Netflix Is So Done Paying the Apple Tax

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It's been over three years since Netflix (NASDAQ: NFLX) first started offering in-app subscriptions through Apple's (NASDAQ: AAPL) App Store, forking over a 30% cut of any subscriptions sold through that particular distribution channel. In 2016, Apple tweaked its fee structure for subscriptions, where its cut drops from 30% to 15% after the first year, rewarding developers that are able to nurture long-term relationships with customers. Still, even the reduced 15% cut adds up over time, especially as Apple's overall contribution is minimal.

In August, Netflix started "testing" out directing new and returning customers to subscribe outside of the app, cutting Apple -- and its tax -- out of the process.

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Taking a bite out of Apple

VentureBeat reported last week that Netflix has now officially made the decision to kill support for iTunes billing for new and returning customers. Subscribers that are currently subscribed via iTunes will still be able to pay through Apple, but new and returning members will be directed to sign up for direct billing outside of the app.

The move follows a similar one from May, when Netflix pulled support for billing through Alphabet's Google Play. That move also allowed existing members to continue billing through Google Play, but that payment method is not available for new and returning customers.

That means Netflix has now effectively removed in-app subscriptions for new and returning users on the two dominant mobile platforms.

What this means for Netflix

Netflix now has over 130 million paid memberships globally, but its domestic and international segments have very different dynamics. The core U.S. market is quite mature and saturated, with member growth rapidly decelerating; Netflix added just 1 million paid subscriptions in the U.S. in the third quarter. In other words, Netflix is shifting the focus of its U.S. business from member growth to profitability.

On the international front, Netflix is far less profitable to begin with, with a contribution margin of just 17% (compared to 39% in the U.S.). The company is already making progress with growing international profits and cutting middlemen out of the equation will bolster those efforts.

What this means for Apple

In no uncertain terms, Netflix's move is a blow to Apple, which has been aggressively focused on growing its services business. That segment is highly profitable precisely because the company doesn't need to do a lot operationally to earn its cut of third-party sales, and paid subscriptions are a core pillar of the services business.

Paid subscriptions have become an important operating metric that Apple now includes in its earnings calls. The company had 330 million total paid subscriptions at the end of the fiscal fourth quarter.

Additionally, Apple is preparing to launch its own video-streaming service in 2019, which will make it a direct competitor to Netflix. CEO Tim Cook directly acknowledged the forthcoming service for the first time over the summer, and the growth in third-party video subscriptions is part of what's motivating Apple to build a similar service. "Some of [paid subscriptions] are third-party video subscriptions and we see the growth that is going on there," Cook said. "It's like 100% year over year."

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of Apple and Netflix. The Motley Fool owns shares of and recommends GOOGL, GOOG, Apple, and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.