Should Apple benefit from the App Store?
If you invest in a restaurant, you are entitled to its benefits and profits. If you write a software from scratch, you’re entitled to the economic benefits from it. That’s how business works. A party puts time and money at risk for a shot at success. It is the case for many and should be the case here for Apple. Apple introduced the App Store in 2008 and over the years, it has invested a lot in growing and maintaining the App Store. On principle, it should be treated equally as other businesses. Some argue that Apple should not charge commission fees on its platform. Well, Apple is responsible for the store and it should be able to benefit from it the way it sees fit. If you run a restaurant and somebody comes in and asks you to not charge for food or drinks, what will you think? Insane, right?
Is 30% too high a commission?
Apple levies a 30% commission on digital goods bought through its in-app purchase. For subscriptions, the commission is 30% in the first year and drops to 15% in the second year onwards. Many have lamented that the fee is too high and it puts an enormous financial strain on developers, especially those that are already operating on a low margin. Well, there is no free lunch in the business world. Developers have access to a lucrative user base with more than 500 million paid subscribers and a billion active devices. By being on the App Store, apps can be found through the search function, as well as accessible in every corner of the world. Users can download the app in a matter of seconds with the level of trust that can be hardly found anywhere. Is it right to argue that developers should get all of those for free without having to pay? I don’t agree with that.
Some said that Apple should NOT get any compensation on a regular basis because it doesn’t contribute to the development of apps. But developers don’t pay Apple to receive development input. They pay Apple for the app distribution. No matter how good your product is, if you can’t figure out distribution and get it to the hands of customers, what worth will it be? People pay Facebook or Google for access to a select group of users. Folks pay to attend high-end conferences to mingle with executives and potential clients. Donors pay to participate in fundraising dinners to talk to lawmakers so that they can have more influence. I don’t see the problem with Apple charging developers for this limited yet important commodity: access to customers who trust Apple and are willing to pay for apps on Apple devices.
When I was researching on Wix, I came across this from its annual report:
The App Market consists of web applications that are developed by us or by third-party developers. All third-party applications undergo a limited evaluation which is focused mainly on technical functionality, and partner agreements are signed prior to publication in the App Market. We are customarily entitled to a share in 30% of net revenues from the sale of every third-party application purchased through our App Market. We are responsible for the development, operation and maintenance of applications that we create, and the third-party developers are responsible for the applications that they create. However, we may remove a third-party application at any time if it does not meet our standards or for other reasons.Source: Wix
A short while ago, Apple commissioned an independent study on marketplaces’ take rate. When you look at what other platforms charge, the rate at which Apple sets its commission doesn’t look as outrageous as others make it out to be
Apparently, what Apple is doing is similar to the industry standards. I don’t see there is anything inherently wrong with the commission approach. As to the question of how high the commission should be, I’ll argue that it will never be low enough for developers unless it goes down to zero. Some long-time industry observers noted that developers used to pay for a much higher share of their revenue to have apps distributed in the past, before the App Store was debuted. They cheered when the App Store was introduced and the commission was 30%. Now, they are complaining that 30% is too high. I suspect that 15% will please developers more in the next two years and they will complain again after that.
Should Apple stop requiring the use of in-app purchase?
If your apps don’t generate revenue on Apple devices, you don’t have to pay Apple for anything. In fact, a study commissioned by Apple estimated that 85% of billings on the App Store in 2019 belonged solely to developers. If an app sells digital content and goods that are consumed on Apple iOS, Apple charges a commission. There are a few cases in which apps can avoid in-app purchase
3.1.3(a) “Reader” Apps: Apps may allow a user to access previously purchased content or content subscriptions (specifically: magazines, newspapers, books, audio, music, video, access to professional databases, VoIP, cloud storage, and approved services such as classroom management apps), provided that you agree not to directly or indirectly target iOS users to use a purchasing method other than in-app purchase, and your general communications about other purchasing methods are not designed to discourage use of in-app purchase.
3.1.3(b) Multiplatform Services: Apps that operate across multiple platforms may allow users to access content, subscriptions, or features they have acquired in your app on other platforms or your web site, including consumable items in multiplatform games, provided those items are also available as in-app purchases within the app. You must not directly or indirectly target iOS users to use a purchasing method other than in-app purchase, and your general communications about other purchasing methods must not discourage use of in-app purchase.
