Apple may face backlash in China over demanding App Store cut on tips

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Putting the iPhone maker at ends with WeChat.

Chinese app makers are reportedly upset with Apple after it issued a new policy that recognizes tips as in-app purchases, according to The Wall Street Journal. This means small donations made from inside popular social networks in China will soon be made eligible for Apple’s 30 percent revenue cut.

Unlike in the US and other Western markets, in-app tipping is a more common display of gratitude in China toward writers, developers, and other content creators who give out stuff for free. However, Apple last month demanded app makers disable the tipping function per the new App Store rules, which will now recognize any donation as an official in-app purchase. Those who don’t comply risk being kicked out of the App Store, the WSJ reports.

Tipping is typically done through apps like the massively popular WeChat, which acts much like a mobile operating system with other services bundled inside of it. This results in Chinese consumers making use of services like food delivery and reading the news all from within WeChat’s ecosystem, which encourages users to tip. Apple, until now, hasn’t seen any of that revenue in the same way it does with app downloads and other more traditional in-app purchases.

This debate over tipping is yet another sign that Apple’s relationship with China has become increasingly more fragile. The contention is now a source of concern for the iPhone maker, which has seen the country’s fast-growing population become its largest global software market, with in-app revenues of more than $2 billion in the fourth quarter of 2016 alone, according to the WSJ. And yet Apple’s revenues are falling in China and its market share has fallen behind by local Chinese brands, putting the company on the defensive in what is effectively the most important and lucrative market on the planet.

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Apple may be playing with fire in China

When Apple released its earnings report for the March quarter, there was one data point that jumped off the page regarding iPhone sales. Although iPhone sales declined 1% year over year, Apple saw its revenue increase in every geographic region the company operates in, save for China. Specifically, Apple saw its revenue in China drop by 14% year over year, a factor widely attributed to slumping iPhone sales during the March quarter. And though the iPhone 7 Plus was more popular among Chinese consumers than Apple anticipated, Tim Cook conceded during Apple’s conference call that older generation iPhone models “didn’t perform as well.”

With analysts scratching their heads trying to figure out why iPhone sales in China hit a speed bump recently, Ben Thompson of Stratechery theorized that the stickiness of the iOS ecosystem is less of a factor in China than it is anywhere else in the world. The reason, interestingly enough, stems from the popularity of an app called WeChat.

The fundamental issue is this: unlike the rest of the world, in China the most important layer of the smartphone stack is not the phone’s operating system. Rather, it is WeChat. Connie Chan of Andreessen Horowitz tried to explain in 2015 just how integrated WeChat is into the daily lives of nearly 900 million Chinese, and that integration has only grown since then: every aspect of a typical Chinese person’s life, not just online but also off is conducted through a single app (and, to the extent other apps are used, they are often games promoted through WeChat).

For all intents and purposes WeChat is your phone, and to a far greater extent in China than anywhere else, your phone is everything.

In other words, the headaches that might ordinarily accompany switching between Android and iOS are far less common in China because WeChat trumps whatever mobile platform a user might be using to engage with WeChat. As a result, some have even likened WeChat to a de-facto operating system in its own right due to how popular it is and the myriads of functions it houses.

All that said, a new rule from Apple as it pertains to tipping on the WeChat app has struck some as risky and perhaps ill-timed. According to a report from The Wall Street Journal, Apple recently told social media apps that operate in China, including WeChat, that the company will soon start taking a 30% cut from all “tipping” activity that occurs within the app. Incidentally, in the Chinese market, it’s not uncommon for users to send monetary tips to developers and content providers when they appreciate an app’s services. Apple views this as an in-app purchase whereas Chinese developers disagree and instead view this behavior as a voluntary token of appreciation.

One executive says his company is talking to the Ministry of Industry and Information Technology, a regulator, about whether Apple is imposing unfair rules by turning tipping into in-app purchases. MIIT says it isn’t involved. The People’s Bank of China, which regulates electronic payments, didn’t respond to a request for comment.

With iPhone sales in China not exactly on the rise, it will be interesting to see which side here blinks first.

By Yoni Heisler | BGR

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