I. Content vs. Channel: A Tug-of-War Between Epic Giants

1. The 'Either-Or' Scenario is Purely Fabricated; The Controversy Lies in Commission Rates

Last week, the nearly half-month-long Apple-WeChat 'either-or' scenario finally came to an end – the upcoming iPhone 16 approved WeChat's update, and the iterative version of WeChat submitted nearly a week ago was also successfully launched. For a moment, it seemed like WeChat had achieved a complete victory, with nearly every corner of the internet declaring its success against the tech giant.

Regarding the aforementioned 'either-or' scenario, it's important to note that the earliest reports did not originate from official sources. They claimed that as the market for mini-program games grew rapidly, and many developers bypassed Apple's 30% commission fee by using external links, Apple intended to tighten its grip by requiring Tencent to clean up these external links within and outside its apps. Otherwise, Apple would reject WeChat's updates, leading to rumors that 'iPhone 16 would not support WeChat.'

Dolphin Insights believes that this 'either-or' scenario between Apple and Tencent is purely unfounded, especially since the rumored 'either-or' was initiated by Apple as the threatening party.

Upon reviewing the information, Dolphin Insights found that neither Apple nor Tencent, through their official channels, had mentioned any 'you or me, but not both' ultimatum – a scenario that, while seeming like a battle between titans, would inevitably lead to a lose-lose situation. Instead, the official stance of both parties has consistently been that 'negotiations on commission rates are still ongoing,' including during the current period when iterative updates were approved and launched normally. In other words, the crux of their tug-of-war lies in the commission rates.

While it was Apple that first brought up the issue of 'mini-program commissions' at the negotiating table, Tencent, fresh from its victory in the DNF mobile game battle against Android channels, and amid critical junctures where both the US and EU have forced Apple to adjust its commission rates through aggressive litigation, has been extremely proactive in these negotiations.

2. WeChat Is No Stranger to Controversies Over Apple's Commission Fees

Currently, most payments within WeChat involve e-commerce transactions for physical goods and local services (for which Apple does not take a commission), as well as payments for virtual goods and services, primarily sourced from mini-program game payments and public account tipping.

In these user consumption scenarios, iOS users typically incur a 30% commission fee from Apple during the payment process. However, since mini-programs and public accounts operate within the WeChat ecosystem without involving downloads from the App Store, game developers can more easily bypass Apple's commission fees by using third-party links.

Regarding whether a commission should be charged on public account tipping, Apple and Tencent have already clashed over this issue as early as 2017. While WeChat's argument was seemingly stronger – the tipping amount goes directly to the public account owner, and WeChat does not benefit financially, thus not constituting a commercial activity of the platform – the outcome swung back and forth between 'WeChat disabling iOS tipping functionality' and 'Apple waiving the commission fee.' This suggests that neither party holds an absolute upper hand in these disputes.

II. Why Is Apple Relentlessly Pursuing These 'Minor' Interests?

If we refer to the outcome of the 2017 battle, where Apple eventually waived the commission fee, one might expect that mini-program game payments should also be exempt from the 30% commission. So why is Apple once again stirring up controversy and relentlessly pursuing these interests?

As we all know, Apple is a global giant with annual revenues approaching $400 billion and operating profits of nearly $120 billion.

The mini-program game market on WeChat was valued at $30 billion in 2023 (source: Gama Data), with in-app purchases accounting for approximately $15 billion. Additionally, Apple has its eye on the short-form video market, valued at $37.4 billion (source: iMedia Research, primarily paid content), of which we assume an Android-to-iOS split of 3:7. This brings the total in-app purchase revenue from mini-games and short-form videos on iOS to approximately $48 billion.

At a 30% commission rate, this translates to approximately RMB 15 billion, or roughly $2 billion in incremental revenue/operating profit for Apple, equivalent to 1.7% of its annual profits. Despite this seemingly insignificant amount, Apple has reversed its previous stance of compromise over public account tipping and is seriously pursuing this matter.

