Behind WeChat's Shutdown of Tipping: Apple and the Internet at a Crossroads

A conflict between two monopolists.

"We will reject any app that crosses the line. You might ask, where is the line? In the words of a Supreme Court justice, 'I know it when I see it.'" — Apple's App Store developer guidelines.

Now the justice has acted. The target is WeChat, with its 889 million users.

On Wednesday afternoon, WeChat announced that long negotiations with Apple had come to nothing, and that it had shut off the official-account tipping feature in the iOS version of WeChat, telling users to tip authors by QR code instead.

That evening Apple issued a response: WeChat could run tipping through Apple's in-app purchase system, and Apple was simply treating everyone alike.

Almost simultaneously, WeChat pushed out a second notice: the QR-code transfer tipping it had put up that same afternoon was being shut off too. That one had hit another Apple rule — apps may not steer users around Apple's payment mechanism.

The sums involved in WeChat official-account tipping are small. But they are a potential threat to Apple. Pony Ma, at a media briefing not long ago, repeated that Tencent was thinking about building paid reading.

Today WeChat sits on the home screen of nearly every smartphone in China. By Tencent's own published numbers, half of China's mobile internet users spend an average of 90 minutes a day scrolling through it. For many people this one app — chat, news, shopping, finance and every other service bundled together — simply is the internet.

But if Apple relaxes its enforcement of the App Store rules, it hands over its control of Chinese internet services.

What is this rule, exactly?

In-app purchase, usually shortened to IAP, lets apps sell digital goods inside the app through Apple's own payment channel.

Apple's rules are strict. Any sale of digital goods — music, e-books, in-game items, even virtual gifts during a livestream — has to pass through Apple's payment system, and Apple takes 30%.

In June 2016, Apple updated its terms for App Store developers. Under the clauses on in-app payment, Apple requires any iOS developer who wants to offer paid subscriptions, in-game currency, paid content, or paid unlocking inside an app to use Apple's own IAP interface. Developers may not add purchase buttons, external links, or promotions pointing to any non-IAP channel.

Most content apps with paid features — Inke, Dedao, Tencent Video and the rest — have already wired themselves into that interface. When you pay, the app charges your Apple ID, not a third-party payment service.

By Apple's rules, the tip button under a WeChat official account is a link that jumps to an outside payment method. When you tip an official account, you tap the tip button, pick an amount, and finish the payment with WeChat Pay.

Tipping went into closed testing in early 2016. At the time, WeChat official accounts were opening an "original content" feature to invited accounts; only accounts that had earned the "original" label were invited to switch on "tipping."

At the WeChat Open Class PRO event at the end of last year, the WeChat team explained the rules for tipping: it is a voluntary, unpaid gift from a user to an author. Tips cannot be used for fundraising, for selling goods, or for value-added services.

Strictly speaking, tipping is not a purchase at all.

At the bottom of the tipping page you can still read a line that says: "Tipping is an unpaid gift given voluntarily to encourage an article's author." The reader who pays gets nothing tangible back; the account operator can see, in the backend, the time and amount of every tip.

But Apple counts it as a virtual sale, and takes 30% regardless. "This is exactly the point we've been discussing with Apple, but unfortunately Apple sees it differently than we do," a WeChat insider said in an interview on April 19.

By WeChat's account, this outcome came "after long negotiations with Apple," and rested on the clause Apple added to its developer guidelines in June 2016: "Apps may not include buttons, external links, or other calls to action that direct customers to purchasing mechanisms other than in-app purchase."

If tipping ran through IAP, an author who would have received 100 yuan in tips would keep 70. The 30 yuan Apple takes has to come from somewhere: WeChat subsidizes it out of its own pocket, or the author swallows the loss, or the user pays more to cover it — each step further from what tipping was meant to be.

The "QR-code tipping" WeChat put up next broke another Apple rule: apps cannot send users somewhere else to pay, even when that somewhere else is the developer's own website rather than a page inside the app.

Not long ago the music app Spotify ran into the same conflict with Apple.

This paid streaming music service, which charges $10 a month, was unhappy with Apple's 30% cut. Starting last June it encouraged users to buy subscriptions on its own website, while the price on the iPhone rose to $13. A month later Spotify's CEO said Apple's App Store had refused to approve the new version of its app. Apple's response: "Spotify worked around the rules of Apple's in-app purchase system, which violates the terms of Apple's App Store."

To this day Spotify still prices its app 30% above its website, and WeChat's QR-code tipping was taken down for good.

