Doesn't courts have the power to ask Apple to actually calculate this number and give the supporting evidence about that? Because judges are not robots and understand that it is really Apple doesn't want to know the number so that it doesn't have to disclose the margin. This is probably not the first a time a company trying this tactic in court. It would be surprising (for me) if not.
How could they calculate this if they weren't tracking it?
The cost would need to included not just development hours that have gone into creating and maintaining the system, but hours of other employee's used for the project. Also the servers, the network, buildings, etc.
If there were forced to calculate this number, it wouldn't surprise me if they were able to do so in a manner that shows they lose money. At best they could be forced to track the cost going forward using a third party auditor.
It isn't hard. It is basic managerial accounting. You just need access to lots of internal data. Ultimate parent level GAAP accounting won't provide the specific details you need. Apple definitely knows what the number is, every 10k they won't shut up about how much growth is coming from services.
> If there were forced to calculate this number, it wouldn't surprise me if they were able to do so in a manner that shows they lose money
That's why a court would ask for the procedures that they followed and revise if they did something like that intentionally. This would be the definition of malicious compliance.
The App Store is dependent on the OS. The OS is dependent on the hardware. Are you including the cost of API development, architecture, and hardware R&D into the probability of the app store.
Because that is what Apple is round-a-bout saying. That its such an integrated product, you can't tally the net revenue from one component and call it profit.
Right, they would have to define their parameters first, and there might be a margin of error. But then, that's true of every revenue number they track. And this probably is one of the most important sources of revenue they have. So, I just try unsuccessfully to imagine a scenario where an executive says "I guess we'll never know if revenue is going up or down, c'est la vie!"
How much "profit" does the app store need to pay back to all the api development that powers the apps under the hood?
Similar to the amazon dont make a profit for a decade by dumping it into growth, Apple can dump all their app store "profit" into developing new api's that apps can access, such as ai tools etc.
Apple is quite large, so I suspect they don’t exactly use the same strategy as Amazon did in its early days. It also wouldn’t be profit, because that would be an expense they would keep track of.
Realistically, it's not fair to put many of the costs of iOS development on the App store. They would need to do it anyway. And if there were no App store, they would still be designing their product as a collection of independent apps. That's what MacOS is anyway. So they would still need to build all of the features for supporting apps into iOS, even if they never allowed any outside apps.
I thought Chief Financial Officers were supposed to be good at financials.
Do they also have to be good at perjury?
Is that FAANG job interview analogous to the one for software engineers?
"Can you go to the whiteboard, and perform for me one of the standard case studies of CFOs who got away with perjury? Which you should have memorized, even if you learned nothing else in school."
"Using STAR format, tell me about a time that you lied about financials, and got away with it."
"OK, in the 3 minutes left, I want to turn this over to you, for any questions you have. ... Oh, if you have experience working with financials, normally people mention that in the Hobbies section of their resume; here at Faang, our interviews focus instead on the fundamentals."
For those claiming Apple should be able to calculate the App Store's profit margin - can you actually define how to do it?
As someone who qualified as an accountant over 15 years ago, it's not obvious to me how you would develop a meaningful allocation of costs.
I suspect this misunderstanding stems from the same thinking that leads people to believe the myth that Costco makes no profit on its physical products, only on memberships.
But that being said, if the AppStore were somehow spun off into a separate company, I think their costs would be less than 10% or even 5% of the cut that Apple takes from the AppStore sales. I'm sure I could run it at those costs.
Still, it's fair for Apple to want the cut they take from the App store revenues. I totally get their position. They built a great product and platform. They deserve to reap the rewards.
Are you serious? What company doesn’t categorize labor and expenses, especially for capitalization and R&D purposes. There’s zero chance Apple doesn’t know. It’s 100% nonsense.
They know all the labor costs and revenue for each of their products. Every single one.
Zero chance Apple doesn’t categorize server allocation and assign those to budgets. Small companies do it.
So, the obvious answer is they’re lying. They’ve done it before, too. They’re doing it now.
Let's look at a few things that we know about Apple:
1. The first $1 trillion, $3 trillion and (soon to be) $4 trillion company.
2. Cancels or stops production of products that don't make money (VisionPro being the latest).
3. Spent over half a trillion dollars in stock buybacks.
No company gets to the height Apple is currently without knowing every dollar coming in and going out.
