Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

About halfway through Apple's more than two-hour product demonstration on Monday was a moment that wouldn't have raised the heart rates of die-hard technologists but may be the most significant of the announcements Apple made. 

Apple is giving its digital store for apps the most significant overhaul in its nine-year history. This App Store makeover doesn't have the cool factor of a virtual reality Darth Vader -- which also got its turn in Apple's spotlight Monday. But even if Apple Inc. never comes up with its next world-changing technology, through small tweaks it can squeeze more money from the App Store, which generates an estimated $9 billion in annual revenue. It's dull but important. 

Bearing Fruit
Apple sold roughly $29 billion worth of digital goods through its App Store in 2016. That's roughly equivalent to the yearly sales of beauty company L'Oreal.
Source: Apple disclosures and Bloomberg Gadfly estimates
Note: Apple disclosed more than $10 billion and $20 billion in purchases for 2013 and 2015. Figures for 2014 and 2016 are extrapolated from Apple's disclosures about growth rates and payouts to developers.

The App Store changes are more evolution than revolution. Video games -- by far the most popular app category -- are getting their own dedicated corner of the storefront. That means apps that aren't games can stand out more when they aren't drowned out by companies selling Fidget Spinner games and Sudoku puzzles. Apple is also redoubling efforts to highlight new apps for people to try and to learn how to get more out of the apps they already have on their iPhones.

These are all good ideas and show that Apple continues to respond to companies' longstanding gripes about how tough it is to stand out in the sea of apps.

People are devoted to apps. Smartphone and tablet apps account for about 60 percent of the time Americans spend on digital media, research firm comScore has estimated. But it is getting harder to persuade people to try and use new ones. This app stagnation is a problem for people who want to find helpful or fun new activities on their phones and tablets. And of course it's an even bigger problem for Apple and its allies who depend on reaching their customers through apps.

App Attention
About 60 percent of Americans' digital media time is spent in smartphone or tablet apps, up from 44 percent three years earlier
Source: comScore 2017 U.S. cross-platform report

App sales are growing more essential as Apple finds it tougher to sell more iPhones, computers and iPads. People last year bought roughly $29 billion worth of apps, virtual lucky eggs for Pokemon Go and other digital goods from the App Store. Apple's commissions likely work out to more than $8.5 billion, based on the company's historically typical 30 percent cut of App Store purchases.

Even small changes matter when companies have an audience of billions. That's why Google obsesses over fractions of a second of delay when people click on internet links. It's why Facebook constantly tinkers with its computer formulas to keep people surfing its news feed just a little bit longer.

And small changes matter for Apple because it has 500 million visits each week to the app storefront and significant revenue. App Store sales account for about one-third of Apple's more than $24 billion in nonhardware revenue in the company's most recent fiscal year, according to estimates of Gene Munster, co-founder of investment firm Loup Ventures and a former Apple stock analyst.

Sales of apps, digital music, AppleCare warranties and more of what Apple calls its "services" business is now the company's second-biggest product line by revenue after the iPhone. The company has set a goal to double this pool of services revenue to around $50 billion by 2020. If Apple can squeeze an extra $10 each year in digital purchases from each of the more than 1 billion Apple devices in active use, it translates into more than $10 billion a year in high-margin revenue. 

It is true that even this highly profitable pile of money is more about Apple's past than its future. Apple can sell a lot of digital apps, movies and music because so many people own Apple phones, computers and tablets. Those gadgets are a conduit to buy digital doodads, mostly from companies other than Apple.

But it is fresh revenue that's more in Apple's control than iPhones sales in China or the Apple Watch catching on with the masses. As selling more iPhones becomes a tougher slog, Apple might as well try harder to sell the existing Apple device owners more digital stuff. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. It's no longer true that Apple consistently takes 30 cents of every dollar of purchases people make through the App Store. For example, Apple last year changed its policies to take a smaller cut from companies that sell subscription products like Spotify music memberships.

  2. Some Apple watchers have said this goal isn't possible unless Apple acquires a company -- Netflix is the often-cited possibility -- with large piles of revenue from sources other than tech gadgets. 

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net