If you are reading this on your phone, hold it tight—because what I’m about to tell you will blow your mind
I’ll show you why Apple AAPL -0.3% is by far the world’s largest online retail force. I know it’s hard to believe, but Apple’s partners sell 2x as much online as does Amazon AMZN +0.6%—the supposed king of online shopping.
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This largely invisible side of Apple’s business carries so much power that Capitol Hill is growing more and more worried. It’s the reason Apple’s CEO, Tim Cook, was recently called in to explain himself to Congress.
And as I’ll show you, it is one of the reasons Apple stock is blazing to all-time highs. But first, some background.
Apple’s biggest invention is not iPhone
I remember my first smartphone. It was an HTC P3600, which came out a year before the iPhone.
The phone came with a few apps for musts like mail and calendar. There were some third-party apps too, but they were a pain in the butt to get. You had to dig up the right version for your phone, download it on a computer first, then install it to your phone via cable.
Then iPhone came along. As a phone, it didn’t change much. There were already dozens of phones with touchscreens in place of buttons before iPhone. The real revolution came a year later.
In 2008, Apple launched the App Store, the world’s first app shop built into the phone. For the first time ever, you could install third-party apps to your phone without needing a degree in computer science. That changed the role of apps for good.
Today the App Store boasts 2 million apps that we turn to in nearly every aspect of our lives. We watch TV shows on streaming apps. We exercise with the help of fitness apps. We navigate roads with GPS apps. We pay at stores and restaurants with banking apps.
But most important, we spend a lot of money through apps.
As it turns out, the App Store’s apps earn nearly 2X more than Amazon does
Amazon’s (AMZN) dominance may trick you into thinking that online shopping is just for physical stuff like clothes, books, and electronics. Not so. It’s much, much more. We spend money online on all kinds of things that don’t arrive in a box—such as taking a ride with Uber UBER -1.4%.
Now let me ask you this.
How do you hail an Uber? You use an app.
And how did you (or your kids) earn that high-on-the-leaderboard ranking in the Fortnite game? Well, you know … there’s an app for that.
Without giving it a lot of thought, we spend more and more money through apps. This is what I call “app-commerce.” And as we recently found out, this invisible corner of online retail rakes in more money than anyone could have imagined.
This past June, a groundbreaking study revealed how much money people spent on the App Store’s apps in 2019. The figure includes everything: physical stuff like clothes and groceries, services like Uber and Netflix—as well as digital products like flight tickets and games.
Take a seat before you read on because the number is mind boggling.
Last year, the App Store’s apps (used on the iPhone) earned a staggering $519 billion in sales. For perspective, Amazon generated $328 billion in sales in 2019. With its partners earning 2X more than Amazon, it turns out Apple’s App Store, not Amazon, is the world’s largest online retail force.
Now, you might say that Apple has nothing to do with those sales because App Store apps are independent of Apple. False. Apple exerts strict control over which apps Apple customers use, and how they use them.
Apple holds sway over iPhone apps
Imagine there is just one chain of department stores along the entire east coast. And this chain is owned by a single company that dictates the way more than a hundred million Americans shop. It tells them what products they can buy, and from whom. Even how those product are used at home.
You would call this nuts. But in effect, it’s the App Store.
Think about it, nearly half of all Americans carry an iPhone. But unlike any other phone, iPhone doesn’t allow you to install apps from wherever you want. Like a walled garden, the App Store is the only place an iPhone user can get apps.
Even there, Apple strictly governs what apps you can get and how you can use them.
For example, Apple doesn’t allow you to replace its “home-grown” apps—the ones that come with the iPhone. They are immutably set as default options for their particular use. So when you send an email, Apple’s Mail pops up first. And Apple’s Safari is always the go-to app to browse the Internet.
Apple also doesn’t play music on the Home Pod from any app other than its own Apple Music (unless you put in a specific request.) And when you ask Siri to call or message someone, the iPhone defaults to Apple’s own Phone and iMessage apps.
There’s more. Apple tacks on an “Apple tax” of 15-30% to every penny its third-party apps earn from Apple customers in the app. They have no choice but to pay it because the App Store’s guidelines prohibit charging Apple customers outside of the app.
In other words, Apple holds an iron grip on how half of America spends its money through apps. This is a powerful leverage driving Apple’s biggest money maker.
The App Store is driving Apple’s biggest business