I'm about to write an essay about how I think Apple could make their 30% cut on App Store sales very worth it to developers, but I thought it was worth doing a quick, dense review first on the history and contentiousness of this "tax".
- "There was some precedent; Apple had been charging roughly the same commission on music sales on its iTunes software. For each 99 cent song it sold, Apple passed on 72 cents to major music labels and 62 cents to independent labels, according to The Wall Street Journal in 2007."
- When Apple began setting rules for the App Store, “30 percent was just kind of a no-brainer,” said Mr. Shoemaker, who joined the company in early 2009. “It was, ‘Of course that’s what we’re going to use.’ Nobody questioned it.”
Both from this NYT piece.
What does it cost Apple?
- Apple charges a 30% cut of app sales and in-app purchases to developers and now 15% to developers making under $1m annually (small devs make for 5% of overall revenue). [source 1] [source 2]
- Apple doesn't release the cost to operate the app store, but they essentially provide the same service for Mac for a fixed price of ~$100/year (which developers also pay for iOS). So it should be safe to assume that the fixed price covers it.
How much do they make from it?
- Apple brings in $50 billion a year from app sales so this comes out to about $15b a year, which is a nontrivial ~14.2% of their 2020 profit of $105b [source][source]
Why were developers ok with this in the first place?
- It's unprecedented in software for developers to pay a % fees to the OS owners. Normally, OS owners have had to appease developers to build killer apps for their platforms.
- But iPhone was so far ahead of the competition at launch in 2007 out of the box that it reversed the dynamic and developers wanted to be on the platform instead. Then, they got used to the 30% and Android followed suit because Android doesn't directly compete with iPhone (see below).
Why can Apple still charge this much?
- Apple is not technically a monopoly because consumers have the choice of Android. But Android and iOS users are very distinct demographics that don't switch, and Apple users are far more willing to pay money for apps.
- Android has far more users but they pay a lot less, while Apple has a low fewer users but they pay a lot more, resulting in overall revenues being about even.
Does Google (or anyone else) have incentive to lower their cut and compete?
- Not really, let's say developers save money and pass them on to their Android customers, customers have already demonstrated willingness to pay more than a (100/70 = 1.42x) premium for Apple's products, mostly due to their tight integration with other Apple hardware and focus on privacy.
- We've already seen competing app platforms like Windows Phone fail. Apps are very long-tailed in their usage and the long tail of developers don't have resources to build for yet another platform (except perhaps the web).
Is the web viable competition to apps?
- Not really for apps that solve familiar problems — the web can't do several important things that native apps can, e.g. notifications, bluetooth, NFC, etc. Some claim that Apple and Google are deliberately crippling web browser standards to keep it this way because because they own iOS/Android and exert a lot of influence on W3C as owners of Safari and Chrome.
- But increasingly, it can do more than you expect and some big companies stand to make/save a lot of money by delivering their apps through the web. Amazon is offering its cloud gaming service on iOS through the browser, and technically, it can work!
Why are developers unhappy with it now?
There's 2 different arguments
- Apple builds its own competitive apps and can always undercut them on prices by at least that 30%, e.g. Apple Music vs. Spotify.
- The "it's not fair" argument. In particular, Fortnite flouted this rule and offered discounts to users paying them directly and Apple took them off the App Store. Fortnite is a beloved and popular game so this generated lots of public sentiment against Apple.
- Apple terms don't let developers tell users that their prices are inflated because of this cut and that they can get the same service for cheaper. Facebook, for example, had to charge users more for attending real-life events if they bought a ticket on an iPhone, though they now have a temporary relief.
“I think we’re realizing that 30 percent is way too much,” said Phillip Shoemaker, a former senior App Store executive, who left Apple in 2016. Credit card companies charge roughly 3 percent to process payments. “It should be closer to that,” he said.
Do developers have enough leverage to change Apple's mind?
- Small developers (ones making under $1m ARR) don't financially but because they are a large number, they probably matter from a public sentiment point of view. They only make up for 5% of the revenue. Apple also recently reduced their take to 15% for small developers.
- Big developers have mostly been OK playing by Apple's rules or making special deals, but that may change with new incentives and more regulation?
Who has special deals with Apple?
- Amazon has a reduced rate of 15% with Apple for Prime Video subscriptions.
- Facebook temporarily isn't paying for live events.
What about ad revenue?
- Notably, Apple does not take a cut of ad revenue made on apps running on iOS, thereby increasing the incentive to be a free app monetized by ads.
What big companies are likely to keep complaining?
- Spotify, they directly struggle to compete with Apple Music, and it'll likely get even harder with Apple's bundled Apple One. Apple has this response to Spotify.
- Amazon and Google now both own cloud gaming platforms that they would presumably want on iOS, and gaming accounts for 77% of app revenue right now, so there's lots of money at stake. [source]
- Netflix, maybe. For now they don't allow signing up via the app. They've probably done the calculation that most users will be ok signing up with an untaxed platform, then logging in with iOS.
So, will Apple reduce its cut?
- Unlikely unless it comes from regulatory pressure, which Apple is trying to mitigate with restructuring as a progressive tax with a 15% cut for small developers.
- It'll be interesting to follow the development of cloud gaming and if that gets Amazon and Google to exercise more of their muscle.
How would the world change if Apple lowered their cut to 0%?
- Apple would lose $15b in annual profit, around 14.2% of annual profit.
- For reference, the only segment that makes more profit for Apple is likely iPhone hardware sales with sales of $55b and a margin of 60%, coming out to ~$33b. [source] [source]
- We'd see subscription services like Spotify, Netflix, Audible and Peloton becoming more competitively priced and easier to sign up for on iOS. Audible may stop doing their really weird credits scheme.
- I suspect there won't be much of a change to the indie app ecosystem from going from 15% to 0, though some that have held out on principle may join in.
Clarifying out position
- We plan for Insight to be a freemium product once its out of beta, so as an iOS browser this we'd naturally like to keep costs down.
- We generally have a no-ads position and ad blocking is one of our users' favorite features. We don't want to cripple it to make sustainable revenue.
- All things considered, it'd be easier to live without the 15%/30% cut, but for now we're willing to play with it.
That's all I can think of for now. I'd like to keep this piece updated so feel free to reach out to me at @abhinavsharma if there's something you'd like me to add that I've missed out on.