3.1.5(a) Goods and Services Outside of the App: If your app enables people to purchase goods or services that will be consumed outside of the app, you must use purchase methods other than in-app purchase to collect those payments, such as Apple Pay or traditional credit card entry.Source: Apple
What these exceptions essentially say is this:
- If a customer already has a subscription purchased before, the customer can continue to use that subscription and the app doesn’t have to pay Apple. For instance, if you install Netflix or Bloomberg app AFTER purchasing a subscription on a browser, neither Netflix or Bloomberg has to pay Apple
- If an app acquires new users on an Apple device with its payment mechanism, it is obligated to offer in-app purchase as well and it must not use language that blatantly discourages the use of in-app purchase
- If you book an Uber, but the transaction takes place in a car, not on an Apple device, Uber can avoid using in-app purchase. The same case applies for AirBnb rentals. If you book a room on AirBnb iOS app, but stay in a physical room, AirBnb doesn’t have to pay Apple. However, if AirBnb offers AirBnb Experiences on iOS, asks users to pay and then offers content on iOS, then it will have to pay Apple
I do think these exceptions make sense. If the consumption of goods or services takes place outside an iOS device, Apple shouldn’t benefit from that. In return for giving such apps access to users, Apple benefits from the presence of the apps that make the ecosystem and their devices more useful. Imagine how much you would like your iPhone less if it didn’t have Uber, AirBnb, Booking.com apps, just to name a few.
If Apple didn’t mandate the use of in-app purchase, how many apps would voluntarily use it? My guess is: not many. Hence, every time a user opens an app on their iPhone, they would have to go to a browser to pay for services. That wouldn’t be a nice user experience.
If Apple didn’t forbid the discouragement of in-app purchase, I imagine apps would play every trick in the book to favor their own payment mechanism. Take Turbo Tax below as an example of tricks that apps could use. In that case, Apple would be affected financially. Therefore, I can see the reasoning behind its requirement of not discouraging the use of in-app purchase. If you don’t look out for yourself, who will?
A curated store or an open system?
Many argue that Apple should open up its walled garden like Android. The problem is that while Apple is known for security and privacy, the same can’t be said about Android, which is prone to malware. A study estimated that Android devices are 50 times more malware-affected than iOS ones. Plus, Apple is known for protecting user privacy. It went to court against the US government for that. Many users, including yours truly, appreciate it greatly.
It’s worth pointing out that Apple wasn’t the first to introduce a locked-down system that didn’t degrade. Nintendo, Sony, and Microsoft consoles restricted the software that could be modified on their host operating systems and ran with limited capabilities. This resulted in fewer support calls, reduced frustration, and limited piracy.
One of Apple’s most touted virtues is that the company creates secure devices that respect user’s privacy. In fact, they have even gone to court against the US government over security. Yet iOS remains the most secure consumer operating system. This has been made possible through multiple layers of security that address different threats.
For now, let me just say that, as a parent, there are few things that would make me happier than more stringent App Store rules governing what applications can do. In the end, I value my iOS devices because I know that I can trust them with my information because security is paramount to Apple.
In the battle over the security and privacy of my phone, I am happy to pay a premium knowing that my information is safe and sound, and that it is not going to be sold to the highest bidder.Source: Miguel de Icaza
Opening up a platform to allow total freedom for developers may not be as good as many think. Take Facebook as an example. It strives to give everyone’s freedom to say whatever they want. The consequences are that folks use First Amendment Right to spew out misinformation and hate speech. With regard to apps on Facebook, you don’t need to look further than what happened with Cambridge Analytica.
The problem with an open platform is that giving everyone unrestricted freedom is a preclude to getting the worst behavior from them. Precisely because of that, I much prefer a curated and controlled platform. Of course, that means Apple is very powerful as it can dictate which app is distributed and how. We should definitely strive to continuously hold Apple accountable, but requiring Apple to open its marketplace isn’t the solution.
Apple stifles innovation?
Since its debut, the App Store has facilitated the introduction of many apps. Without the App Store, we likely wouldn’t have Uber, Lyft or Robinhood, just to name a few. So far, it has been a boon to innovation in my opinion.
