Advertising and the Apple Tax

ALSO: my audit of 2022 in podcasting starts to take shape...

As the year draws to a close (and what a year it’s been) I’m in an increasingly reflective mood. So the final few editions of Future Proof for 2022 will probably have a slightly bigger scale. What are the primary issues facing digital media today? And how might they be resolved?

Today, I want to talk about advertising (and Apple).

For those of you to whom I’m just an email on the internet, I’m about to turn 30. This means I have been working in or around the media for about a decade, ranging from things like student newspapers to TV research, written criticism to my day job, podcast production. This is not, I should add, a very large amount of time, but one thing has been constant during that period: a belief that advertising is doomed. The demise of print advertising revenues had been heralded for many years – followed swiftly by the death of digital advertising (a death that has been more rapid but just as painful).

Podcasting, my “home industry” so to speak, was on a slightly delayed cycle here. By the time the first blogs were springing up, Google had already perfected its advertising placement mechanics, meaning that monetising (even for a few cents) a blog post was not massively challenging. But an equivalent mechanism was a long time coming in podcasting – and when it arrived, it did so just in time to see advertising CPMs (cost per thousand listens) disappearing down the toilet. And so the last few years, which I’ve spent in podcasting, have really been defined by one major question. Assuming that advertising revenue is not a sustainable business for the industry, how do we monetise a product that we have spent almost two decades giving away for free?

But podcasting is just an, extreme, example industry. YouTube has far fewer issues with digital advertising (though, of course, you need 100,000+ subscribers before you can start to see any real revenue) for a simple reason: if I’m served an advert for the Jaguar F-Pace electric hybrid on YouTube, I can click on that advert and be delivered, moments later, to the same website where I can enter card details and spend however many thousands of dollars on the car. It’s essentially the dream that advertisers always had – that the consumer could see the advert and straight away action the purchase desire.

And yet… even with that element, which would’ve seemed like a fantasy to Don Draper, digital advertising is still in decline. And when you solve the biggest issue in advertising – the latency between product awareness and product purchase – and STILL can’t move the dial on your industry’s decline, you know the ship is sinking.

To move this conversation slightly away from podcasting, this has been the thrust of Elon Musk’s Twitter takeover. (I recognise that I am mentioning Mr Musk with alarming frequency on this newsletter, for which I apologise). But when he came into Twitter he wanted to transition the business away from being an advertising one, and towards being sales-driven. And though this seems deranged – and possibly the way he has handled that transition has been deranged – it is basically representative of every trend in digital media right now.

Not least the way that Musk has, in recent days, moved on from tweeting about Donald Trump and the culture wars, and started to focus his ire on Apple.

Elon Musk @elonmusk

Did you know Apple puts a secret 30% tax on everything you buy through their App Store? https://t.co/LGkPZ4EYcz

Watcher.Guru @WatcherGuru

@elonmusk Apple takes a 30% tax from app developers who make over $1 million through the ‌App Store‌ on an annual basis. Apple's App Store is the equivalent to a 30% tax on the Internet.

Apple vs Elon Musk is an interesting one. Musk is pitting it as Apple vs freedom of speech (“Apple has mostly stopped advertising on Twitter,” he tweeted. “Do they hate free speech in America?”) but, equally, this could be read as a battle between two of the world’s biggest companies: Apple, with a market cap of $2.65tn, and Tesla, market cap of $910bn (potentially #1 vs #6 biggest company in the world). What Musk is attempting to do is open up a discourse about Apple’s market dominance in the way that he has previously managed to open up new avenues of conversation about space travel, electric cars, whether you should have a handgun on your nightstand…etc.

But it’s a dangerous game, not least because Apple users and Tesla drivers are heavily intersecting groups – and both are fiercely partisan. Apple fanboys and Tesla propagandists stalk the web, but asking people to pick between the two might be like asking a Chinese football fan to choose between Manchester Utd and Barcelona. An impossible decision.

One piece of writing I found interesting, on Musk, came this week from Casey Newton and Zoë Schiffer in the Platformer newsletter. “Why some tech CEOs are rooting for Musk” basically took the stance that many executives in tech were frustrated with the extent to which employee culture (bottom-up, rather than top-down) was driving businesses, rather than a maximised effort at tech innovation. Musk, seen as championing smaller, sleeker workforces, appeals to that mentality. But more interesting to me would be to see whether this industrial support (fairly quiet right now) continues, if and when Musk accelerates his coming battle with Apple.

I’ve written in the past about the issues with Apple, and why this is one of the most important questions in digital media right now. Epic Games – the mega video games company which develops the Unreal Engine, as well as games like Fortnite and Gears of War – took Apple to court over the 30% cut that Apple takes of all revenues (including in-game purchases) from apps that have been downloaded via its app store.

The dispute pitted Epic Games and its CEO Tim Sweeney (representing here the entrepreneurial upstart Wild West of digital media) against Apple and Tim Cook (standing in here for the slick corporates of West Coast Big Tech) in a ruling that had potential monopoly busting and antitrust implications. Anyway, the ruling basically went Apple’s way, though Epic has appealed it. And Epic is not without clout: removing Fortnite from the Apple app store came with billion-dollar cost implications for Apple.

Now Musk is starting that fight again, because he’s realised first-hand how the Apple Tax impacts tech companies publishing via the app store. Musk’s issue is simple: he wants to move the company over to generating around 50% of its revenue through Twitter Blue, the premium subscription plan that costs $8 a month. There’s no reliable public data on this, but let’s assume that around half of Twitter’s users are on iOS and predominantly use the app on their phones. This means that $2.40 of each $8.00 payment is going to Apple, rather than Twitter, because they’ve been made as in-app purchases.

Twitter of course has the option to require the purchase to be made via their desktop app, where they wouldn’t have to pay that premium. But that would massively curtail their ability to sell subscriptions. So they face the same dilemma that Epic Games did: should we remove the functionality to purchase via the app, thus impeding out ability to grow the Twitter Blue brand, or should we suck it up and pay the Apple Tax? Or – hail Mary – should we sue Apple?

We’ve seen all of this before in the past. Audible, for example, the Amazon-owned audiobook company, used to forbid in-app purchases. Instead, users would log-in via desktop and create a subscription which would then generate “credits” which could be spent in-app (but which did not originate there as a purchase). They’ve since relaxed this, I’m not sure why.

Anyway, with advertising showing no signs of rebounding (especially with the Western world sliding into a predicted two-year recession) the question of subscriptions and paywalls, and how to better utilise those functions, isn’t going away. Musk is undertaking this process in the most obstreperous and disruptive way possible. That may be to the detriment of the overall movement, I don’t know. But it’s certainly shedding light on a discussion happening at basically every level of tech companies right now.

And while it may be true that CEOs are secretly sending Musk letters of congratulations because they hate their employees and want to end the HR-driven culture of the modern workplace, I suspect it’s also true that a lot of CEOs are grateful to Musk for raising these issues and taking the heat. Just as there was much industrial support for Tim Sweeney – another shoot-from-the-hip, sort-of libertarian street fighter – in his battle with Apple. Put simply: Apple has so much power in the industry that most companies won’t challenge them (the cost implications of Apple withdrawing advertising from Twitter are HUGE) but almost everyone has a problem with how they do business.

Right now, we’re still in a place where most companies are willing to suck it up and pay the Apple Tax. But assuming that advertising continues to dwindle, and a cost-of-living squeeze means that subscriptions stop growing (or even decline). Suddenly that 30% charge could become existential. And if there’s a sufficient groundswell of support, we could see more serious challenges to the Appleopoly.