With the App Store’s introduction, it became one of the biggest online marketplaces for the iPhone. Apple told app makers that it would take a 30 percent cut of their sales. That commission has proved hugely consequential for Apple. Not only did it attract huge profits, but some of the biggest problems for Apple, drawing antitrust scrutiny, fury from app makers, and lawsuits from consumers and partners.
The tech giants’ smartphones have become the only way other businesses reach millions of people. Regardless, businesses are increasingly pleading: Do you need a third of my sales?
Digging deeper into this, we reach out to experts at Matellio to hear out their opinions and solve them once and for all.
The Background
The debate kicked off on August 13, 2020, with a Fortnite update on iOS and Android devices. Thanks to this update, players could purchase V-bucks directly from Epic Games instead of AppStore or PlayStore. Violation of App policies attracted immediate delisting of Fortnite from App Store, and shortly after, Google followed.
Epic was quick to respond and, overnight, released an ad attacking Apple or its AppStore policies. It filed a lawsuit against Apple aimed at getting their store onto iOS devices. The problems intensified more for Apple with the Arizona bill’s clearance that addresses the fees technology companies like Apple and Google charge app developers raise new antitrust challenges for embattled US tech giants. The bill would require Apple and Google to allow app developers to use their payment systems, rather than Google’s or Apple’s, to process user purchases within the app.
What is it that Apple and Google do that have some developers so worked up?
AppStore and Google PlayStore enforce a 30% fee on the app revenue. However, Apple updated its policies according to which existing developers who make up to $1M in 2020 for all the app and the developers who are new to the App Store. If a participating developer surpasses the $1 million thresholds, the standard commission rate will apply for the remainder of the year. If a developer’s business falls below the $1 million thresholds in a future calendar year, they can requalify the year after the 15 percent commission.
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The App Distribution Scenario Before App Store and Google PlayStore
Before the popular App Marketplaces in the scene, it was difficult for the businesses to reach target users, and app development was a costly affair.
Problem with App Discovery
Getting your apps on the user’s radar was not easy. It required an expensive marketing campaign, including CD circulation and website development. With website development, business owners also have to invest in SEO and Paid marketing services to ensure their target audience recognizes them.
Even if you delivered your apps to the target audience, it was inconvenient for them to install and use them. While most of the platforms allowed for third-party apps, the process typically involved downloading a PC or Mac program, then syncing the phone with the PC, and manually going through an often complicated and mildly scary installation routine. This inconvenience took a toll on the user base.
Problem with App Development
The app store created a powerful two-sided market, encouraging developers to produce smartphone software and services. Developers had to deal with multiple platforms with clumsy development tools.
An example is Microsft Visual Studio that required businesses to invest $4,000 on the license. It was difficult to develop the apps or even plan for them with high costs, killing small developers forever.
How App Marketplaces Changed the Scenario?
App Marketplaces like App Store offered more than just a marketplace. It gave app developers a rich software development kit (SDK) with a well-structured process for app verification and distribution, assuring quality and reliability. Most importantly, it enabled developers to charge for phone software very easily, which made Apple’s hefty 30% cut a bit more bearable.
Let’s Not Ignore the Anomalies
The issues with exceptions began Apple realized that they could not delist from its platform, including Netflix, that would not agree to AppStore companies. Apple, therefore, created an exemption for the “reader apps” that are allowed to sell subscriptions and content to customers outside of the app without having to offer a corresponding in-app purchase – something most developers can’t do.
Additionally, it was observed that Amazon Prime Video pays half the usual App Store commission in a special deal agreed between Jeff Bezos and Eddy Cue. Amazon is also allowed to sell ebooks on its website, which can be read in the Kindle app on iPhones and iPads, again under the ‘reader’ app exception.
The coronavirus crisis highlighted another interesting difference in the way that Apple treats physical and digital products. Companies that offered, say, fitness classes in their studios didn’t have to use in-app purchases and didn’t have to pay Apple a commission. But when they were forced to switch to online classes, Apple considered those digital products and thus subject to its 30% commission.
Another anomaly falls under the category of arbitrary ‘physical versus digital goods’ category. Uber, for example, doesn’t pay Apple a cut when people use the app to book rides. That might seem straightforward, yet Uber is insistent that it isn’t a taxi company. It is instead an IT company offering a service in connecting riders and drivers. Wouldn’t that mean its service is a digital product?
Who Wins the Battle?
Every coin has two sides. Unfortunately, this time, neither the developers (most of them fairly large and successful apps) nor coalition like App Fairness nor Apple or Google nor legislators and anticompetitive agencies is 100% percent right. All of them have some downside or the other. The loudest voices are large developers like Epic, Spotify, and many more and coalitions of large developers like App Fairness.
The group that everyone seems to be ignoring or forgetting about is the small developers. Developers that have small apps on these platforms with just a couple thousand users. And what it would do to them if App Store and Play Store were dismantled piece by piece by regulators or large developers using legal mechanics.
The majority of the App Store apps, not from a user point of view but a quantity point of view, are from small no-brand developers. Who without App Store will have no mechanism to launch small businesses and get to a customer base/user group at this scale. If App Store goes away, Spotify, Uber, and Epic have enough marketing dollars and brand recognition to drive traffic to themselves and get discovered.
But some small business with hopes of building a new delivery app or an app to delivery the next fitness revolution or Sunday sermons through an app is doomed because without pouring 10s of thousands if not 100s of thousands of dollars into a marketing campaign it is impossible to get discovered and get to scale. It is already a challenge, and with App Stores gone, it would become even harder for them. Many users on Android and iOS are comfortable downloading any app from the PlayStore and AppStore because they know Apple and Google have vetted it and, in most cases, is fairly secure and won’t be malicious.
And if big developers leave, Apple and Google will not have as compelling an incentive to keep running the distribution platform that they are currently. And we snap back in time where only a select few large companies will be able to build and distribute apps. Apple and Google snap back to time and find other ways to make money from developers, like charging a high $ amount for development tools, SDK, etc. This further discourages small developers and makes it unattainable for them.
Try and find a company willing to take on the responsibility for providing what Apple and Google are providing in terms of development tools, security, hosting apps, and more for less than 30% cut and that too only if you charge the end-user. Believe it or not, this is a fairly reasonable margin for a retailer to charge for giving you shelf space.
It would be great for Apple and Google to charge less and we usually argue against these big companies. But in this case, I feel like a bunch of large developers who have significant resources is going after Apple and Google and coming off as the saviors might end up killing competition from small developers by taking away easy access to market and tools from those developers.