Dolphin Insights believes that Apple's current focus precisely determines the potential room for concession in the ongoing commission negotiations between Tencent and Apple.

1. Apple Needs to Plan Ahead Amidst Harsh Realities

Apple's commission fees, colloquially known as the 'Apple tax,' refer to the percentage taken by Apple from app downloads and subsequent in-app purchases or subscriptions made through the App Store. The rationale behind these fees is twofold:

1) The App Store provides developers with access to a high-quality user base.

2) The apps available on the App Store have been vetted by Apple for quality and security, providing users with peace of mind.

However, since iOS is a closed system with the App Store as its sole source for applications, this commission effectively becomes a mandatory 'Apple tax.'

Launched in 2008, the App Store has gradually become a significant driver of Apple's overall revenue growth, fueled by the increasing shipments of its hardware products and global user penetration.

Revenue from the App Store is classified under Apple Services and is not further broken down in official disclosures. Third-party platforms like Sensor Tower often estimate App Store revenue based on transaction volumes and the standard 30% commission rate. Additionally, Apple discloses ecosystem data annually, including net sales paid to app developers since 2008, and relevant data from recent Apple tax lawsuits can also be referenced.

While there may be discrepancies among various revenue sources, Dolphin Insights primarily relies on a combination of Apple's net sales data to developers, Sensor Tower estimates, and investment bank projections for our analysis to maintain data consistency.

In fiscal year 2023, Apple Services generated $85.2 billion in revenue, accounting for 22% of total revenue. App Store revenue is estimated at $25.8 billion, representing approximately 30% of Services revenue. Subscription-based services (Music, iCloud, TV, etc.) and licensing revenue (e.g., setting default options like Google as the search engine) each account for roughly 30% of Services revenue.

However, over the past decade, both Apple's official disclosures of revenue share paid to developers and Sensor Tower's transaction data reveal a noticeable slowdown in App Store revenue growth.

This trend runs counter to the market's valuation logic for Apple: As hardware sales have become increasingly challenging over the past three years, Services revenue, led by the App Store, has been crucial in driving profit growth and supporting Apple's valuation (since App Store commission revenue incurs minimal costs). Therefore, identifying new sources of growth for the App Store has become increasingly urgent for Apple, and its stance towards these issues is far more serious than it was with public account tipping.

2. Mini-Games Represent a Double Incremental Opportunity

While the search for new growth sources is understandable, why is Apple specifically targeting mini-games, which are still relatively small in scale?

Dolphin Insights believes that Apple's focus on mini-games stems not only from their growth potential (reaching a broader audience of casual gamers) but also from their impact on eroding the market share of existing app-based games.

As is well known, in-app purchases within the App Store are dominated by game apps, accounting for 55% of total in-app spending in 2023. However, following the pandemic and the subsequent decline in the stay-at-home economy, coupled with supply chain disruptions affecting new game releases, the global mobile gaming market has struggled.

According to Sensor Tower's combined data from the App Store and Google Play, in-app spending on mobile games declined by 11% year-over-year in 2022 and a further 4% in 2023.

In China, where mini-games experienced a surge in 2023, app-based game revenue has been largely stagnant over the past two years, with the exception of significant contributions from games like 'Ni Shui Han.'

With mini-games expected to exceed RMB 50 billion in revenue over the next few years, Apple's tax revenue, which is primarily derived from app-based games, stands to be increasingly impacted if its market share does not grow in tandem with iOS user penetration.

III. A Retrospective on Five Years of Global Resistance: How Much Has Apple Truly Conceded?

Despite the slowdown in App Store revenue growth, app developers' resentment towards Apple's commission fees remains undiminished. Google Play, with its open-source Android system, faces similar issues, having amassed a larger user base and more apps through its open model, leading to substantial 'Google tax' revenue.

