So, what is the 'Apple Tax'? When Apple users pay to download apps through an app store (usually the App Store) or purchase digital goods or services within the app, they need to first pay the money to Apple's payment system. Apple will take a certain percentage as commission and then transfer the remaining fee to the app developer. This commission rate is the tax rate of the 'Apple Tax.' In fact, the market has been suffering from the 'Apple Tax' for a long time, and the game of producers and distributors has been continuing. Apple has a strong attitude towards 'by-passers,' while WeChat and TikTok have the courage to compete with hardware platforms due to their huge traffic.

On August 14th, the three-month and six-month results of Tencent's announcement ending on June 30, 2024 showed that the company's revenue was RMB 161.117 billion, a year-on-year increase of 8%. The gross profit was RMB 85.895 billion, a year-on-year increase of 21%. Thanks to its powerful transaction and content ecology, the total user usage time of small programs has increased by more than 20% year-on-year. The transaction amount achieved through small programs has achieved a double-digit percentage increase year-on-year. The total revenue of mini-games has increased by more than 30% year-on-year.

On August 15th, regarding the 'Apple Tax' issue, a Tencent executive publicly stated that they did not actually bypass the in-app purchase and were negotiating with Apple, while also coming up with fair conditions to commercialize them. Currently, this discussion is in progress, and we hope positive results can be achieved, as this may lead to a win-win situation.

The 'Apple Tax' earns RMB 0.5 billion per day, and the highest market rate in China is 30%.

In China, the 'Apple Tax' rate for 'standard enterprises' is 30%, while for small businesses it is 15%. Compared to the US's 27% and 12%, the EU's 17% and 10%, and South Korea's 26% and 11%, China's 'Apple Tax' rate is the highest.

The 'Apple Tax' is one of Apple's important sources of income and is an important part of Apple's service business revenue. Although Apple has not disclosed the revenue of the 'Apple Tax,' the data on service revenue is visible.

On August 2nd, Apple's financial report was released, which ended on June 29, 2024, showing that the company's revenue was $85.8 billion, and service business revenue was $24.2 billion, a year-on-year increase of 14%, accounting for 28% of the revenue, an increase of 2% from the previous quarter's 26%. Apple's service business is second only to Apple's iPhone sales in terms of revenue, with a gross margin of 70.8%, while its iPhone and other hardware products have a gross margin of 36.5%.

According to third-party data statistics agency Sensor Tower, the 'Apple Tax' earned approximately $22.34 billion worldwide in 2023, which is equivalent to RMB 160.8 billion, and this number in China is over 40 billion yuan. Based on this calculation, Apple earns RMB 0.5 billion from the 'Apple Tax' every day.

The market has been suffering from the 'Apple Tax' for a long time, and Apple has a strong attitude towards 'by-passers.'

For a long time, the market has debated the validity of the 'Apple Tax.' For small developers, the balance between profit and loss is between a few points, and the 'Apple Tax' greatly increases this balance point. No matter how Apple takes commission, consumers are ultimately the ones who pay for the 'Apple Tax'.

Therefore, many developers have been trying to bypass the 'Apple Tax,' but Apple's attitude has been very strong. In 2020, Epic Games, a game developer with 0.3 billion players under its belt, used the direct payment method to buy in-game props to avoid the 30% 'Apple Tax.' Immediately, Apple removed 'Fortnite' from the App Store and cut off its development tools, claiming that the game violated payment rules. The two sides subsequently engaged in a protracted legal battle. In 2021, a US court required Epic Games to pay commissions and interest while also requiring Apple to improve its App Store policies. Ultimately, Apple compromised and agreed that developers could introduce purchasing methods outside of the Apple iOS payment system via email and other means. However, Epic still needs to pay a certain fee to Apple. According to the latest regulations, if the number of application programs downloaded outside of the App Store is more than 1 million times, Apple will charge each user 0.50 euros (about RMB 3.9), but will not charge commissions or fees within the application program.

Although Apple has not disclosed the income from the 'Apple Tax,' it is one of Apple's important sources of income and an important part of Apple's service business revenue. Regardless, service revenue data can be seen.

