Apple Slashes App Store Fees for Smaller Developers

From The Wall Street Journal:

Apple Inc. is halving the commission it charges smaller developers that sell software through its App Store, a partial concession in its battle with critics over how it wields power in its digital ecosystem.

The iPhone maker said that starting next year it will collect 15% rather than 30% of App Store sales from companies that generate no more than $1 million in revenue through the software platform, including in-app purchases. The fee will remain 30% for developers whose sales through the App Store, excluding commission payments, exceed $1 million—meaning the reduction won’t affect such vocal Apple opponents as videogame company Epic Games Inc.

Apple’s 30% take has been at the heart of complaints this year from other tech companies and some users over how it manages the vast digital world of people who use iPhones, iPads and other Apple devices. The policy is also central to a major legal battle with Epic, and to government examinations in the U.S. and Europe of Apple’s competitive behavior as a gatekeeper between software makers and the hundreds of millions of people who use Apple’s gadgets.

Critics have charged that Apple’s commission is too large, is unfairly levied against different companies, leaves customers footing the bill and leads to workarounds by some developers to avoid the fees.

. . . .

A tiny fraction of developers account for the vast majority of sales in the App Store, which is central to a services unit that brought Apple $53.77 billion in revenue in its latest fiscal year. Research firm Sensor Tower estimates that only about 0.2% of the 1.8 million apps in the App Store generated more than $1 million last year, and says that group accounted for an estimated 92% of Apple’s App Store revenue.

The fee cut, therefore, gives Apple ammunition to rebut claims that its practices hurt smaller developers, while leaving untouched the vast bulk of its App Store revenue.

Link to the rest at The Wall Street Journal (PG apologizes for the paywall, but hasn’t figured out a way around it.)

PG was interested in this article because apps and ebooks are really quite similar to each other (although a dropsy epidemic would rage through New York publishing if such a statement were to be uttered within hearing range.)

Apps are electronic code and ebooks are electronic code as well. Apps run on tablets, smartphones, etc., and ebooks “run” on the same devices. Ebook readers don’t use their thumbs as actively as people who play app games on their phones, but, fundamentally, both purchase software for their electronic devices.

Apps and ebooks are sold online through digital storefronts in exactly the same manner.

Unlike app developers, when it comes to royalties, more than a few authors may analogize the sales of ebooks to the sales of printed books with printing costs, shipping fees, physical stores, warehouses full of books, etc., etc.

From the point of view of those who are running ecommerce at Amazon and Apple, ebooks and apps are just two different file formats.

It would be interesting if the people running iBooks caught the spirit of their much larger and more profitable contemporaries in the App department and decided that indie authors are pretty much like small app developers and should be paid 85% of the purchase price of ebooks instead of a much small percentage.

On more than one occasion, PG has been accused of being an Amazon shill because he likes the way Amazon treats indie authors and says so.

However, PG thinks it would be a great idea if Amazon treated indie authors like Apple treats small indie app developers and reduced Amazon’s take on KDP indie ebooks so authors received 85% of the proceeds Amazon collected for their books. (Amazon could also get rid of its ridiculous “Delivery Cost for a Digital Book” charge at the same time.)

9 thoughts on “Apple Slashes App Store Fees for Smaller Developers”

  1. PG, this isn’t a refutation of your commentary – because I don’t know the numbers at either Apple or Amazon. Nobody outside of those companies does.

    Gross revenue is not an indicator of whether overcharging is happening. Net revenue after accounting for all expenses in earning that revenue is. Gross revenue from some activity is one line in the financials; unless the company actually separates out the expenses by activity, we don’t know what the net revenue is for that activity – and unless it is a completely separate business unit, they don’t. (Amazon Web Services is one of the few that does report net revenue separately from the rest of the muddle. The net margin per transaction is only middling there – but the volume is immense.)

    • Even if the company does separate out the expenses by activity the result is going to be heavily dependant on the rules chosen for the apportionment of overheads and what intra-company fees and charges are being levied. Often there is no objective way to set such rules and charges and strong financial motivation to be inventive (hence Hollywood Accounting, for example).

      • The public perception of overcharging is a price that is not in line with the benefits provided or with comparable goods/setvices from competitors. (For example, the Windows App store charges go from zero to 25% or so depending on the app.)

        That can be waved off as subjective consumer perception.

        However, there is a second, business-focused definition of oversharging that is not blithely dismissible.

        Namely, leaving money on the table by pricing above the product/service’s sweet spot.
        Price elasticity means that volume varies with price and the optimum price maximizes revenue and profits. Undercharging is the opposite, charging less than the optimum. There are those that believe their products and services are above such pedestrian things as price elasticity but there is ample evidence that in fully competitive markets, price elasticity is real and you ignore it at your peril.

        Undercharging is typically done to maximize market share at the expense of near term profits, typically for valid strategic reasons. Less money in one category leading to more money is another, derivative area. The mythical razor/razorblade model.

        For example, right now Sony and Microsoft are introducing a new generation of gaming consoles. Both are selling two models, mostly because MS, in a bid to maximize future sales of games for the next generation, introduced a lower end model that can fully exploit the new game features at a 40% lower price than the maximum power model. Specifically, $500 and $300. This put Sony in a weak competitive position because they only designed one model and it has turned out to be both less powerful than the top competition and more expensive to build than the low end model. In fact, going by videos of product teardowns and specs it appears Sony is losing significant money on the top model and MS is either barely breaking even or barely losing money on the top model and making but a small profit on the low end.

