tech

Tencent released its Q2 financial report last week. The report mentioned the highly watched mini-games business this year, with data indicating that the Q2 mini-games revenue increased by more than 30% year-on-year, and the total user time spent in mini-programs grew by over 20% year-on-year.

Tencent's Chief Strategy Officer acknowledged during the earnings call that Tencent is negotiating with Apple regarding the revenue from mini-games.

Tencent's unilateral statement this time indirectly responded to the recent "dispute" between Tencent, ByteDance, and Apple—Apple demanded that Tencent and ByteDance "plug the loopholes" to prevent creators on the WeChat and TikTok platforms from using these "loopholes" to direct users to external payment systems; otherwise, they will suspend software updates for WeChat and TikTok.

Advertisement

Tencent's Chief Strategy Officer stated that Tencent prefers to achieve a positive outcome and create a win-win situation; otherwise, the status quo will continue.

At present, mini-game developers on the WeChat and TikTok platforms have not paid the "Apple tax" like mobile game apps. If the "Apple tax" is forcibly imposed, what impact will it have on the rapidly developing mini-games industry? Where will this event lead? Today, the DataEye Research Institute will discuss this topic.

Will mini-games also have to pay the "Apple tax"? Will Apple succeed?

Considering that readers may be outsiders, let's first introduce the background of this event.

Apple demands to "plug the loopholes" and pay the "Apple tax." The core of Apple's pressure on Tencent and ByteDance this time is to hope that the two leading mini-game platforms will plug the external payment loopholes for mini-games on the iOS side, and even require Tencent to prohibit the chat function between players and developers in WeChat mini-games. Essentially, they want mini-game developers on WeChat and TikTok to pay the "Apple tax."

Currently, the payment method for mini-games on the iOS side is slightly different from the traditional mobile game app payment path. The specific operation is: after the player clicks the recharge button, they are redirected to the customer service page, where the customer service number sends a related payment link. The player clicks the link and directly uses "WeChat Pay" to complete the recharge. The player only needs to enter the payment password as usual. In contrast, mini-games on the Android side do not have related "redirection link" operations; instead, they directly jump to WeChat Pay for payment.

In other words, most iOS mini-game developers use "redirection links" to enable users to complete payments and game recharges, thereby bypassing iOS payments, which results in Apple being unable to collect the "Apple tax" from mini-game developers.In fact, since Apple introduced its "Apple tax" revenue-sharing policy in 2008, the associated controversies have never ceased. It can now be said that Apple is once again extending its tax-collecting hand to the mini-game sector.

Apple may have the following two considerations:

Firstly, the rapidly developing mini-games sector is something Apple wishes to "get a slice of." As early as 2018, Apple had already demanded that WeChat pay the "Apple tax" for mini-games. At that time, WeChat chose to rectify the virtual payments for mini-games and directly shut down the payment function on the iOS platform. The main reason was that the mini-games at that time were small in scale and mostly ad-driven (IAA), so the impact of iOS closing the payment end would not be too significant.

Now, mini-games have become an important growth point in the domestic gaming market. In the first half of 2024, the mini-game market showed strong performance, achieving a revenue of 16.603 billion yuan, a year-on-year increase of 60.5%, of which in-app purchases generated actual sales revenue of 9.098 billion yuan, a year-on-year increase of 81.56%.

Secondly, Apple itself is not faring well and needs to mine for gold to support its performance. The "Apple tax" revenue-sharing policy has been widely criticized since its introduction, and recently, developers have become more assertive in their resistance. Even the European Union previously initiated an antitrust investigation against Apple, which ultimately led to Apple being fined more than 1.8 billion euros in March of this year.

It is reported that the "Apple tax" has been reduced in many overseas regions. For example, the relevant revenue-sharing in Europe has been reduced to 17%. At the same time, Apple's financial report for the third quarter of the fiscal year 2024 shows that although iPhone shipments increased by 1.5% year-on-year, its market share has dropped from 16.6% to 15.8%. Moreover, in the Chinese market, revenue decreased by 6.5% year-on-year, and its smartphone sales failed to enter the top 5 of the domestic market.