Even the "Iron Man" Musk has no choice but to accept the "Apple Tax". Every time he launches a new business after acquiring Twitter, there is always a conflict with Apple's existing policies. In Isaacson's book "Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future", Musk's life mentor and investor Larry Ellison advised him in November 2022: "Don't go head-to-head with Apple. Twitter is a company that can't afford to offend. Apple is an important advertiser. More importantly, if Twitter can't be normally listed in the Apple App Store as before, it is dead." Later, when Musk visited Cook, he also mentioned the issue of the 30% commission. Cook also explained that this proportion will gradually decrease to 15% in the future.

Faced with a choice between Apple and WeChat, Tencent has once resorted to traffic to fight against Apple.

In the process of playing games with the "Apple Tax", Tencent once faced the dilemma of choosing between WeChat and Apple.

In 2017, WeChat launched a reward function for public account articles. Readers can use WeChat Pay to reward authors directly. At that time, Apple said that readers' rewards for reading public account articles are a form of "content consumption" and Apple needs to take a 30% commission. But Tencent said that WeChat did not deduct from the reward, and the reward function was only to increase platform activity. After more than a year of communication, Apple made concessions and added a system clause that "users can give gifts to other users without going through iOS in-app purchases." Based on this clause, WeChat changed the public account reward function to "like the author" and went back online.

However, Apple still did not relax its hold on WeChat mini programs, and Tencent also cooperated. In May 2018, Tencent released a "Notification on Regulating Virtual Payment Behavior in Public Accounts", announcing that WeChat mini programs do not support virtual payment business on iOS for the time being in order to ensure normal use of mini programs on iOS. This round ended in a draw.

Perhaps Apple made concessions because of WeChat's strong traffic. Because more than 90% of Chinese people use WeChat: according to Tencent's financial report for the first quarter of 2024, the merged monthly active users of WeChat and WeChat are 1.359 billion; in comparison, this number increased to 1.371 billion on June 30, 2024.

Figure 1: Tencent WeChat monthly active numbers Data Source: Tencent Financial Report

There is such a saying in the market: WeChat has always maintained a strong "resistance" to the "Apple Tax", and even gave up many businesses in order not to integrate into this system. But Tencent did not publicly comment on this statement. However, as an important strategic business, WeChat mini programs carry Tencent's ecology in the era of mobile internet. Tencent will naturally not easily give away its long-nurtured monetization business to others.

Envying WeChat and Douyin mini-games, Apple once again speaks tough.

Some mini-programs, mobile games, and mini-games developers will also avoid the "Apple Tax" to increase their meager profits. Generally, they will publish top-up links or customer service functions through mini-programs, guiding players to top up or buy props on official websites and other channels. This is the recent news that Apple requires Tencent and ByteDance to block the "loopholes" in WeChat and Douyin payments.

In the context of the slowing growth of the domestic and global gaming industry in the past few years, mini-games have maintained high-speed growth for three consecutive years. According to the "China Game Industry Report for January-June 2024" published by the China Audio-Video and Digital Publishing Association, the revenue of mini-games in the first half of this year was 16.603 billion yuan, an increase of 60.5% year-on-year, and continued high growth. Among them, the actual sales revenue generated by in-app purchases was 9.098 billion yuan, a year-on-year increase of 81.56%; advertising revenue was 7.505 billion yuan, a year-on-year increase of 40.75%.

Figure 2: More than 1 million people play WeChat mini-games Data Source: WeChat Mini-Program Mini-Games

Tencent, the largest player in the domestic mini-games market, also frequently appears in the above data. The data disclosed in the company's financial report shows that the annual revenue growth of mini-games exceeded 50% in 2023, and the year-on-year growth in the first quarter of 2024 was 30%. In July 2024, at the WeChat Mini-Game Developer Conference, Tencent announced that the number of mini-game users had reached 1 billion, and the monthly active users exceeded 0.5 billion, and the usage time continued to increase.