But WeChat's official-account platform is no longer the only place tipping exists. Tips on Weibo articles, Weibo Q&A, Toutiao articles, Tencent's Qi'e Hao articles and WeChat's own sticker store can all still be paid the old way, and Zhihu Live has likewise sidestepped Apple's in-app payment by jumping to WeChat Pay.

Tencent's latest quarterly results show Weixin and WeChat together now have 889 million users. That user base is plainly not a reason for Apple to compromise here — or rather, it is precisely because WeChat is that big that Apple will not give ground.

According to the recently released 2016 Report on WeChat's Social and Economic Impact, information consumption on WeChat over the past year — games, the sticker store and tipping included — came to nearly 5.63 billion yuan, up 20.4% year on year.

From the start, the rule was a way to hit competitors

In-app purchase launched in 2009, so that apps in the App Store could sell digital goods through Apple's own payment channel.

But if the point were only a smooth payment experience, Apple could take nothing, or take very little. From banks to Alipay, few payment channels take more than 2%.

Apple's stated reason is that the App Store is like a shop: it rents space to developers, and developers hand over a share of their revenue for the right to sell there.

Inside Apple, though, Steve Jobs made clear early on that he saw the closed App Store as a competitive weapon.

At the end of 2010, Apple executives discussed by internal email how to hit back at Kindle. Philip Schiller, the senior vice president for worldwide marketing, wrote to Eddy Cue, then running the App Store: "Seeing Kindle advertise that a book you buy on the iPhone can also be read on an Android phone is not a fun thing to watch." Jobs replied: "Step one is to get all transactions through our system, including books (and eventually newspapers and magazines too)."

That was the year the iPad launched. On stage, Jobs sat in the leather armchair he had picked out, held the first-generation iPad, paged through the New York Times and some magazines on it, and watched a Pixar film clip — with the iPad, Apple was getting ready to go big in digital content.

Apple already sold music and movies through iTunes; once the iPad shipped, it moved into e-books as well. Competitors like Kindle either handed Apple 30% of every sale, or could take no payment at all on the very iPhones and iPads people used to consume digital content.

Beyond that 30%, Apple also joined several of America's biggest publishers in raising book prices together to hit Amazon.

That broke antitrust law, and the U.S. Department of Justice sued Apple and the publishers. At one point the DOJ widened its claims to cover the revenue split on all of Apple's digital content sales, demanding Apple change the way it sold music, books, movies and every kind of digital content inside apps.

The case ran four years, all the way to the Supreme Court. Because phones were not yet the main purchasing channel, the ruling landed on the e-book price cartel, and the App Store's revenue split went untouched.

Last year the case finally closed: the U.S. Supreme Court rejected Apple's appeal and ordered it to pay $450 million in damages, $400 million of which goes to e-book buyers.

Sellers of digital content with large user bases, like Amazon and Spotify, have had to find ways around the rules.

Amazon pulled the store out of Kindle and its other digital-consumption apps. You can shop on Amazon's phone app today, but to buy an e-book you still have to open a computer, or the web in a browser.

Music services like Spotify accused Apple of using its control of the App Store to compete unfairly, saying the 30% cut piled on pressure in their fight with Apple's own iTunes and Beats Music. Spotify, too, sidestepped Apple's in-app payment by having users sign up on the web — pay on the website and you get Spotify's monthly streaming service at the original $10, not the $13 that includes Apple's cut.

Spotify ran a promotion pointing users to the cheaper price on its site. Apple threatened to pull Spotify from the App Store unless the promotion stopped. Spotify backed down — and made the fight public.

The App Store's rules are already strangling innovation, and speech too

Riding the iPhone, Apple today has a firm hold on one slice of the market: 10% to 40% of users depending on the region, and the slice with the most spending power in digital consumption.

Stay off the App Store and you cannot reach these people. Plenty of developers build for iOS only, or wait until the iPhone app has been live a while before making an Android version.

WeChat is no slouch at monopoly itself — in some ways far rougher than Apple.

Inside WeChat you cannot use Alipay, and you cannot tap a link straight through to the country's largest e-commerce platform; across many of the services Tencent has invested in, Alipay is not an option. And in reverse, Alibaba restricts WeChat Pay the same way.

But tipping really is WeChat's own invention. The so-called "paid knowledge market" started here, and Weibo, Toutiao, Zhihu and others soon built similar features letting you tip an article's author.