Overall, whether Apple is "fattening the pig to slaughter" or "robbing Peter to pay Paul," the Chinese mini-game market, which is now worth tens of billions and may reach hundreds of billions in the future, is something Apple is determined to take a bite out of.

DataEye Research Institute has noticed that the Chinese market has always been a major source of revenue for the "Apple tax," second only to the American market. Sensor Tower's statistical data shows that the "Apple tax" generated approximately $22.34 billion globally in 2023, equivalent to 160.8 billion yuan, with over 40 billion yuan coming from China alone. If the "Apple tax rate" remains unchanged in the next five years, the Chinese market will cumulatively "pay taxes" of about 287.3 billion yuan.

However, it is worth noting that in 2017, Apple imposed a 30% "Apple tax" on WeChat for "tipping." At that time, WeChat did not choose to comply but instead closed the tipping function to fight to the end, leading a number of content platforms to put pressure on Apple. This forced Apple to make concessions, clarifying that tipping is a gift from users and should not be subject to the "Apple tax."

In light of the "tipping" related events, Tencent made Apple concede. Now that Apple is once again putting pressure on Tencent, it remains to be seen what the outcome will be, and it is worth continued attention.Turn against each other? Cooperate? Or continue the stalemate?

As mentioned earlier, Tencent is negotiating with Apple Inc. regarding the revenue from WeChat mini-games, hoping for positive progress in the negotiations to create a win-win situation.

Based on the potential cooperation between the two parties, the DataEye Research Institute believes that there could theoretically be several possible outcomes:

(1) Scenario one, if the negotiations fail: The multi-loss situation no one wants to see

The worst-case scenario, which is the least desired by all parties, is that if the negotiations between WeChat, TikTok, and Apple Inc. end in failure, it could lead to Apple ceasing updates for the WeChat and TikTok apps (but not affecting their use).

From the perspective of the traffic platform, the platform's business may be affected, but the platform's strong ecosystem and user base are the "confidence". Currently, both WeChat and TikTok are giant-level app products in the Chinese region, with a large scale of monthly active users. An official "cease of updates" on the iOS side may lead to unfixed bugs and the inability to update new features.

However, from Apple's perspective, WeChat and TikTok are national-level applications with a large number of platform users and a complete ecosystem. For example, for most people, losing "WeChat" means losing the "social network". If users want to maintain normal work and life, they will inevitably be forced to switch to the Android camp. Similarly, although TikTok is considered an "entertainment tool", there are a large number of "creators/CPs" on the platform. In order to continue producing video content, they can only switch camps. For most manufacturers, the Android side is the core market for mini-game competition.

DataEye-ADX advertising data shows that from 2024 to now, the proportion of WeChat mini-game video material advertising on Android has exceeded 80%.

In addition, with the mini-games themselves having very little organic traffic, the lack of a mini-game ranking on the iOS side similar to the Android side means that users can only rely on effect advertising to discover new mini-game products. This means that for small and medium-sized manufacturers, the iOS side can only obtain new users by continuously buying traffic, and the need to compete with larger manufacturers for more traffic means a significant marketing cost burden. Simply put, the closure of mini-games on the iOS side will affect revenue, but it will also reduce the operating costs on the iOS side. The overall impact is not fatal.

However, WeChat's tough stance against Apple is undoubtedly a lose-lose situation at the strategic level, and Apple may suffer more. Therefore, this extreme multi-loss situation is unlikely to occur.(II) Scenario Two, Successful Negotiation: Achieving Cooperation, Who Will Pay the "Apple Tax"?

In the long run, this is the most likely scenario.

WeChat, TikTok, and Apple Inc. reach a cooperation agreement, which will then lead to the platforms patching up vulnerabilities. This also implies that mini-games will have to pay the "Apple Tax" as required.

