Small Business

Their businesses went virtual. Then Apple wanted a cut

By Jack Nicas and David McCabe

ClassPass built its business on helping people book exercise classes at local gyms. So when the pandemic forced gyms across the United States to close, the company shifted to virtual classes.

Then ClassPass received a concerning message from Apple. Because the classes it sold on its iPhone app were now virtual, Apple said it was entitled to 30% of the sales, up from no fee previously, according to a person close to ClassPass who spoke on the condition of anonymity for fear of upsetting Apple. The iPhone maker said it was merely enforcing a decade-old rule.

Airbnb experienced similar demands from Apple after it began an “online experiences” business that offered virtual cooking classes, meditation sessions and drag-queen shows, augmenting the in-person experiences it started selling in 2016, according to two people familiar with the issues.

Airbnb discussed Apple’s demands with House lawmakers’ offices that are investigating how Apple controls its App Store, according to three people who spoke on the condition of anonymity to discuss private conversations. Those lawmakers are now considering Apple’s efforts to collect a commission from Airbnb and ClassPass as part of their yearlong antitrust inquiry into the biggest tech companies, according to a person with knowledge of their investigation.

Those lawmakers are set to grill Tim Cook, Apple’s chief executive, and the chief executives of Amazon, Facebook and Google in a high-profile hearing Wednesday.

Apple’s disputes with the smaller companies point to the control the world’s largest tech companies have had over the shift to online life brought on by the pandemic. While much of the rest of the economy is struggling, the pandemic has further entrenched their businesses.

With millions more employees working from home, Amazon and Google are selling more online cloud space, with revenue for Amazon Web Services and Google Cloud soaring in the first quarter of the year, which included the start of the pandemic. Facebook and YouTube, which is part of Google, some of the internet’s largest gathering places, had traffic surge as people couldn’t socialize in person.

Apple has also brought in more revenue from its online-services business, mostly on the back of its App Store, and its Macs, iPads and iPhones have become even more important tools.

With gyms shut down, ClassPass dropped its typical commission on virtual classes, passing along 100% of sales to gyms, the person close to the company said. That meant Apple would have taken its cut from hundreds of struggling independent fitness centers, yoga studios and boxing gyms.


Pic: ClassPass

Apple said that with Airbnb and ClassPass, it was not trying to generate revenue — though that is a side effect — but instead was trying to enforce a rule that has been in place since it first published its app guidelines in 2010.

Apple said waiving the commission in these cases would not be fair to the many other app developers that have paid the fee for similar businesses for years. Because of the pandemic, Apple said that it gave ClassPass until the end of the year to comply and that it was continuing to negotiate with Airbnb.

“To ensure every developer can create and grow a successful business, Apple maintains a clear, consistent set of guidelines that apply equally to everyone,” the company said in a statement.

ClassPass was told it must comply with the rule this month, according to the person close to the company. Instead, it stopped offering virtual classes in its iPhone app because those classes were subject to Apple’s commission, according to Apple. As a result, fewer potential customers now see the classes advertised by its gym partners.

In 2016, Airbnb started a business offering in-person “experiences” to travelers, such as guided tours, bar crawls and cooking classes with locals in their vacation destinations. In early April, as the pandemic gutted travel plans and the company’s bottom line, Airbnb began selling virtual versions of similar experiences, although it quickly expanded that business to more prominent offerings, like cooking classes with famous chefs and training sessions with Olympic athletes.

Later that month, Apple reached out to say that when the online experiences were sold in Airbnb’s iPhone app, the company would have to pay Apple’s fees, said a person familiar with their exchanges.

Apple said it believed that Airbnb had long intended to offer virtual experiences — not that the business was created simply because of the pandemic — and that it would continue to do so once the world has resumed to normal. Apple also pointed out that Airbnb had never paid Apple any money despite the fact that it built its multibillion-dollar business with the help of its iPhone app.


Airbnb is still negotiating with Apple. In June, Brian Chesky, Airbnb’s chief executive, said that the online experiences offering was the company’s “fastest growing product ever” and had earned $ 1 million in revenue. Apple said that if the two companies could not come to terms, it could remove Airbnb’s app from the App Store.

Many companies and app developers complain that Apple forces them to pay its commission to be included in the App Store, which is crucial to reaching the roughly 900 million people with iPhones. Apple said the App Store had 500 million visitors from 175 countries each week.

For months, economists and lawyers at the Justice Department have held meetings with companies and app developers about the App Store as part of its antitrust investigation into Apple. Music service Spotify and another large company that declined to be named also said they have had recent conversations with attorneys general from several states about the issue.

Unlike Spotify, Airbnb and ClassPass do not offer services that directly compete with one of Apple’s digital products.

Many companies complain that they are also subject to what they call Apple’s capricious enforcement of its rules, which can lead to their apps’ removal from the App Store, killing some of their business. If Apple removes an app from the App Store, the developer couldn’t gain new app users and couldn’t update the apps already on people’s phones, eventually rendering them broken.

Apple said a small fraction of iPhone apps were subject to its commission, which is in line with the fees other platforms charge, according to a study released by Apple last week. Airbnb, for instance, charges a 20% commission on experiences.

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