1. First Round of Adjustments: Voluntary, Global, and Benefiting Small Apps

Amid relentless protests from companies like Epic Games and Spotify and regulatory scrutiny, Apple and Google both made concessions in 2020:

(1) At the end of 2020, Apple announced that, effective January 1, 2021, it would reduce the commission rate for apps participating in the App Store Small Business Program (with annual net income below $1 million, or revenue below $1.3 million) from 30% to 15%. However, apps with annual revenue exceeding $1 million would continue to be subject to the standard 30% 'Apple tax.'

(2) In 2021, Google reduced its commission rate for apps generating less than $1 million in annual revenue from 30% to 15%, while maintaining a 30% rate for revenue exceeding $1 million.

While both Apple and Google highlighted that over 90% of apps on their platforms fall below the $1 million annual revenue threshold and would thus benefit from the reduced rate, the pyramid-shaped revenue structure means that while these small developers represent a large number, they contribute only a small fraction of overall revenue (10-20%).

Therefore, even with the reduction to 15% for developers earning less than $1 million, the actual impact on overall App Store commission revenue is minimal, with Apple and Google still able to collect the majority of revenue at the standard 30% rate.

As such, these adjustments failed to address the core concerns of non-small app developers like Epic Games and Spotify, who demanded the allowance of alternative app stores to compete with the App Store and the ability to redirect payments to third-party processors.

2. Second Round of Adjustments: Passive, Discriminatory, Payment Liberalization, and Significant Fee Reductions

While the first round of adjustments saw major app developers initiate the charge, with regulatory scrutiny providing support, the second round was primarily driven by regulatory agencies in various regions.

Unlike the first round, where Apple and Google took proactive steps to quell public outrage, their primary strategy in the second round, in response to regulatory lawsuits, was to delay and differentiate their responses.

While app developers can directly generate public opinion, regulatory lawsuits and rulings require detailed evidence and strict adherence to relevant laws. However, legal frameworks vary widely across regions, leading to significant differences in enforcement.

Regions like the EU and South Korea, which have been particularly vocal about pushing for change, have had to amend laws while filing lawsuits. Moreover, many other regional regulatory agencies have not proactively initiated reviews or charges against Apple.

As a result, Apple and Google have adopted a 'delay' strategy, engaging in protracted legal battles and making concessions only in regions where they have lost lawsuits, while maintaining the status quo elsewhere. This has led to varying commission rates across different regions, with domestic media highlighting the higher rates in China as a point of contention in the WeChat-Apple spat.

However, are rates truly more favorable in other regions, as suggested by the quoted rates? Dolphin Insights believes this is not necessarily the case. Upon closer examination of the new rate structures, we found that obtaining the advertised discounts may not be straightforward. While Apple has adjusted its commission rates, it has also slyly attached a host of supplementary clauses.

Let's take a look at how much Apple has truly conceded in regions like South Korea, where rates were adjusted following a 2021 court ruling, and Europe, which has recently seen heated debates on this issue:

(1) South Korea Breaks Precedent: Allows Third-Party Payments, But Have Developers Really Saved Money?

The legal battle between South Korean regulators and Apple lasted from 2021 to 2022, culminating in a successful ruling in favor of allowing third-party payment channels after the revision of the Telecommunications Business Act (which prohibits app store operators from forcing developers to use specific payment methods).

However, even with the allowance of third-party payments, commission fees still apply. The only relief is a 4% reduction in payment processing and other fees, meaning the standard commission rate drops from 30% to 26%, and for developers under the 'Small Business Program,' the rate drops from 15% to 11%.

When developers opt for third-party payment channels, they must choose from Apple's pre-approved list of PSP payment service providers. Special technical modules must be integrated to ensure transaction security, prompt users of non-Apple Pay payment methods, and submit regular sales reports to Apple.

Currently, there are only four options, with fee rates varying based on funding sources. Credit card payments tend to have higher rates, while e-wallet rates are lower:

While these service providers' fees (for domestic transactions in South Korea) are slightly lower than Apple's 4% discount, additional technical costs and cross-border payment processing fees (1%-2%) may render third-party PSPs less cost-effective than Apple Pay for some merchants.