Firstly, how much is the "Apple Tax"? In the Chinese market, it is 30% for APPs. The mini-game industry has relatively thin profit margins, so logically it should not be charged as much. The percentage needs to be negotiated.

Secondly, who will pay the "Apple Tax"? The DataEye Research Institute believes that, on the surface, there are several possibilities:

The first possibility is that the platforms may bear the cost. WeChat and TikTok could take on the "Apple Tax" since they have already made substantial profits from mini-games.

DataEye Research Institute has learned from several insiders in the mini-game industry that currently, WeChat mini-games on the Android platform have a 60% revenue share for regular games and a 70% share for creative games. However, game developers on the iOS platform do not have to share revenue, meaning that their income on iOS reaches 100%.

A mini-game industry practitioner told the DataEye Research Institute: The current revenue share on the Android platform by WeChat was introduced in 2022. The rapidly developing mini-game market in the past two years has undergone significant changes, yet the revenue share ratio and rules have not been updated. He believes that Tencent, which has already "made enough money," should also "step up" for mini-game developers.

This implies that if the Tencent and TikTok platforms pay the "Apple Tax," the revenue from mini-games on the iOS platform will most likely be shared proportionally, similar to the Android platform.

This situation is essentially the "platform bearing the pressure alone and paying out of its own pocket for game developers." The likelihood of this is not high (unless, of course, a more top-level "mysterious force" demands it).The second possibility may be borne by the game manufacturers/developers, CP. WeChat continues to maintain its policy of not taking a cut of the revenue on the iOS side, but the "Apple tax" is borne by the manufacturers themselves, achieving a break-even situation.

A small game industry insider stated that with the introduction of the "Apple tax" on the iOS side for mini-games, the revenue of game manufacturers is likely to decline by 30%. In fact, for small game manufacturers that were not highly profitable to begin with, losses could occur at any moment.

If this is the case, to protect their profits, game manufacturers will inevitably adopt two methods to cope/shift the burden: "payment cutting," or raising the price on iOS.

The third possibility is that the platform and game manufacturers/developers, CP, share the burden together. This means that WeChat may reduce the revenue share taken from iOS mini-game users to achieve a balance among developers, the platform, and Apple.

In fact, no matter which possibility, paying the "Apple tax" will to some extent harm the interests of current iOS mini-game developers. The possibility of a win-win situation for Apple, Tencent Douyin, and game manufacturers/developers is essentially a math problem—how to pay, how much to pay, requires "clear negotiation and calculation."

In fact, the final issue of the "Apple tax" affecting the iOS player experience is a likely event!

Specifically, the DataEye Research Institute believes that to reduce the loss of benefits, iOS mini-game developers may actually face the following situations:

1. Continuing to "cut payments" on iOS, such as PC official website recharges, directing to public accounts, etc., trying every means to bypass Apple payments;

2. Increasing the paid design on the iOS side, offsetting with high pricing and other methods, shifting the costs to the players;

3. Some non-compliant methods such as "0.1 discount," because the 0.1 discount price is low enough, and the psychological impact of price increases on players is relatively small (for example, from 0.5 yuan to 0.9 yuan). Of course, the 0.1 discount approach is, after all, a niche and non-compliant method.4. Reducing or discontinuing in-app purchases on iOS in favor of IAA, hybrid monetization, or focusing on Android monetization, DataEye Research Institute believes that if the "Apple tax" is implemented on small games, it is estimated that an increasing number of pure IAP small game products will transform into hybrid monetization products, and at the same time, to cope with the "Apple tax," the proportion of advertising monetization may be increased.

In fact, this year, the trend of hybrid monetization in small games has become more and more apparent. In the first half of 2024, the proportion of hybrid monetization small games in the top 20 monthly consumption list continued to increase, from 50% in January to 80% in June, and the latest data in July shows that among the top 10 consumption list, there are as many as 9 hybrid monetization products.

This year, several pure IAP small games have transitioned to a hybrid monetization model. For example, traditional in-app purchase products such as "This City Has Good Fields," "Young General," and "Snow Blade Heroes" all transitioned to hybrid monetization products in June.