I'm reminded of "if it don't make dollars, it don't make sense" chorus from DJ Quik's "Dollaz + Sense".
When I apply that to Apple (let alone any successful company for that matter), the claim that they don't know if the AppStore is profitable or not *defies belief*.
Schiller might not know exactly how much profit is generated, but to suggest that he's clueless whether or not on the WHOLE if the AppStore is profitable... If people believe that, I got a bunch of bridges up for sale.
Exactly. Considering how Schiller and other Apple executives straight up regularly lie to the engineering public, there's not a whole lot of mystery here.
Yeah, like Schiller isn't ever told about revenue and expenses at Apple. Please. What a joke.
> If they can't calculate it how do they know they're not losing money?
If they were losing money, what would they do? They probably can't raise their rates, since people are already very unhappy with their current rates, so it would be a hard sell given how much the company as a whole makes. They can't close the App Store, since it would flush their entire iPhone line down the toilet. Could they lower costs? Probably—cut back on reviewers, get rid of the promotional pages they create. I dunno.
Well, I claim to be a dog on the Internet, so there’s that.
But seriously, this ignores too many simple truths. Companies with even under $100 million in revenue categorize labor and other general expenses. Even full-time employees who don’t log their hours have them tracked by entry-level management all over the U.S.
Why would one do this? To capitalize on software costs, apart from even hardware costs. Something Apple does regularly, and they have a history of sharing that information with shareholders.
So, the GP is talking out of his rear end. The obvious reason Apple doesn't want to share their margins is because every closed software ecosystem is absolutely screwing their developers. That’s why.
There isn’t a single company I’ve worked for in nearly 20 years that doesn’t assign department and project costs to employees, contractors, and ancillary workers. Each department and project also has its own materials expenditure reports.
All of them. Even the smallest companies do this. It’s such a naive claim to think otherwise. I have no idea why people here think the “integrated” argument holds up at Apple, either. Staff there absolutely have "App Store and related work" assigned to their employee profiles. Without a doubt. Even their hiring roles don’t hire general software engineers; each role is preassigned to a specific department or project.
When you get into brands and vertical integration, what you spend is not the cost, and what you receive is not the revenue.
Perception of value can be more important than the actual value. Like Trump famously said:
> My net worth fluctuates, and it goes up and down with attitudes and feelings, even my own feelings
He was right! The numbers on paper (and the convictions in court) don't matter when you ride the feelings into the White House.
You can argue that all Apple R&D and marketing are expenses for the App Store, or at least are so intertwined that they can't be separated. People pay a premium for the brand, and (the perception of) quality and safety. That can't be dissected into pieces.
Seriously, I'm not sure what is so hard to understand here (I suspect it's actually not that hard to understand, people just hate Apple because "Big Company Bad"). What is the precise dollar figure of value that HN has added to YC? Literally impossible to calculate.
OK, let's do that. But we need to use an example where there are two or more outputs under 'joint supply'. Otherwise it's not analogous to the situation with Apple's ecosystem.
Let's figure out the profit margin on wool from your sheep farm. Each month:
- Your wool revenue is $1000
- Your mutton revenue is $1000
- Your total costs (feed, labor, etc.) are $1000
What's your profit margin on wool?
Most people will try to split the costs 50/50 since revenues are equal, making wool's margin (1000 - 500)/1000 = 50%.
But then ask them: What if wool prices double, so now:
- Wool revenue is $2000
- Mutton revenue is still $1000
- Total costs still $1000
Should wool's costs still be $500? Or should they now be $667 since wool is 2/3 of revenue? The margin would be either:
A) (2000 - 500)/2000 = 75%
B) (2000 - 667)/2000 = 67%
Which is right? There's no correct answer, because any cost allocation between wool and mutton is arbitrary. We can calculate the total profit margin for the farm, but not for individual products.
As someone who has some deep interests outside of tech, I’ll say that any time I see HN commentary stray into those interests the quality of people’s understanding takes a very sharp nosedive. The knowledgeable responses don’t get nearly the attention of the shallow and instinctive (but wrong) rebuttals.
I have to assume this pattern holds true for the areas I’m less knowledgeable in. It’s probably safe to assume that the further a topic strays from tech, the less faith you should put in the popular HN take.
I'm not an accountant, but my understanding is that accounting guiding principles say that the answer is B.
