Apple App Store’s Commission Rates study misses the mark

On 22 July 2020, i.e. a few days away from the Congressional hearing (which may however be postponed) where the CEOs of Google, Apple, Facebook and Amazon are expected to testify, the Analysis Group released an Apple-sponsored study entitled “Apple’s App Store and Other Digital Marketplaces: A Comparison of Commission Rates”.

The purpose of this study is to show that “Apple’s App Store commission rate is similar in magnitude to the commission rates charged by many other app stores and digital content marketplaces.” With that objective in mind, the study looks at the rates charged by various marketplaces (app stores, video game digital marketplaces, marketplaces distributing digital content, e-commerce marketplaces). The study also refers to the distribution fees collected by various categories of brick-and-mortar shops.

Surprisingly, while the authors hold PhDs in economics, they do not carry out much economic analysis: the study is limited to observing the commissions charged by various marketplaces without providing any insight as to why these rates are what they are. Its simplistic conclusion is that, because other marketplaces charge commissions in line with those of the App Store (although we will see that this is not necessarily true), Apple is a good corporate citizen in taking a 30% commission on the in-app purchase revenue of apps that offer “digital goods or services” to iOS users. In other words, there is nothing to investigate here. Competition authorities and regulators should look elsewhere.

But this simplistic study misses the mark on several key points.

First, while some of Apple’s most vocal critics have rightly observed that Apple’s 30% commission is outrageous, the core problems with Apple’s conduct with regards to the App Store lie elsewhere, as recently observed by the European Commission in its press release announcing the opening of formal proceedings against Apple. The Commission announced that it will investigate two restrictions imposed by Apple in its agreements with companies that wish to distribute apps to users of Apple devices, namely (i) the mandatory use of Apple’s own proprietary in-app purchase system “IAP” for the distribution of paid digital content, and (ii) the restrictions on the ability of developers to inform users of alternative purchasing possibilities outside of apps. In other words, the Commission’s case is not an excessive pricing case.

Second, even if one was to focus on the App Store’s commission rate, the Analysis Group study still did not get it right:

  • The study does not emphasize enough the fact that the commission rates charged by marketplaces can vary considerably and in some cases are materially lower than the App Store’s rate. That is for instance the case with respect to e-commerce marketplaces in the retail and travel industry (where, for instance, eBay charges a commission between 10-12% and Booking.com takes on average a 15% commission). Although this would require further analysis, it seems that commissions are lower in sectors where marketplaces face competition. By contrast, the App Store faces no competition (as it is the only way for app developers to reach iOS users) and the Google Play Store faces very limited competition (as alternative app stores allowed on Android devices have very small market shares). Thus, 30% is what monopolist marketplaces charge because “they can”.
  • The study compares apples with oranges. The level of service and the underlying costs of these marketplaces are different. For instance, the services provided by Uber and Lyft (charging respectively 25% and 20% commission) and the costs incurred by these companies are very different from the App Store, as illustrated by their low level of profitability. The same remark can be made with respect to other marketplaces referred to in the study. For instance, Booking.com (charging 15% on average) has large back office operations, as they need to conclude contracts with millions of hotels and provide extensive customer services.
  • Even within a category of marketplaces, there are outliers. For instance, Epic Games charge a 12% commission. According to Epic Games’ CEO, Tim Sweeney, this is plenty to achieve a reasonable profit:

“While running Fortnite we learned a lot about the cost of running a digital store on PC. The math is quite simple: we pay around 2.5 per cent to 3.5 per cent for payment processing for major payment methods, less than 1.5 per cent for CDN costs (assuming all games are updated as often as Fortnite), and between 1 and 2 per cent for variable operating and customer support costs.” Sweeney told a journalist.

“Fixed costs of developing and supporting the platform become negligible at a large scale. In our analysis, stores charging 30 per cent are marking up their costs by 300 to 400 per cent,” he reveals. “But with developers receiving 88 per cent of revenue and Epic receiving 12 per cent, this store will still be a profitable business for us,” he explains.

Needless to say, this is an interesting observation.

  • Another important issue not addressed in the study is that unlike many other marketplaces, Apple takes money from users on both sides of its platform. Apple sells expensive hardware to iPhone and iPad users (in part due to the attractiveness of its App Store, which is in turn due to the presence of superstar apps), but also charges a high commission to app developers. Thus, Apple effectively charges both sides, and Apple’s ability to sell expensive hardware is linked to the presence of highly attractive apps in the App Store. In other words, would Apple be able to charge $1,000 for an iPhone, whose App Store would not contain Instagram, Netflix, Spotify or Tinder?
  • The study also fails to observe that in many instances it is the app that brings the user to the App Store and not vice versa. This is especially true for apps with strong brands, such as Netflix, Tinder or Spotify. Leading app developers spend millions of dollars on advertising to acquire new customers, directing them to the only place where their app may be downloaded on iOS – i.e. the App Store. In such cases, users go to the App Store to search specifically for the particular app. Ironically, Apple benefits from the advertising efforts of app developers in that it monetises this user traffic by engaging in advertising. When a user types the name of the app in the App Store search tool, Apple will often display an ad from a competing app on top of the app that the user searches for. Thus, Apple’s claim that it charges a 30% for distribution and customer acquisition should be taken with a pinch of salt.
  • Finally, the fact that, unlike many other marketplaces, Apple is vertically-integrated should not be overlooked. Apple operates the App Store, but it also competes with other apps on the App Store. The 30% commission can thus generate exclusionary effects.

In other words, the Analysis Group study is nothing but a PR stunt, timely released less than a week before Apple’s CEO is expected to testify in Congress.

In many ways, the most interesting aspect of the study is what it does not say. It thus invites academic researchers to look into some of the issues alluded to above.

I leavelast word to the famous DHH:

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