(III) Situation three, negotiation deadlock: Both parties are at a standstill, maintaining the status quo.

In the short term, this is the most likely outcome.

WeChat and the Apple platform continue to be at a standstill, with negotiations yielding no results. Previously, WeChat and Apple had a dispute over the collection of the "Apple tax" on the "reward" issue, and later, at the budding stage of small games, Apple also proposed to collect the "Apple tax." However, Apple did not get what it wanted in the end, and WeChat continued to update.

Now, after many years, the "Apple tax" has re-emerged. On the one hand, it is due to the covetousness of the small game "cake," and on the other hand, it is to show Apple's strong position.

However, it is clear that national-level apps such as WeChat and TikTok are still important to Apple. They cannot break face, nor can they make a clean cut. Both parties are at a standstill, maintaining the status quo, which may be the best solution.

The DataEye Research Institute has discussed this topic with many senior game practitioners in China.

Game media person Charles believes that Apple has successfully blocked the payment loophole, and the "Apple tax" is likely to be borne by developers, ultimately leading to more aggressive "payment cutting" or encouraging users to play on the Android channel. However, there is also a possibility that Apple will take a step back, for example, by allowing WeChat mini-games to accept Apple in-app purchases and only charge a 15% "Apple tax." Of course, Charles thinks that the best solution for now is for both parties to be at a standstill and then let the issue fade away.Game media personality Roski also believes that the "Apple tax" is likely to be borne by developers, who, in order to minimize the loss of profits, will also likely increase the pricing of their products, leading to iOS users having to pay more for various services. Roski thinks that Tencent is likely to open up to the "Apple tax," but will also leave some ways for everyone to bypass it. However, the current best solution is still to maintain the status quo and keep the stalemate.

Game self-media "Lemon Game Talk" Lemon Brother believes that this part of the tax will most likely be borne by consumers in different forms in the end. In the past, when the overseas exchange rate changed, it was the players who paid. At the same time, he also believes that "where there is a policy, there is a countermeasure." He further analyzes: top products have little impact, but "like" products will probably be more difficult, because the multiplication of "like" products is inherently difficult.

Whether it is the developer bearing it alone, or the platform paying after and then synchronizing with the Android side to have the same revenue sharing on the iOS side, it ultimately directly harms the interests of small game manufacturers, leading to the small game ecosystem on the iOS side being affected.

Who will have the last laugh in the multi-party game?

The DataEye Research Institute believes that whether it is Apple, Tencent Douyin, or game manufacturers/developers, each has its own considerations of pros and cons. For Apple, it is reasonable for WeChat mini-games to pay a certain "Apple tax" based on the iOS platform; but for the WeChat side, as the core platform, it is also justified to maintain the core interests of platform users.

From the perspective of small game practitioners, they pay more attention to profit and ROI. The implementation of the "Apple tax" may lead to increased costs and declining profits, and manufacturers may reduce or give up the iOS side of small games, which may just be a matter of time.

In addition, the DataEye Research Institute believes that no matter how the situation between Apple and the platform develops, the current advertising suppliers may be the least affected party: first, small games are highly dependent on buying volume; second, if the ecosystem on the iOS side deteriorates, the competition for buying volume on the Android side will become more intense, and the bidding price for buying volume may further increase - the advertising platform is still the ultimate winner.

Great power game: Chinese software platform VS American hardware channel

The DataEye Research Institute believes that the game between Chinese software platforms represented by Tencent and Douyin, and American hardware channels represented by Apple, is actually a contest between great powers.

Everyone wants to eat the cake, but no one can eat the cake alone - therefore, sincere cooperation is still a necessary premise, and the core issue is still the issue of dividing the cake. From an international perspective, the "Apple tax" issue is a national level issue in the EU and Japan.DataEye believes that the Chinese gaming industry, from top to bottom, has sufficient strength, wisdom, and say in the matter to reach a win-win outcome for all parties involved!