October 26, 2021

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How Apple’s Scoring Big on Gaming – Tech News Briefing

This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.

Zoe Thomas: This is your Tech News Briefing for Tuesday, October 5th. I’m Zoe Thomas for the Wall Street Journal. Video gaming is a massive and growing industry. Nintendo, Microsoft’s Xbox, Sony’s PlayStation, and Activision Blizzard, the publisher of Candy Crush, have all touted record profits and earnings in recent years, but you may be surprised to hear that one company made more profit from gaming in the 2019 fiscal year than all four of those combined, Apple. According to a Wall Street Journal analysis, Apple’s operating profits from games totaled $8.5 billion that year. But Apple’s gaming revenue could be under threat, competitors and lawmakers are questioning the dominance of its App Store, and one of its biggest markets is clamping down on gaming all together. On today’s show, reporter Tim Higgins, who covers Apple, joins us to discuss how the iPhone maker came to earn so much in this sector and what challenges it’s now facing to protect those profits. That’s after the headlines.
Frances Haugen, the Facebook whistleblower, will be testifying in front of Congress today. Lawmakers will be asking Haugen about the internal company documents she gathered. Those documents revealed, among other things, what Facebook knew about its impact on the health and wellbeing of young users, and the company’s response to what it had learned. Haugen’s testimony will be used to update children’s privacy regulations and other online consumer protection laws according to the Senate subcommittee holding the hearing. We’ll bring you a roundup of the hearing on tomorrow’s show. In the meantime, you can watch the hearing live on our website, wsj.com.
And speaking of Facebook, the company’s platforms, including WhatsApp and Instagram, were offline on Monday. The outages appeared to be widespread, affecting users in multiple countries according to Downdetector. It also impacted Facebook’s internal communications. Facebook’s Chief Technology Officer, Mike Schroepfer, apologized on Twitter for the disruption. He said the company was experiencing networking issues and working as fast as possible to restore service.
And there have been billionaires, there have been scientists, and now Captain Kirk is headed to space. Actor William Shatner, who played the popular Star Trek captain, is set to ride on a Blue Origin space flight next week, scheduled for October 12th. It’ll be the 18th launch of Blue Origin’s New Shepard spacecraft and comes months after its first fully-crewed mission carried the company’s founder, Jeff Bezos, to the edge of space.
Okay, coming up, Apple isn’t playing around when it comes to gaming. How did video game earnings become so important to the iPhone maker? We’ll discuss after the break.
Earlier this month, a judge ruled that Apple was not a monopolist in the mobile gaming market. The decision stemmed from a lawsuit brought by Epic Games, the maker of Fortnite. Epic argued that Apple had an antitrust monopoly because it requires all third-party software downloaded on Apple mobile devices to come through its App Store. Apple then takes up to a 30% cut of sales in those third-party apps. The judge ordered Apple to make some changes to its App Store. Though overall, the decision was viewed by industry experts as mostly a win for the company, but the case shed light on how big gaming revenue has become for the maker of iPhones, iPads, and MacBooks. Our reporter, Tim Higgins, has been looking at what we learned from the case and how competitors are viewing Apple’s dominance in this space. And he joins me now, hi Tim.

Tim Higgins: Hi.

Zoe Thomas: All right, if I’m a consumer of Apple products, why should I care that Apple makes so much money from gaming? We know Apple’s a big company, why does this matter to me?

Tim Higgins: Well, if you’re an Apple user, you might like the convenience of the App Store. Game developers, however, say that maybe there’s a more efficient way, a cheaper way that they could do outside of Apple’s system. Developers would say that these rules make it harder for them to perhaps be innovative or cut their cost to the user. Whereas Apple argues that they’re providing an ecosystem them that users want and are protected in, and that’s kind of the rub.

Zoe Thomas: Tell me a little bit about how this historically built up, because you don’t necessarily go from selling devices to selling software and gaming right away. How did they get here?

Tim Higgins: There’s a history of Apple kind of evolving from a computer company to a personal tech company. The iPod really changed the world for Apple. It became a digital musical device company. It’s a relationship with music. The labels really became very lucrative for Apple. So there’s this kind of backstory of these other revenue streams. And as the iPhone came out, part of it was to keep that music business going, but with the development of the App Store and kind of the evolution of the app economy and really the boom in mobile gaming, Apple really has benefited from that.
What’s remarkable about it is that of those more than billion iPhone users out there, really just a small percentage are into the gaming. If you look at the figures that came out from the Epic trial, just 6% of App Store gaming customers in 2017 accounted for 88% of the store’s gaming billing for that year. An even smaller group were spending kind of the bulk of that money, which is remarkable. There’s kind of a group of the biggest spenders on average who are spending almost $2,700 a year on games in the App Store. And these whales, if you will, are very valuable to the video game makers, but also to Apple.

