The Coming War Between Apple and Facebook

Eric Seufert argues that Apple and Facebook, which have long occupied separate roles as content platform and advertising platform respectively, are being pushed toward conflict by slowing smartphone growth and a maturing app economy. Focused on the global mobile app ecosystem from roughly 2008 through early 2017, the analysis traces how Apple's historic restraint on in-App Store promotion, including the 2013 removal of AppGratis, the brief 2014 ban on rewarded video ads, and the 2016 shutdown of iAd, protected user experience and hardware sales. With App Store revenue near $6BN against Apple's $233BN total in 2015, that restraint left room for Facebook's mobile ad business to flourish through app install ads, Instagram, Audience Network, and WhatsApp.

Both companies now face pressure to find new growth. Facebook confronts saturated ad load and slowing user growth in developed markets, illustrated by an 8% after-hours stock drop in November 2016 when its CFO changed a single word describing ad load impact. It is responding by raising inventory prices through video investment and expanding inventory surface area, absorbing third-party content via Instant Articles, Live Video, and Instant Games, the last a Messenger-based HTML5 game store that could carry a 30% revenue cut.

Apple, facing falling hardware sales and iPhone replacement cycles of about three years, is shifting toward services. Its App Store search ads convert above 50%, and iOS 10 zeroed the IDFA for the 10-20% of users with Limit Ad Tracking enabled, though networks worked around this with fingerprinting. Because Apple controls distribution, it holds the strongest hand, and enforcement of its "app store within the App Store" policy is the likeliest flashpoint. Escalation could range from Apple restricting App Store links to Facebook building an in-app purchase economy that sidesteps Apple's 30% fee.

Still, the app economy is thriving: Apple paid developers $20BN in 2016, collected roughly $8.5BN in fees, and logged a record $240MM day on January 1, 2017. The conclusion is that platforms inevitably expand at scale, and the two giants may ultimately settle into an uneasy coexistence as "frenemies."