App developers that sell “digital goods or services” on the App Store or Google Play must use these app stores’ in-app payment solutions (respectively called In-App Purchase or “IAP” in the case of the App Store and Google Play Billing or “GPB” in the case of Google Play). The mandatory use of IAP or GPB and the associated payment of a 30% commission has been a major source of contention between app developers and Apple and Google.
On 19 November 2020, Apple announced the launch of its App Store Small Business Program, whereby from 1 January 2021 it would reduce its commission from 30% to 15% for small businesses earning up to $1 million per year; an announcement, which I discussed in a previous blog post. On 16 March 2021, it was Google’s turn to announce a reduction of its fees. From 1 July 2021, Google will reduce its commission from 30% to 15% for the first $1 million of revenue every developer earns each year.
In this blog post, I discuss two issues (i) whether these announcements will be sufficient to satisfy the tensions between Apple and Google and app developers and (ii) the differences between the fee cuts put in place by Apple and Google, which although apparently identical do not produce the same effects.
As to the first issue, while small app developers will be happy to pay reduced fees, these fee cuts do little to address three major problems that have created frictions/disputes between app store operators and app developers :
- First, there is no objective technical reason why Apple and Google should mandate app developers selling “digital goods or services” to use their in-app payment solution, while a variety of other solutions exist that are equally, if not more secure. This reduces competition in in-app payment solutions and deprives app developers (and their users) from the benefits of such competition in terms of price and innovation. IAP and GPB are also rigid, one-size-fits-all solutions that cannot provide for the specific needs of each app.
- Second, the mandatory use of IAP or GPB and the associated fees (whether 30 or 15%) only applies to apps that sell “digital goods or services” (which in the case of Apple only represent 16% of the apps on the App Store), while other applications are free to use their own in-app payment solutions and do not have to pay any commission. This odd structure, whereby a small number of apps, will pay a commission while the great majority of apps do not pay any commission is hard to understand, and seems terribly unfair, considering that all apps are distributed and use the same app store services. In practice, this means a game developer will pay a 30% (or 15% commission), while large successful apps, such as YouTube, Facebook or Amazon Shopping will pay no fee.
- Third, the mandatory use of IAP or GBP is also problematic because it disintermediates app developers from their users. For instance, whenever a payment is made through IAP, Apple becomes the merchant of record and gets to handle crucial aspects of the customer relationship such as billing, despite the fact Apple does not provide the good or service in question. This leads to considerable inefficiencies for app users. In addition, whenever a payment is made through IAP Apple typically collects personal data, such as name, postal address, email address, and credit cards details, which it does not share with app developers, hence preventing them from improving their services and offering adequate customer service.
None of these problems are addressed by Apple and Google’s decision to reduce their fees from 30% to 15% for small businesses earning up to $1 million per year (in the case of Apple) or from 30% to 15% for the first $1 million of revenue every developer earns each year (in the case of Google).
In fact, these fee cuts are nothing more than a “cheap” PR stunt by the companies. Indeed, while Apple and Google claim that millions of app developers will benefit from these fee cuts, these cuts will hardly affect their app store revenues. According to a new estimate from app analytics firm Sensor Tower reported by Ben Thompson in his famous newsletter (behind a paywall):
- If the 15% fee schedule on revenue up to $1 million had been in place on Google Play in 2020, Google would have missed out on $587 million, or about 5% of Sensor Tower’s estimate of $11.6 billion in Google Play fees for the year.
- If Apple’s program had been in place for 2020, Sensor Tower estimates that Apple would have missed out on $595 million, or about 2.7% of its estimated $21.7 billion in App Store fees in 2020.
Regarding the second issue, while Apple and Google may seem to have pursued a similar path, their fee cuts work differently. In the case of Apple, the fee cut applies only to small businesses earning up to $1 million per year. More precisely, “developers can qualify for the program and a reduced, 15 percent commission if they earned up to $1 million in proceeds during the previous calendar year.” This approach has two unappealing features:
- First, the $1 million cap is arbitrary: An app developer that generates $999,999 in one calendar year will profit from a 15% reduction this year and the following year, while a developer that garners $1,000,001 will have to pay a 30% commission the following year.
- Second, this cap also gives terrible incentives to app developers whose revenues approach $1 million. They would indeed pay a heavy penalty from exceeding this sum if only by a penny as the following year they would pay the full 30% on all their revenues. For instance, an app developer whose revenues stand at $950,000 by mid-November might be better off ceasing or slowing down its sales of “digital goods or services” until the beginning of the following year.
While it does not solve any of the issues referred to above, Google’s fee cut does not share the unappealing features of Apple’s App Store Small Business Program; whether an app developer generates $999,999 or $1,000,001 in one calendar year, it will benefit from the same fee reduction the following year. This means that app developers whose revenues approach $1 million will no longer have to fear exceeding that sum and thus missing out on the fee reduction the following year. The Google fee cut will also benefit all app developers, independently of their revenue, since it applies to the first $1 million of revenue every developer earns each year.
Moreover, as Ben Thompson funnily observes:
“Google’s approach should seem familiar: it is exactly how progressive taxes are levied. The logic for only charging marginal taxes on income above the previous threshold is the same as why Apple’s policy is stupid: you don’t want to penalize people for working more and earning more money. At the same time, this example should be illuminating in another way: the reason why the best way to implement these rising rates is to emulate the income tax is because these are taxes! In any sort of normal business arrangement the more business you did with a service provider the lower the rates would become. This certainly applies to credit card fees, the largest component of App Store expenses: you get a lower rate the greater your revenue. The fact that Apple and Google are going in the opposite direction — raising rates as revenue increases — gives away the fact that they are nothing more than toll collectors.”
Now, if Apple and Google want to address the concerns of app developers, they should stop mandating the use of their in-app payment solutions on app developers selling “digital goods or services” and charging the associated 30% or 15% commission. If Apple and Google want to continue to charge a commission, this commission should equally apply to all developers and be in line with the costs incurred for the development and maintenance of their respective app stores.
[Disclosure: I am outside counsel to the Coalition for App Fairness]
Photo by Rahul Chakraborty on Unsplash