But that's only because the example is over-simplified, and assumes that the labor & feed benefit both wool & mutton equally.
They don't. For example, a lot of the labor cost will be in the shearing. That should be allocated completely to wool, right? Not so fast, if you don't shear your sheep your meat production will be affected so even farmers that raise sheep for mutton will still shear their sheep. So there is no correct answer in a real-world situation. rahimnathwani is correct.
It's not apparent why we need a joint supply analogy.
The ecosystem wouldn't work without the hardware, the SDKs and the app store. They are designed and maintained in tandem. They are in joint supply. Why does Apple create Xcode and the various SDKs? Is it to support hardware sales, or to support app store sales?
A and B are both close enough to the truth to indicate a profit margin of around 70%. There is room to quibble over the last few percent, no room to deny a hefty profit margin, hence It won't matter if they get it a few percent too low since actual profits will be far up in the double digits region.
The two options I gave are illustrative, and do not cover the complete range of possible answers. So you can't assume the 'true' answer (if it exists) lies within that range.
I could reasonably argue that 100% of costs should be allocated to wool (after all, I'm a wool farmer, and mutton is just a byproduct!), or that 100% of costs should be allocated to mutton.
The options were illustrative but the numbers are plausible, it doesn't matter whether you use wool and mutton or bits and bytes as illustrations. That is what this is about, not the last few percent but the grand scale of the margin. That Apple takes to the IT-version of Hollywood Accounting [1] may be expected but does not need to be defended.
In my original example, the profit on wool could be $0 (0% of revenue) or $1000 (100% of revenue), depending on how you allocate costs. So, if there's a true number, it's somewhere in the range 0% to 100%.
For the lone farmer who's just trying to make it through the season and can't afford an accountant, it may seem difficult to correctly account for costs, but if you're one of the richest large multi-national corporations in the world, you'd book the revenue according to GAAP and not try to guess at how to do it from first principles. In particular, you'd pick a method and stay with that until there's a reason to change. By "percentage of revenue contribution" is entirely valid, though there are other methods.
Since the question was written to pose by percentage of revenue contribution as wrong, by production units is another way you could do it. But importantly, as a public company, you pick a method and go with that so that the numbers can be compared from year to year, and quarter to quarter, and is more important than the absolute number, though that's still important.
Importantly, it's not this big crazy unknown question that's never been answered before in the history of the business of sheep. Or hardware and software sales. Apple, whos legal and accounting department used an aggressive tax minimization strategy similar to the Dutch Sandwich to book revenue in Europe until they got called out for it, isn't comprised of "hick farmers" who don't know what they're doing and can't figure out a method on how to book revenue. It's a ploy yet again to avoid paying taxes or developers and isn't some off-the-cuff answer.
Apple, as a public company, is required to break out material revenue, and thus the App store revenue is listed in their quarterly 10-K with the SEC. Cost of sales and operating expenses are also listed. Importantly though, the lawyers fighting Apple just need to establish that the percentage is quite high, even if a specific number came be agreed upon, and thus Apple is can sustainability pay out whatever they're being asked for.
Though, the SEC is a US institution and has limited reach outside of the US, and the linked case is coming from the UK,
so I'm not sure if the existence of the 10-K comes into play.
You are assuming Apple is a reseller (whose revenue is the full price paid by the end buyer) rather than an agent (whose revenue is only their commission).
You are also ignoring the app store's advertising revenue.
And you're assuming that it costs zero to run the app store.
>You are assuming Apple is a reseller (whose revenue is the full price paid by the end buyer) rather than an agent (whose revenue is only their commission).
This isn't an unreasonable assumption, especially considering the invoice for my last App Store purchase has an Apple address and tax identifier (VAT number). Apple is the merchant of record.
Taking these positions is a foolish risk. Such obvious disingenuous behaviour may be rewarded in the US but judicial systems in other countries may take a dim view of this sort of obvious obfuscation. The judge could appoint a forensic accounting firm to get full access to their financial records system and calculate the profitability.They will surely find some report to management in the system reporting profitability at which point there's a perjury and contempt of court charge risk. They need less arrogant lawyers :-)
I typically don’t argue in favor of big corporations but I believe them, kind of. Apple includes a lot of things into their SDKs for free, which are paid on Google's platform. For example Apple Maps, Apple Weather, etc. components are all free and can be extremely expensive on Android (Google charging per view for Google Maps, for example). That is of course if you use these things in your app.
they could still calculate their profit margin: cost to build all their free SDK / profit from app store. Seems quite simple. Why would you believe them that they are not able to perform this calculation?