Zoe Thomas: When you’re thinking about downloading a game, you’re spending maybe a dollar on it, you’re not necessarily spending a ton of money. So how does Apple go from making 30% of a dollar to making 8.5 billion dollars in revenue?

Tim Higgins: The economics of gaming really are about in-app purchases. And for most people, these games are free, in fact. What happens in a game is that there are other potential things you can do in the game, whether maybe it changes the look of the character or gives you advantages or opens up new kind of avenues of gaming, these in app purchases really are where the money is being generated. And it’s kind of an interesting kind of dynamic here for a lot of these games that are free, initially free, really there’s this push by the video game makers to kind of find those whales who are willing to spend more and more money.

Zoe Thomas: Is Apple itself doing anything to encourage more in app purchases or trying to get more gamers to use its devices so that it can get more sales from gaming?

Tim Higgins: Really, in a lot of ways, this is a passive income for Apple. Now, they would probably disagree with that because they would argue that what they’re doing and the money they’re capturing is fair because they’re providing this ecosystem to the gaming companies, providing the technology behind the App Store and whatnot. They do help promote some of these games within the App Store. And you look at the phones each year as they’re developed, there are some tweaks that appeal to the gaming community. The most recent iPhone, the iPhone 13 Pro, has improvements to the screen, the refresh rate is higher, so those people who are into gaming would probably notice kind of a smoother gaming experience in the screen, which is something that the gaming community pays attention to. So there’s those kinds of things that help make the device more appealing for gamers.

Zoe Thomas: You know Tim, it’s not just gaming developers though who are paying attention to Apple’s dominance in the app market, regulators and lawmakers have also questioned how much control Apple has here. Do we expect they’ll take any steps to address this?

Tim Higgins: Potentially, one of the most damning parts of the Epic lawsuit for Apple is just the attention that it’s shown onto Apple’s business, onto Apple’s App Store, and to Apple’s gaming profits. It’s been long known that Apple’s been doing well in regard to the App Store, but it’s never been exactly clear exactly how well. Apple doesn’t like to disclose that kind of information, it’s tucked away in a broader services category. And what the Epic lawsuit did was turn up company records for the first time that kind of give a better window into its financial house. And some people will look at that and say that’s a rather remarkable figure, the amount that they’re generating from gaming, it surprises probably a lot of people just how much of that profit appears to be coming from the gaming sector.

Zoe Thomas: All right, stepping away from the US a little bit, I want to talk about China. It’s a big market for gaming and also a lot of changes there could affect other game makers, but also Apple and its gaming revenue.

Tim Higgins: The most recent figures I have seen estimates that about 31% of the gaming money spent in Apple’s App Store came from China, whereas 26% came from the US. And in China, mobile apps, mobile games are a big deal. And so the potential of the government there cracking down on young people, trying to limit the amount of time they spend on those games, could have dramatic ramifications for the entire industry. And since Apple is such a big player, it would in turn have a big effect for them.

Zoe Thomas: So this is a pretty quickly developing sector. There’s changes happening in gaming as fast as the storylines in gaming. So what does that mean for Apple’s future in this industry?

Tim Higgins: These details kind of underscore why we see Epic fighting so hard, but it also underscores why we see the likes of Facebook and Microsoft and others pushing back against Apple’s kind of grip on the App Store economy. And you talk to people in the industry and observers, and there’s a feeling that some of this fight is also being fueled by the fear of what’s next. If Apple’s rules continue to be the law of the land, there’s worries that it’ll carry over into the next generation of technology, whether it’s augmented reality or virtual reality. These are the areas that big tech are preparing to play in next and rivals don’t want to have Apple’s rules carry over there. They would like to be able to get past Apple’s tax, if you will.

Zoe Thomas: All right, that was our reporter, Tim Higgins. Thanks Tim.

Tim Higgins: Thank you.

Zoe Thomas: And that’s it for today’s Tech News Briefing. You can always find more tech stories on our website, wsj.com. And if you like our show, please rate and review it. You can do that wherever you get your podcasts. I’m Zoe Thomas for the Wall Street Journal. Thanks for listening.

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