If Apple's cut of developer revenue is payment for the storage, display and purchasing it gives apps, then in WeChat official-account tipping it gives nothing at all: an author writes an article, publishes it on the WeChat official-account platform, and a reader decides to tip, opens WeChat Pay, and tells the author they liked it.

Apple supplies only the payment, and still wants 30% of the revenue — in plenty of markets, gross margins don't even reach 30%.

The App Store's cut has become an important source of Apple's revenue. Growth in services is the strongest part of Apple's entire business.

As of the fourth quarter of 2016, China was the second-largest market outside the United States. App Store revenue there topped $2 billion, far ahead of the U.S. market's $1.5 billion. All of Apple's hardware revenue is falling; only the "services" business — music, apps, e-books and the rest — is still growing, by more than 20%.

The control system built around the App Store doesn't only squeeze possible competitors. It also suppresses speech Apple dislikes. Metadata, pulled from the store last month, is one example.

It was a simple app: every time the U.S. military carried out a drone strike, it pushed a notification. The developer submitted it again and again over several years, and even when it slipped past review and went live, it was pulled again soon after. Apple's reason: if you want to talk politics, write a book or sing a song — don't make an app.

Apple is standing at a crossroads

All of this feels a lot like Microsoft's monopoly twenty years ago.

Internet Explorer rose entirely on Microsoft's commercial dominance. In 1995, Microsoft bundled its newly built IE into Windows 95, required PC makers to put the IE icon on the desktop Windows opened to, and barred them from including Netscape's browser — or their licensing fees would go up.

At the time Netscape, a browser you paid to download, held 90% of the market, while Microsoft's IE had only just been built and was nowhere near as good to use.

But Windows 95 held 90% of the operating-system market. Even with the worse product, demand for buying Netscape fell sharply.

Five years later, once personal computers had reached households and the operating system no longer mattered much, Microsoft's IE had become the biggest gateway to the internet era.

Microsoft used its monopoly on the operating system to put its browser in front of nearly every consumer — and set off a costly antitrust investigation.

Apple's iPhone and App Store haven't reached a 90% monopoly, but the scale is already too large to ignore. Three years ago, App Store revenue already matched Hollywood's box-office take in the United States. At Apple's events, executives have said App Store revenue is growing about 50% a year.

As hardware revenue like the iPhone's slowly slides, App Store revenue matters more than ever.

Apple's latest quarterly results show services are the only part of its business still growing. Services revenue was $6.325 billion, up 24% from $5.086 billion a year earlier. In public appearances, Tim Cook likes to cite numbers like the App Store passing 2 million apps and generating $50 billion for developers to date.

Even the greatest companies run up against the life cycle of innovation: the products and methods that made them industry leaders can badly obstruct their next round of "disruptive innovation." Right now, that obstruction is the closed set of rules Apple wrote for itself years ago.

The iPhone rose on the back of the App Store, much as Windows once put personal computers in every home. But once computers were everywhere, it was not the browser but individual websites, one by one, that decided what people used. Phones are going through the same shift now. Whether you carry a 6,000-yuan iPhone or a 2,000-yuan iPhone, the services you use are the same.

Tencent takes in tens of billions of yuan a year from mobile games, and last year spent $8.6 billion buying the Finnish mobile-game company Supercell. In mobile games, Tencent has always split revenue with Apple without complaint. But now WeChat has become a new variable.

In China, much of what is new is born inside WeChat's ecosystem and has nothing to do with iOS.

When WeChat released mini programs, no developer dared treat them lightly — because this is WeChat, covering every internet-connected user in the country, even though it is closed enough to have stripped out the most basic building block of the World Wide Web: the hyperlink.

Today the smartphone and the operating system have both turned into infrastructure, like broadband or electricity. What controls what people use is no longer the phone, but the companies behind individual apps. WeChat is one of them.

Years ago the internet replaced Windows as the ground new businesses were built on. The same thing is happening on phones: a handful of internet apps are replacing the phone's operating system as the internet's controllers.

Now Apple, the company that once ran the "1984" ad against hegemony, has a choice to make.

Sooner or later it will have to make it. Apple can become a more open hardware company that supports innovation on its platform — and lose its monopoly.

That doesn't have to mean opening the App Store entirely. Lowering the cut on certain kinds of spending is another possibility.

Apple once launched the iPod and the iPhone with no monopoly at all, remaking a market on product innovation alone. That, of course, has only gotten harder.

Or it can become another Microsoft, until its monopoly is challenged by governments or by technology.

The App Store's rules may slow that down. They can't stop it. How does the line go? Evolution always finds a way.

Cover image from VisualHunt