After over a year of effort, the South Korean government's breakthrough against Apple's App Store appears to have been in vain.

(2) EU Pursues Aggressively: Significant Commission Rate Cuts, But Will Implementation Be Easy?

Compared to South Korea's tentative steps, the EU regulators have taken more significant actions, especially after the adoption of the Digital Markets Act (DMA) in March last year, accelerating antitrust reviews of global tech giants.

Apple's violation of DMA primarily lies in the monopoly position and forced exclusivity of the App Store. Following the EU's ruling in early 2023 that Apple violated DMA, potentially incurring fines of up to 10% of global revenue, Apple made its first significant changes to App Store pricing policies in the EU, focusing on:

While maintaining existing rules, introducing new ones as alternatives for developers. Under the new rules:

a. Developers can opt for third-party app stores outside of the Apple Store, but each app can only be downloaded from one store.

b. In-app purchases can use payment providers other than Apple Pay or redirect to external websites for payment, requiring StoreKit External Purchase and External Link Purchase authorizations from Apple. Developers must configure additional technical modules and prompt users about non-Apple Pay transactions.

c. For revenue generated through the App Store, Apple's tax rate drops from 30% to 17%+3% (credit card processing fee) = 20%. For developers in the Small Business Program, the rate drops from 15% to 10%+3% = 13%.

d. However, developers opting for the new rules must pay a Core Technology Fee of €0.5 per first-time install within a 12-month period, for installs exceeding 1 million.

Definition of 'First-Time Installs in a Year': The cumulative number of first-time downloads per Apple account within each 12-month period, including downloads from other app stores. Multiple downloads from the same account on different iPhones count as one; post-update downloads count as one; downloads on non-iOS devices like iPadOS, MacOS count multiple times; re-installs after uninstallation also count multiple times.

These changes, implemented in March, were analyzed by investment banks for their potential impact on Apple's profits. Limited to the EU (where App Store revenue is estimated at 7% of total) and with additional fees like the CTF, the estimated impact is minimal, with revenue and profit impacts of around 0.2% and 0.5%, respectively.

Despite regulatory pressure, Apple's concessions were limited (as discussed earlier, South Korea's adjustments hardly constituted concessions). Soon, European software companies led by Spotify wrote a protest letter to the European Commission, arguing that Apple's App Store rule changes still violated DMA provisions:

a. If the original App Store pricing rules violated DMA, why were they allowed to coexist with the new rules?

b. Questions about the new Core Technology Fee (CTF) and payment processing fees. While Apple claims only 1% of EU developers will pay CTF, Dolphin Insights estimates that for high-DAU apps (which contribute significantly to App Store revenue), download-based fees could increase costs, resulting in effective tax rates exceeding 30%, discouraging developers from adopting the new rules.

c. Complex 'security' steps for external link downloads (requiring users to manually confirm installation from the website) and intimidating prompts for non-Apple Pay payment methods.

In June, the EU ruled against Apple for non-compliance with DMA, demanding further rectifications. In early August, Apple adjusted App Store rules, focusing on reducing friction for external link downloads and payments, as mentioned in point c above.

1) Developers can promote downloads and payments through external links within their apps.

2) Removed the 'security step' requiring special settings before clicking external links.

3) Multiple URLs are allowed for in-app external links, with no format restrictions, but tracking user behavior for advertising is prohibited.

4) 'Security prompts' will continue but can be disabled by users.

However, the controversial CTF fee remains unchanged. Further, Apple seeks a share of revenue from external app stores and payment channels, seemingly punishing developers for using third-party services outside of Apple's ecosystem:

For developers introducing external links and guiding users to purchase through them, Apple charges two fees based on revenue scale (5% acquisition fee and 10% store service fee) to justify its role in user reach and app distribution, management, and review.

a. Acquisition Fee: 5% of virtual goods or services purchased through external links promoted within apps distributed through the App Store, within 12 months of first installation (reset with each update or redownload). Reflects the App Store's distribution role.

b. Store Service Fee: An additional 10% fee applies to all platforms, reduced to 5% for Small Business Program participants and auto-renewing subscriptions over a year. Reflects Apple's services like app review, security, and fraud detection.