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Folks are so naive.
I think it was always naive.
The cost would need to included not just development hours that have gone into creating and maintaining the system, but hours of other employee's used for the project. Also the servers, the network, buildings, etc.
If there were forced to calculate this number, it wouldn't surprise me if they were able to do so in a manner that shows they lose money. At best they could be forced to track the cost going forward using a third party auditor.
That's why a court would ask for the procedures that they followed and revise if they did something like that intentionally. This would be the definition of malicious compliance.
When they say that the profit margin isn't 75-78%, I assume that's because it's 79% or more.
Because that is what Apple is round-a-bout saying. That its such an integrated product, you can't tally the net revenue from one component and call it profit.
Similar to the amazon dont make a profit for a decade by dumping it into growth, Apple can dump all their app store "profit" into developing new api's that apps can access, such as ai tools etc.
MacOS yes, but if they were just shipping a phone with built in applications it would look quite a lot different I'd imagine.
Do they also have to be good at perjury?
Is that FAANG job interview analogous to the one for software engineers?
"Can you go to the whiteboard, and perform for me one of the standard case studies of CFOs who got away with perjury? Which you should have memorized, even if you learned nothing else in school."
"Using STAR format, tell me about a time that you lied about financials, and got away with it."
"OK, in the 3 minutes left, I want to turn this over to you, for any questions you have. ... Oh, if you have experience working with financials, normally people mention that in the Hobbies section of their resume; here at Faang, our interviews focus instead on the fundamentals."
As someone who qualified as an accountant over 15 years ago, it's not obvious to me how you would develop a meaningful allocation of costs.
I suspect this misunderstanding stems from the same thinking that leads people to believe the myth that Costco makes no profit on its physical products, only on memberships.
But that being said, if the AppStore were somehow spun off into a separate company, I think their costs would be less than 10% or even 5% of the cut that Apple takes from the AppStore sales. I'm sure I could run it at those costs.
Still, it's fair for Apple to want the cut they take from the App store revenues. I totally get their position. They built a great product and platform. They deserve to reap the rewards.
Are you counting the surely enormous amount you would have to pay Apple for the privilege of being the App Store?
They know all the labor costs and revenue for each of their products. Every single one.
Zero chance Apple doesn’t categorize server allocation and assign those to budgets. Small companies do it.
So, the obvious answer is they’re lying. They’ve done it before, too. They’re doing it now.
Your rebuttal is simply “of course they know the answer”.
Is there any reason someone reading this thread should prefer your take over theirs?
1. The first $1 trillion, $3 trillion and (soon to be) $4 trillion company. 2. Cancels or stops production of products that don't make money (VisionPro being the latest). 3. Spent over half a trillion dollars in stock buybacks.
No company gets to the height Apple is currently without knowing every dollar coming in and going out.
I'm reminded of "if it don't make dollars, it don't make sense" chorus from DJ Quik's "Dollaz + Sense".
When I apply that to Apple (let alone any successful company for that matter), the claim that they don't know if the AppStore is profitable or not *defies belief*.
Schiller might not know exactly how much profit is generated, but to suggest that he's clueless whether or not on the WHOLE if the AppStore is profitable... If people believe that, I got a bunch of bridges up for sale.
Yeah, like Schiller isn't ever told about revenue and expenses at Apple. Please. What a joke.
If they were losing money, what would they do? They probably can't raise their rates, since people are already very unhappy with their current rates, so it would be a hard sell given how much the company as a whole makes. They can't close the App Store, since it would flush their entire iPhone line down the toilet. Could they lower costs? Probably—cut back on reviewers, get rid of the promotional pages they create. I dunno.
But seriously, this ignores too many simple truths. Companies with even under $100 million in revenue categorize labor and other general expenses. Even full-time employees who don’t log their hours have them tracked by entry-level management all over the U.S.
Why would one do this? To capitalize on software costs, apart from even hardware costs. Something Apple does regularly, and they have a history of sharing that information with shareholders.
So, the GP is talking out of his rear end. The obvious reason Apple doesn't want to share their margins is because every closed software ecosystem is absolutely screwing their developers. That’s why.