Some argue that Apple’s iron grip on the App Store limits future innovation. Well, that may sound logical on the surface, but I really doubt the sentiment. The reason is that it’s difficult to pinpoint exactly what sort of innovation is being stifled by Apple’s rules. There are only a handful of app marketplaces for phones. Even though they differ from one another to some extent, they should work essentailly the same way. If an app can appear on Google Play, which works similarly as the App Store, it shouldn’t have to alter its core too much to be featured on the App Store. If an app cannot work on any of the app marketplace, then it’s hardly Apple’s fault that such an “innovation” can’t be brought to life.
Innovation is very abstract and can be misused as a blanket reason like “national security”. The argument that Apple stifles innovation CAN be a valid one, but as of now, I see it more like a hypothetical scenario with no evidence to back it up.
Apple’s inconsistent enforcement of its rules
In my opinion, most of Apple’s fights with developers resulted from execution failure. The rules are there, but they applied the rules differently from one case to another. To Hey as an example, the app was rejected in the beginning because it didn’t offer in-app purchase. However, the issue was that Hey’s competitors did the exact same thing, but were approved by Apple to appear on iOS. As you can imagine, laws don’t mean much if they aren’t applied fairly and consistently. It’s the same for the App Store Guidelines. To make the Guidelines more respected and mean anything, Apple must be better in its application.
Some may argue that Apple has to handle thousands of updates and apps on a daily basis, so it’s understandable that some slipped through the cracks. I’d say that as a $2 trillion company that holds so much power over us, it should be better.
Solutions to the App Store issue
The App Store Guidelines haven’t changed much since they were written. While I tend to agree that they may need updating, I struggle to see exactly how they should be. One reason is that this is a very nuanced and complicated issue. Apple has to strike a sweet balance between its own interest and the interest of users as well as developers. Only Apple has enough information to make informed decisions.
Some, including Ben Thompson, argued that Apple should update its guidelines based on the marginal cost of apps. Specifically, apps that have marginal costs should be granted a lower commission (10%) than the standard 30% now. While it may sound logical, I doubt its practicality for the following reasons:
- What would be the thresholds for an app’s marginal cost to be qualified for a lower commission? 5%, 10% or 30%? I suspect if this approach was implemented, we would see more apps claiming to have increased marginal costs
- How would Apple validate the marginal cost? Surely, relying purely on an app’s words wouldn’t be the case. If an app has to submit financial records, who is to say those records are correct?
- Plus, do you really want a $2 trillion company to have financial records of thousands of private entities? I don’t.
Right now, the practical and feasible things I think Apple can do include:
- Be more consistent in its application of the App Store Guidelines
- Be more transparent and communicative when it comes to high profile disputes to explain its side of the story
- Think about how to change the App Store moving forward. I am sure they would prefer not having PR onslaughts. Hence, I truly hope that somewhere inside the company, some folks are trying to figure out a solution to this problem.
One grey area that is highly complex lies in the case of Spotify vs Apple Music. Spotify refuses to adopt in-app purchases because its low gross margin doesn’t allow it to. Apple Music, which competes with Spotify, may not be subject to the 30% requirement as Spotify. Some argue that Apple, as the owner of the App Store, shouldn’t launch competing products. However, as a company, Apple should be able to launch any product or service that is in accordance with the laws. I don’t see any legal problem with the existence of Apple Music. It is, to a high degree, similar to retailers launching private labels to compete with brands. I understand that a lot of critics are vocal about this behavior, but it has been around for a long time legally and until somebody makes it illegal to do so, I don’t see why Apple should be an exception.
It comes down to essentially this: when developers benefit from the App Store, they operate on the terms of Apple. Apple gains its enormous bargaining power by expertly managing both software and hardware. The $2 trillion+ valuation, customer satisfaction and half a trillion in app sales in 2019 are both proof that whatever the company is doing works and a condemnation of the lack of alternatives.
Of course, lawmakers can intervene and force Apple to change. I believe if that is the case, the company will appeal to even the highest court in the land and actually may have a chance to win. There are appeals from tech observers that the existing anti-trust regulations aren’t modern enough for the tech giants and should be updated. I believe it will be a time-consuming and complex process and I, for one, am glad that it’s not my job.
Disclaim: I own Apple stocks in my portfolio