If developers choose not to use EU alternative rules and operate within the App Store, the store service fee is 20% (7% for Small Business Program participants), but the CTF is waived.

Comparing January and August fee adjustments, Dolphin Insights finds that Apple has consistently introduced new fees to achieve a 'surface-level' commission reduction without affecting core revenue.

For example, considering Spotify:

As an EU-based company, we estimate Spotify's 2023 EU subscription revenue exceeded €6 billion, with 160 million active users annually. With 238 million global downloads in 2022 and a 20% MAU growth in 2023, we project over 300 million global downloads in 2023. Based on EU user shares, we estimate ~85 million downloads in the EU. Apple's take rate varies from 15% to 25% depending on the implementation method. However, Spotify's overall costs increase when guiding users to other app stores and payment channels, including platform fees.

Considering payment service fees starting at 2-3%, upfront technical costs, and periodic sales reporting, the optimal solution might revert to the App Store + Apple Pay combination (20.7% in the chart below). Apple's complex maneuvers continue to reinforce the App Store's monopoly within iOS.

These complex fee structures complicate EU regulatory oversight and delay resolutions, prolonging seemingly intractable issues.

IV. Inevitable Toll on Mini Programs, but Breakthroughs Possible for WeChat

Based on the above analysis, Dolphin Insights believes that while WeChat faces no immediate iOS exclusion risk, some commission fees are inevitable.

1. Domestic Regulation Lacks Momentum to Counter Apple's Taxes

Reflecting on past experiences with Apple globally:

(1) Developers have largely 'lost' battles against Apple. While legal victories may occur, actual implementation is challenging, often leading developers to guide users to official websites for payments, which is inconvenient for users.

(2) Regulatory interventions, like hefty fines, have compelled Apple to make concessions, albeit gradually. The EU's DMA exemplifies this, reducing Apple's overall fee rate from 30%.

However, domestic regulators rarely impose severe penalties on foreign enterprises. In May 2023, a Shanghai court dismissed a suit against Apple for abuse of market dominance and unfair pricing, citing difficulties in accurately calculating commissions and operational costs. Apple's 30% fee was not deemed the highest in the market (50% exists), and Apple Pay's exclusivity ensured data and transaction security.

Moreover, Apple's significant presence in China supports employment and social stability, making regulators hesitant to act harshly. Revising laws to regulate giants, as in South Korea and the EU, remains challenging domestically.

2. Complete Fee Waivers Unlikely, but Negotiations for Lower Fees Possible

Avoiding Apple fees entirely is unrealistic, especially as App Store growth attracts scrutiny. However, mini-game transactions occur directly between users and developers within the WeChat ecosystem, not involving WeChat financially. WeChat provides the platform and infrastructure, charging a commission to cover costs and share revenue.

Therefore, Tencent recognizes mini-game revenue based on Net revenue, unlike Gross revenue for exclusive/self-published games on App Store. Logically, the App Store should not take a commission, except for a 3% payment processing fee for Apple Pay transactions.

Before bypassing the App Store, Apple mandated a 30% fee on in-game purchases through Apple Pay, precluding WeChat from additional fees. On Android, where app stores like Huawei, Xiaomi, OPPO, and Vivo do not charge commissions, WeChat charges 40%. Thus, on iOS, WeChat's 'earnest money' for providing infrastructure and distribution effectively goes to Apple.

Of course, Apple's "aggressiveness" is not limited to WeChat alone. It can be said that there is widespread discontent over the issue of Apple's App Store fees. Let's take two platforms similar to WeChat as examples:

(1) Roblox: An in-app ecosystem similar to WeChat's.