And Tencent's latest financial report announced on August 14 shows that the gross profit for the second quarter of 2024 increased by 21% year-on-year to RMB 85.9 billion, thanks to the high-gross sources of income such as local market game revenue, video ad revenue, mini game platform service fees, and video number merchant technology service fees. The gross profit margin increased from 54% in the same period last year to 57%. The gross profit of value-added service business increased by 12% year-on-year to RMB 45 billion, mainly due to the increase in local market game revenue and mini-game platform service fees. The gross margin increased from 54% in the same period last year to 57%.

Figure 3: As of June 30, Tencent's value-added services situation

Douyin mini games are also developing rapidly. According to official disclosed data, from Q2 2023 to Q1 2024, the user scale of Douyin mini games increased by 100%, the number of products increased by 70%, and advertising consumption increased by 530%.

However, as mentioned earlier, at present, neither WeChat nor Douyin mini games has opened virtual payment functions on the iOS side of Apple's mobile phone. Faced with huge business opportunities, Apple is also seeking a larger share of the pie: Apple "warned" Tencent in May and "warned" Byte in June, but Tencent and Byte have not made positive responses to the "Apple tax".

This time, Apple has made a 'tough' statement: if the 'loopholes' are not blocked, the updates of WeChat and Douyin will be suspended. In early August, Apple announced that its net income for Q3 2024 was US $21.45 billion, a year-on-year increase of 7.9%, better than market expectations. However, the performance in Greater China was severely lower than expected, with revenue of US $14.728 billion, a year-on-year decrease of 6.5%. Moreover, Apple's revenue in Greater China has been continuously declining for four consecutive quarters since Q3 2023.

The dynamic game has been continuing, and the result remains to be seen.

As for the 'Apple tax', it is a reasonable income of the platform business. Apple does not force merchants to enter, and the users who enter want to squeeze into Apple's ecosystem and do their own business. However, Apple has priced its own ecosystem and user group. Apple has always believed that its business model is legal and believes that its commission model is beneficial to the development of the entire ecosystem.

Apple is trying to maintain its revenue model, while developers, consumers and others hope to promote a more fair and open market environment. For example, today's Tencent, with the blessing of Mini Programs and Video Number, has a more mature ecosystem and is able to wrestle with Apple and Android to protect its developers within the ecosystem.

The 'Android tax' on Android phones is even higher than the 'Apple tax', specifically 50%-70%. It is more aimed at gaming apps and allows users to download from third-party platforms; although Android will try its best to impose restrictions, such as searching for Tencent's download platform 'Application Treasure' in Xiaomi's app store, it will prompt the use of the built-in APP for more security and stability. Even if it is downloaded from a website, there will still be risk prompts during installation.

Game developers have also been playing games with Android, and Tencent is still one of the representatives. Due to the expiration of the contract, on June 20th this year, Tencent's 'DNF' mobile game announced that it will no longer be listed in some Android app stores. Although players who use the relevant Android app stores can still complete the update in the game, Android players who have not yet downloaded the game are recommended to go to the game's official website for download.

Morgan Stanley once released a report saying that Tencent's 'DNF' mobile game will become one of Tencent's largest scale games in recent years and is expected to become the catalyst for the inflection point of its Q2 domestic game business growth. The total revenue of the game in the first year is expected to be 10 billion yuan. Some market analysis has also said that the popularity of the game and huge traffic give Tencent the confidence not to give any more channel commissions.

Some people once suggested that Tencent make mobile phones, but Ma Huateng's response was: 'Making mobile phones is not Tencent's expertise. Tencent is more focused on services in mobile phones, and how to use hardware devices to give full play to their unique experience.' But Hardware is the first entry point, and controlling the distribution of software can restrict the software ecosystem. Fortunately, after more than ten years of development, Tencent's software has also become a 'necessity', and when wrangling with hardware, it has a strong voice.

Because of the 'Apple tax', Apple has been accused of monopoly, but it has not been recognized as a monopoly in the United States; in Europe, Apple has been accused of abusing its market position and fined hundreds of millions of euros.

In the era of mobile internet, content producers, channel operators, and consumers are the three major subjects, and there will be collisions between enterprises, regulators, and consumers. A round of games has been played between content producers and channel operators around the sharing ratio, which is a normal phenomenon in the market. The battle between Apple and Tencent and Byte over the 'Apple tax' will find a dynamic balance point among the three parties.

Editor/Lambor