Apple's App Store in China, Long a Profit Center, Faces Government Pressure

This is about two control-freak enterprises - the Chinese government and Apple - battling over who sets the rules about the transfer of data for money.

China will win because it controls access to a population on which Apple is increasingly dependent - and Apple has already capitulated on related issues.

The US government's announcement that it is looking into forcible transfers of intellectual capital which have adversely affected almost every US and other non-Chinese company doing business in China, is unlikely to change that dynamic unless it is willing to start a trade war. But that should not be ruled out. JL

Amy Qin reports in the New York Times:

Tighter regulations from censors and a spat with deeply connected internet giant, Tencent, point to Apple’s difficulties in China. Apple has shifted its strategy to become dependent on services instead of hardware, making it more vulnerable to Chinese regulators. “Apple has been successful in China because their business model — selling devices that integrate software and hardware — couldn’t be copied (or) blocked. Devices are sold once, but services are delivered over time, which means they can be interrupted or held hostage at any time.

In China, where Western-owned online services like Facebook and Google have long been blocked, Apple’s app store is a lucrative exception. Apple offers gaming, dining and dating apps in a country where most rivals are locally owned — and where it can reap big fees from iPhone users.

That business is now facing a number of threats.

The latest came this week, when a law firm representing more than two dozen app developers asked the Chinese authorities to investigate whether Apple’s app store policies violated local pricing and antitrust laws.

While it is not clear whether the government will respond, the call follows several other developments that have put a spotlight on the software and content that Apple offers in China. They include tighter regulations from the country’s censors and a high-profile public spat with a powerful and deeply connected Chinese internet giant, Tencent Holdings.

The challenges point to Apple’s difficulties in China, which is a major market for the company. Sales in China have fallen as customers wait for new iPhones and as domestic rivals make bigger and better devices. Apple, in response, has shifted its strategy to become increasingly dependent on services instead of hardware sales, making it more vulnerable to the whims of Chinese regulators.

“Apple has been more successful in China than any Western tech company because their business model — selling devices that integrate software and hardware — couldn’t be copied and couldn’t be blocked,” said Ben Thompson, an analyst who runs the website Stratechery.“Devices are sold once,” Mr. Thompson added, “but services are delivered over time, which means they can be interrupted or held hostage at any time.”

Apple faces a number of issues with its software businesses in China. Regulators shut down Apple’s iBooks Store and iTunes Movies services here just six months after they were introduced. Apple has also removed a number of apps from its Chinese app store at the request of the government, including VPN software that can help internet users evade censorship, and news apps created by The New York Times.

Apple has made other moves to stay on the good side of Beijing. It invested $1 billion in the Chinese ride-hailing app Didi Chuxing and announced plans last month to open a data center in China to comply with a new cybersecurity law.

Greater China, which includes Hong Kong and Taiwan, is one of Apple’s largest markets after the United States. Its mainland app store has been a crucial part of its success. In June, the app store in the mainland accounted for almost a third of Apple’s worldwide app store revenue, according to App Annie, a firm that tracks

metrics for apps.

While China has many locally owned app stores that sell software for phones running Google’s mobile operating system Android, Apple has the business for its iOS platform to itself. As in other markets, Apple makes money from services bought over the platform, including purchases made within apps themselves.

But officials in China have shown a growing sensitivity to foreign companies — particularly in the technology field — that enjoy a strong market share in the country. Two years ago, Qualcomm, the American chip maker, agreed to pay a $975 million fine for violating China’s antimonopoly law after being accused of abusing its dominant market position.

The complaint from Chinese app developers filed this week accused Apple of removing apps from its store without providing reasonable explanations and of taking disproportionate commissions on in-app purchases. The complaint was earlier reported by The Financial Times.

A statement from Dare & Sure Law Firm, a Beijing-based firm that said it had filed the complaint on behalf of 28 app developers, said, “Steve Jobs and Apple’s ‘American dream’ have inspired the people. So why are these young Chinese software developers who also want to pursue the ‘Chinese Dream’ of becoming entrepreneurs and improving their families’ quality of life through honest work any different?”

Lin Wei, a lawyer at Dare & Sure, said the firm had not received a response from either the National Development and Reform Commission or from the State Administration for Industry and Commerce, the two government agencies with which the complaint was lodged. Neither agency responded to multiple telephone calls on Thursday seeking comment.

Apple said in a statement that, “We continue to expand our local developer relations team in China and are working hard to help developers be successful on the App Store,” adding that its guidelines applied “equally to all developers in every country where we operate.”

Whether any official action will be taken is unclear. China’s antimonopoly law is less than a decade old, and experts are still waiting to see how it will be implemented. But according to Hu Gang, secretary general of the research center of the Internet Society of China, a Beijing-based organization backed by the Chinese government, the authorities are likely to pursue the complaint.

“Apple took advantage of its position of unilateral dominance to set unfair conditions for its competitors, and collected a huge commission in the process of doing so,” Mr. Hu said. “This kind of operation is not tenable according to typical business logic.”

“The relevant departments will definitely accept the complaint,” Mr. Hu added. “It’s only a matter of time.”

The complaint follows the recent tussle between Apple and Tencent Holdings, which brought the American company’s position in China into sharp relief.

Tencent owns the messaging service WeChat, which is used by hundreds of millions of Chinese smartphone owners to communicate, shop and pay bills, among many other services.

In January, Tencent gave users the option to open “mini-apps” in WeChat, essentially allowing iOS users to bypass Apple’s app store.

Then, in April, Apple ordered Tencent to shutter its popular “tipping” function, which allowed WeChat users to reward content generators like emoji creators or bloggers with small monetary gifts using WeChat’s in-app payment system. Apple said in a statement at the time that WeChat could still permit users to tip, as long as the function used Apple’s purchase system.

The American company has since moved to cool those tensions. In a conference call last week, Tim Cook, Apple’s chief executive, praised Tencent and said, “We’re looking forward to working with them even more to build even greater experiences for our mutual users in China.”