In fact, in Dolphin's view, Roblox also possesses the functionality of an in-app ecosystem platform (promoting and distributing mini-games within the app). Although users make in-app purchases by buying Robux coins from Roblox, when users spend money on a particular mini-game within Roblox, it can also be considered a "peer-to-peer" sales transaction to a certain extent.

Despite this, Roblox is still subject to the fees imposed by Apple and Google, with these App Store fees and other charges accounting for up to 22% of Billings.

(2) Meta: Apple's tax reaches even advertising fees

Meta's social platforms, Facebook and Instagram, primarily monetize through advertising and have few other paid content offerings. On Facebook and Instagram, advertisers can promote their posts by paying for ad placements. However, if advertisers choose to directly recharge within the iOS app, they cannot escape Apple's 30% cut.

While advertisers pay Meta directly, as opposed to the essentially third-party "peer-to-peer transactions" of Roblox, Meta introduced ways for advertisers to bypass Apple's fees earlier this year: by recharging through Facebook/Instagram's web versions and then spending within the iOS app, or by using Meta Business Suite or Meta Ads Manager for ad placements.

Apple has responded by condemning Meta's blatant instructions on how to bypass the Apple Store ecosystem.

In summary, the mere 3% reduction in payment fees under the supervision of the United States and South Korea, the ongoing trial-and-error adjustments by Apple in the face of a tough stance from the European Union, the ambiguity surrounding Apple's fees in China due to incomplete relevant laws, and the cases of industry leaders Meta and Roblox, all demonstrate that it is not easy to challenge Apple's dominant position. Therefore, it is fundamentally unfeasible for WeChat mini-games to completely avoid Apple's commission fees.

Although bypassing Apple's fees by directing users to pay on the web version is an option, mini-games, which rely on their convenience to attract players, have higher user expectations for ease of use compared to app-based games. "In-app payments" are the primary demand of users.

Currently, due to the issue of Apple's commission fees, Tencent has not commercialized WeChat mini-games on iOS. However, offering free services is not Tencent's ultimate goal, especially as the number of mini-games within WeChat has grown rapidly. Both the basic operation and optimization of the WeChat ecosystem incur ongoing costs.

Therefore, Tencent has ample motivation to actively negotiate with Apple. At the same time, as we mentioned earlier, Tencent, as China's largest traffic hub, has the potential to take a leading role in negotiations over commission fees at this critical juncture of global content distribution.

During Apple's recent product launch event, when showcasing the chip performance of the iPhone 16, the game demo chosen was Tencent's upcoming blockbuster game "Honor of Kings: World," indicating that the relationship between the two parties is not strained, and negotiations are likely progressing smoothly.

Drawing on adjustments made in the European Union (17%~25%), Dolphin estimates that Apple may initially offer a discount of 5pct~10pct on the 30% commission fee, resulting in a commission rate of 20%~25%.

Although Apple's fees are challenging, mini-games have little direct connection with Apple. With WeChat as the primary traffic source, the App Store plays a limited role in driving mini-game adoption.

In this context, if WeChat charges a corresponding 5%~10% commission on mini-games on iOS, the overall distribution cost for mini-game developers remains at 30%.

Assuming the aforementioned adjustments are finalized, Tencent's mini-game revenue in 2025 could increase by an additional net income of RMB 1 to 2 billion, with this incremental revenue essentially representing pure profit.

The revolution is not yet complete, comrades must continue to strive. While the assumed 5~10pct reduction in iOS commission fees for mini-games in 2025 may represent a limited profit increase for Tencent, Dolphin believes that these negotiations over mini-game commissions could pave the way for broader changes in the iOS app gaming market in the future.

If even the toughest nut to crack, Apple, begins to budge, other channel platforms with weaker barriers will naturally compromise on lower commission rates. A global transformation of content distribution channels has finally begun, and the feast for content creators is truly approaching.

Dolphin Investment Research articles on the transformation of content distribution channels: "Armed with a New 'King,' Tencent Takes On Channels Again" (June 21, 2024)