There isn’t a single company I’ve worked for in nearly 20 years that doesn’t assign department and project costs to employees, contractors, and ancillary workers. Each department and project also has its own materials expenditure reports.
All of them. Even the smallest companies do this. It’s such a naive claim to think otherwise. I have no idea why people here think the “integrated” argument holds up at Apple, either. Staff there absolutely have "App Store and related work" assigned to their employee profiles. Without a doubt. Even their hiring roles don’t hire general software engineers; each role is preassigned to a specific department or project.
I am no expert, but that seems like a 74% margin on services, which would seem to include their "app store".
It is difficult for me to imagine that apple is somehow incapable of breaking those numbers down into smaller component categories.
Perception of value can be more important than the actual value. Like Trump famously said:
> My net worth fluctuates, and it goes up and down with attitudes and feelings, even my own feelings
He was right! The numbers on paper (and the convictions in court) don't matter when you ride the feelings into the White House.
You can argue that all Apple R&D and marketing are expenses for the App Store, or at least are so intertwined that they can't be separated. People pay a premium for the brand, and (the perception of) quality and safety. That can't be dissected into pieces.
Let's figure out the profit margin on wool from your sheep farm. Each month:
What's your profit margin on wool?Most people will try to split the costs 50/50 since revenues are equal, making wool's margin (1000 - 500)/1000 = 50%.
But then ask them: What if wool prices double, so now:
Should wool's costs still be $500? Or should they now be $667 since wool is 2/3 of revenue? The margin would be either: Which is right? There's no correct answer, because any cost allocation between wool and mutton is arbitrary. We can calculate the total profit margin for the farm, but not for individual products.I have to assume this pattern holds true for the areas I’m less knowledgeable in. It’s probably safe to assume that the further a topic strays from tech, the less faith you should put in the popular HN take.
But that's only because the example is over-simplified, and assumes that the labor & feed benefit both wool & mutton equally.
They don't. For example, a lot of the labor cost will be in the shearing. That should be allocated completely to wool, right? Not so fast, if you don't shear your sheep your meat production will be affected so even farmers that raise sheep for mutton will still shear their sheep. So there is no correct answer in a real-world situation. rahimnathwani is correct.
Besides, why the analogy? We’re talking app stores. It's not apparent why we need a joint supply analogy.
I could reasonably argue that 100% of costs should be allocated to wool (after all, I'm a wool farmer, and mutton is just a byproduct!), or that 100% of costs should be allocated to mutton.
[1] https://en.wikipedia.org/wiki/Hollywood_accounting
Since the question was written to pose by percentage of revenue contribution as wrong, by production units is another way you could do it. But importantly, as a public company, you pick a method and go with that so that the numbers can be compared from year to year, and quarter to quarter, and is more important than the absolute number, though that's still important.
Importantly, it's not this big crazy unknown question that's never been answered before in the history of the business of sheep. Or hardware and software sales. Apple, whos legal and accounting department used an aggressive tax minimization strategy similar to the Dutch Sandwich to book revenue in Europe until they got called out for it, isn't comprised of "hick farmers" who don't know what they're doing and can't figure out a method on how to book revenue. It's a ploy yet again to avoid paying taxes or developers and isn't some off-the-cuff answer.
Apple, as a public company, is required to break out material revenue, and thus the App store revenue is listed in their quarterly 10-K with the SEC. Cost of sales and operating expenses are also listed. Importantly though, the lawyers fighting Apple just need to establish that the percentage is quite high, even if a specific number came be agreed upon, and thus Apple is can sustainability pay out whatever they're being asked for.
Though, the SEC is a US institution and has limited reach outside of the US, and the linked case is coming from the UK, so I'm not sure if the existence of the 10-K comes into play.
You are also ignoring the app store's advertising revenue.
And you're assuming that it costs zero to run the app store.
This isn't an unreasonable assumption, especially considering the invoice for my last App Store purchase has an Apple address and tax identifier (VAT number). Apple is the merchant of record.
1. Do you think your employer can calculate the profit margin on what you do? I sincerely doubt it, unless maybe you work in sales or something.
2. How would you calculate the value of HN to YC?
3. How would you calculate the value of iMessage? It has no direct revenue, but it has a huge effect on other revenue. How much though?
I'd say a hard limit like 10% for digital download stores (app store, google play, steam, ...), and 20% for streaming sites (youtube, twitch, ...)