Brief:

• Apple plans to offer a subscription service for video games that would let gamers pay a flat fee for a bundle of games, Cheddar reported, citing multiple unnamed sources. The tech giant has been privately discussing a "Netflix for games" service with game developers since the second half of 2018.
• Apple also has talked to game developers about partnering with them as a publisher, possibly indicating the company's willingness to help shoulder the costs of marketing and distribution. The game subscription service is still in the early stages of development, and the company may abandon it, Cheddar reported.
• Apple declined to comment on the report. The company this afternoon reports earnings for the quarter ended Dec. 29, and investors are bracing for disappointing iPhone sales.

Insight:

Apple is looking for ways to reduce its dependence on direct sales of the iPhone, which makes up about 60% of revenue, by building out its fast-growing services business that helps to strengthen its relationships with consumers. The tech giant last year reportedly pushed app makers to raise prices and build subscription revenue to help foster a vibrant app economy. Games make up the biggest category of apps in Apple's App Store with a 25% share of the total, followed by business (9.8%), education (8.5%) and lifestyle (8.3%), according to Statista.

Apple has been criticized for not sharing enough revenue with game developers. Apple collects takes a 30% cut of App Store purchases and lowers that fee to 15% after the first year of a subscription. Epic Games, maker of the worldwide hit game "Fortnite," plans to develop its own app store to keep more of the money generated from download fees and subscriptions. However, Apple maintains a closely guarded system of distributing apps to its devices, which makes it more immune than Google to upstart app stores. Meanwhile, Netflix this month stopped letting new users pay for a subscription to its video-streaming service in its iOS app, eliminating a source of revenue for Apple.

Apple's control of a hardware platform strengthens its competitive position to develop game subscriptions, as Sony Playstation, Microsoft Xbox and Nintendo Switch have done.

Smartphone games, which have made up the biggest segment of the videogame market for several years, are forecast to strengthen their dominance to 49% of global games revenues from 36% in 2017, according to researcher Newzoo. The expanded market share reflects a doubling of smartphone game revenue from $43.8 billion in 2017 to about $90 billion in 2021. About 2.2 billion people now play videogames on a smartphone, according to Newzoo.

Apple doesn't provide breakdowns of App Store sales, grouping them in its broader services category that also includes Apple Music, iTunes, AppleCare product warranties, iCloud storage and Apple Pay. Apple's services revenue grew 24% to $37.1 billion in 2018, while iPhone sales rose 18% to $166.7 billion, according to a regulatory filing. CEO Tim Cook had previously set a goal of making $50 billion in annual services revenue by 2020.