App Store fees significantly, with full implementation expected within 18 months. The move could drive Japan’s standard App Store fees from 30% down to 17%, the lowest level in East Asia.
Under Japan’s new law, Apple and its App Store will be classified as “Designated Providers,” prohibited from restricting third-party billing systems. It will limit app developers from displaying website product prices within apps, and impose restrictions on providing links to website products within apps. Violations could result in injunctions and fines of up to 30% of annual revenue, enforced by the Japan Fair Trade Commission (JFTC).
South Korea had taken the lead in the East Asian crackdown in 2021, amending its Telecommunication Business Act and banning app store operators from forcing software developers to use their payments systems. Late last year, the country’s telecommunications regulator, the Korea Communications Commission (KCC), followed up the action by accusing both Apple and Google of coercing app developers into specific payment methods, warning of possible fines up to $50.5 million.
Despite Apple’s efforts to reduce fees in the EU, the European Commission continues to scrutinize the company’s practices. On June 24, the Commission revealed preliminary findings that Apple’s updated App Store terms are still in violation of the DMA by obstructing app developers from freely directing consumers to alternative channels for promotions and content.
Thierry Breton, the EU’s Internal Market Commissioner, criticized Apple’s monopolistic behavior, stating, “For too long, Apple has been squeezing out innovative companies, denying consumers new opportunities and choices. Today, we are taking further steps to ensure App Store and iOS comply with DMA.”
In March, the EU imposed a 1.8 billion euro (about $2 billion) antitrust fine on Apple for its dominant position in the music streaming app market. The DMA mandates that Apple reduce its App Store fees in the EU from 30% to 17%, and iOS 17.4 must facilitate third-party payments, app stores, and internet-based app downloads. As it stands, the EU could impose further fines up to 5% of Apple’s global daily revenue, potentially reaching $1 billion, if it finds the U.S. tech group to be in violation of the DMA.
As Apple’s second-largest market by revenue, China stands out for continuing to allow some of the highest App Store fee rates in the world.
In 2023, Apple’s revenue from China was CNY 529.8 billion yuan (about $74 billion), triple that of Japan. Analysts believe China’s recent focus on antitrust issues and the introduction of the Fair Competition Review Regulations have laid the groundwork for similar regulatory crackdowns as in other major markets. But the question remains: How will China navigate its relationship with Apple, balancing regulatory pressures with the economic benefits of hosting the tech group’s huge manufacturing base?
Our research shows that Apple’s business model in China has faced an increasing imbalance since 2022: Its service-related revenue, driven by App Store fees, has surged even as its hardware sales stalled. Service revenue has quadrupled since 2015, while iPhone sales have dropped around 10%.
Of Apple’s total revenue of $383.3 billion for fiscal 2023, global App Store fees stood at $22 billion. According to business analytics firm TREFIS, the App Store now contributes nearly 34% of Apple’s service revenue.
Apple is increasingly reliant on its App Store fees to maintain its revenue balance. In China, this means extracting substantial fees from big tech groups like ByteDance and Tencent. For instance, on Douyin, Bytedance’s flagship short-video platform for the domestic market, users buying virtual gifts must purchase virtual currency through the App Store, where iOS users get less value for their money due to Apple’s 30% fee, compared with much lower fees for those using Google’s Android system.
Thousands of small Chinese game developers distributing their games on WeChat’s mini-programs have also complained bitterly against the “Apple Tax” in recent years, arguing that the 30% fee rate is squeezing out their livelihood as they are mostly micro-enterprises with fewer than 10 employees and profit margins of less than 12%. As Beijing seeks to boost employment and domestic spending in the second half of 2024, making Apple accept lower fee rates could be a low-hanging fruit for regulators.
Globally, Apple has sought to allay such concerns by offering fee reductions to small businesses, lowering rates to around 10% in many cases. However, such conciliatory policies have yet to apply to the Chinese market. Developers and content creators have had to bypass the “Apple Tax” through alternative payment methods. Creators of short video dramas on the Douyin platform, for example, have tried to send HTML5 payment links to subscribers individually in order to bypass the in-app purchase channels on Apple devices.
Apple’s response has been to subtly reject or delay iOS app updates from the likes of Tencent and ByteDance, according to analysts and developers. This in turn pressures the large Chinese tech platforms to enforce Apple’s payment rules and fee rates, shutting down potential “bypasses” by small developers and creators. As discontent continues to simmer among the latter group, the South Korean and Japanese regulatory crackdowns have inspired calls for more forceful regulatory action.
Apple’s continuously high fee rates in China “constitute discrimination against Chinese consumers,” said Zhang Ying, a partner at Beijing-based China Going Global think tank. “In the longer-term perspective, I don’t think the hefty ‘Apple tax’ in China will last long.”
Li Sanxi, a professor at the Renmin University of China and director of its Digital Economy Research Center, agrees. “Ultimately, Apple is likely to adopt an approach like that in the EU, reaching compromises with app developers and consumers.”
The global landscape for App Store fees is rapidly evolving. The aggressive legislative and regulatory approaches adopted by the EU, South Korea and Japan have set a precedent that other countries, including China, may soon follow.
For developers and consumers, these changes promise a more equitable and competitive digital marketplace. Reduced fees and fewer restrictions on third-party payments and App Stores — no doubt a negative impact on Apple’s bottom line — could spur innovation, offering users a broader range of choices and developers more favorable economic conditions.
The ripple effects of these legislative and regulatory actions are reshaping the future of digital commerce far beyond the Apple ecosystem. As the world watches, the next move from China is set to be the tipping point in the global campaign to redefine the economics of the App Store.
