Apple to open iPhone to alternative app stores

Apple has revealed an extensive plan to dismantle some of the competitive barriers it has established around its profitable iPhone franchise, but the new options available to consumers and app developers will initially only be accessible within Europe. 

The announcement was made on Thursday as Apple prepares to comply with forthcoming European regulations designed to give consumers the option to use alternative app stores and provide app developers with unprecedented opportunities to avoid paying fees that have become a lucrative source for the tech giant.

The overhaul, set to take effect in early March, will include concessions that Apple had previously declined to make in its app store, including reducing the fees it collects from developers in Europe.

Most notably, for the first time, Apple will allow iPhone users in Europe to use app stores other than the one operated by the company that comes pre-installed on the mobile device. It will also enable developers to offer alternative payment systems that could help them earn more money while potentially reducing their prices.

However, Apple has expressed concern that opening up the iPhone to external parties will increase the likelihood of consumers venturing outside its proprietary system being exposed to hackers and other security issues.

The Cupertino, California-based company is taking what it perceives as a risky step solely to comply with European rules known as the Digital Markets Act, or DMA, which come into effect on March 7. Apple has pledged to incorporate all the complex changes into an iPhone software update — iOS 17.4 — that is scheduled to be released in 27 European Union countries in early March. A test version of that software update will first be distributed to app developers.

Complying with the EU mandate will inevitably lead to "increased privacy and security threats," warned Phil Schiller, who oversees the Apple app store. "Our priority remains to create the best, most secure possible experience for our users in the EU and around the world."

The revisions in Europe will reduce the 15% to 30% commission that Apple plans to continue charging worldwide on in-app transactions completed on the iPhone. The DMA will prohibit Apple from imposing a 30% commission in Europe once it comes into effect.

Therefore, in Europe only, Apple is reducing its commission on in-app transactions to 10% to 17% for developers who choose to remain within the company's payment-processing system. Apple will not collect any commissions on in-app transactions completed through alternative payment systems.

This is a stark contrast to how Apple is complying with a court ruling that took effect last week requiring it to allow iPhone apps to provide links to different payment options in the US. If an in-app transaction is completed outside the Apple system in the US, the company plans to collect commissions ranging from 12% to 27% to prevent freeloading on its iPhone software.

Apple will continue to charge 15% to 30% on in-app transactions done through its payment system in the US.

These in-app commissions are a significant source of revenue for Apple's services division, which in recent years has been one of the company's fastest-growing segments. In Apple's last fiscal year, the services division generated $85 billion in revenue, making it the company's second-largest segment behind sales of the iPhone itself.

Although Apple does not plan to charge for in-app transactions outside its payment system in Europe, it will introduce a "core technology fee" for installing apps on the iPhone. This fee will also apply to alternative app stores that are downloaded onto the iPhone after being reviewed and authorised by Apple.

The review process and other measures that Apple claims to be implementing in Europe have drawn criticism from one of the company's most vocal critics, Epic Games CEO Tim Sweeney, whose company produces the popular video game Fortnite. In a social media post on Thursday, Sweeney characterised Apple's revisions in Europe as "a cunning new example of malicious compliance".

In 2021, Epic took Apple to court over the iPhone commission system in the US. Although Apple was victorious on most counts in that legal battle, it resulted in the ruling that prompted the recent modifications to the iPhone app payment-processing system in the US.

At this stage, it's far too early to predict how these changes in Europe might impact Apple's revenue, but investors didn't seem concerned about it causing a significant dent. Apple's shares barely moved in Thursday's afternoon trading following the announcement.

Apple's alterations to its iPhone app commission structure in Europe could potentially encourage regulators and lawmakers in the US and other major markets to advocate for similar reductions.

Spotify, the world's leading music streaming service and a competitor to Apple, is already pledging to campaign for changes in markets outside Europe, where it believes consumers will benefit from greater freedom.

"If you reside outside certain markets, you will continue to face frustrating obstacles due to Apple's absurd rules," Spotify stated in a blog post. "That's why developers worldwide are persistently urging other governments to enact their own laws similar to the DMA."

In addition to revamping its iPhone app store in Europe, Apple will also make it simpler for consumers to switch to different default options other than its own Safari browser to comply with the forthcoming regulations.

(Inputs from RSS/AP)