        Historically, no gaming console has been successful in building a profitable installed base when launching above $500 and peak sales have come when the price dips below $299. All this combined to force Sony to introduce a second model at $400 to improve competitiveness. However, because it takes years to design a console their cheaper model is simply their base model minus the optical disc drive. Which is a $20-30 part. This means that each $400 unit they ship is losing them at least $70. For “some” reason, the diskless all-digital consoles are very hard to find with estimates pegging them at maybe 13% of all new Sony console shipments. But they do allow Sony to advertise “PLAYSTATION 5, From $399.”

        On the Microsoft side, the low end is estimated to be about 40% of shipments. Expected to grow to 70% in future years.

        In the near term both sides are supply constrained and will sell everything they can ship, to hardcore gamers who are less price sensitive than the market as a whole. The prices are really positioning for next year and beyond, targetting upgraders from the installed base of the previous console generation and newcomers to the market. In the previous generation, Sony outsold MS by about two to one which is why MS launched the low-end model, to quickly capture more of the price sensitive mainstream buyer. (Nonetheless, MS still made billions in profits and created and grew to 15Million users a new subscription service worth over $2B a year. Not a bad “failure”.

        The point that makes all this manuevering critical is that in gaming there is enormous amounts of money to be made (hundreds of billions a year) but it is from the games, not the consoles themselves, which are nonetheless extremely expensive to design and build. And getting more so as technology improves. Installed base is critical for a long list of reasons.

        The end result is that, just as in ebook readers, near-cost pricing is the optimum price. Dominate installed base and you dominate content sales and where hardware margins are razor thin to non existent, game margins are more substantial. (Mind you, development costs for top games are massive so, much like movies, a flop makes for big losses.) Both ebooks and games depend on the delivery platform and network effects mean that install base domiance ripples across time something fierce.

        In ebooks, screwups by Amazon opponents in the 2010-12 time period mean they control the market in 2020 and absent major screwups of their own will continue to dominate into the next decade. There are no signs of a new ebook “generation” anywhere in sight. It won’t come from TradPub and it is unlikely to come from Amazon.

        In consoles, by contrast, there is (for now) a generational restart every decade or so as new hardware technology evolves and all players get a fresh start. Thus Sony’s Playstation 2 totally dominated its era (90%) but royally screwed up with an overpriced ($600) model and an architecture that was ridiculously hard to develop for but not better than the leaner PC-derived XBOX360 model that was cheaper and better performing. MS became a viable competitor going from nothing to (slight) dominance despite manufacturing glitches that might otherwise have sunk them. The next generation, Sony fixed their pricing issues and came in at $400 versus a Microsoft system that came in at $500 with a bundled video controller that was game changing…but develolers didn’t want change. Oops. Advantage, Sony.

        So this time around XBOX hit the market with both the most powerful and the cheapest consoles at once. And, going for the jugular, their $15 gaming subscription featuring 200 games, including day one access to MS-published releases, as an alternative to buying $60 games ($70 for the new Playstation) or waiting months for prices to drop to $40, $30, $20. They also have an install payments plan that combines the hardware with the subscription for $25-35 a month. Sony has neither.

        That is how free and open competition looks like.

        Nothing like books, where traditional publishers don’t believe in price elasticity and, yes, overprice their ebooks, reducing sales of their high margin editions in favor of their low margin editions. It makes their revenue numbers look stable but at the expense of profits and sales growth, resulting in a stagnant business with lower than necessary margins. And ever decreasing market relevance.

        Going back to the OP:

        Likewise, the Apple app store is nothing like a free and open competitive environment, where Apple explicitly bans apps that might compete with Apple apps, even if tbe Apple app comes *after* the demand for it has been established by the now-banned app. Where Kobo had to remove their app’s customer support features because they sent customers to the Kobo website, where they might discover how to buy ebooks for the Kobo app, which the app can’even mention. And on and on it goes. They blocked game streaming apps, they refused a book on selfpublishing because it mentioned Amazon, they forced Spotify to charge $13 a month for a service they sell for $10 on PC and then came out with their own music subscription at $10. And don’t forget tbey pressure tgen-independent Random House to join the Agency conspiracyby blocking their App from the Apple store.

        So, yes, Apple’s app store is being targetted for anticompetitive practices in both Europe and (soon) the US. The EU investigation will only result in the usual billion euro fine, peanuts to Apple, but the Epic lawsuit and a followup DOJ investigation that might result in meaningful change.

        So Apple is belatedly throwing out PR fodder hoping to, again, paint themselves as innocent victims.
        Not going to work.
        Their track record isn’t so easily forgotten and their victims legion.

        • Nothing like books, where traditional publishers don’t believe in price elasticity and, yes, overprice their ebooks, reducing sales of their high margin editions in favor of their low margin editions.

          Their behavior indicates they are true believers in price elasticity.

          PE is derived from the demand curve, and measures the (% change in sales)/(% change in price). For our purposes, PE is always negative. In theory, if PE is greater than -1, increase P until PE = -1. If PE is less then -1, decrease price until PE = -1.

          In simpler terms, adjust price until total revenue falls if you increase price and falls if you decrease price.

          We also have cross price elasticity. That measures the (%change in sales of GoodA)/(%change in price of GoodB).

          So, what’s the change in (% sales of print books) for a given (% change in eBook prices?)

          Traditional publishers are indeed paying close attention to both price elasticity and cross price elasticity. They know they have little future in a market dominated by eBooks, so their concern is how much they can take out of the market for how long.

          Independent authors look at eBooks only and tell us publishers are stupid because they don’t max sales on eBooks. However, they rarely consider the effect on print sales. The traditional publishers do.

  2. Do note that the rebellion against Apple isn’t just about the tax rate but about the restrictions and most importantly *exclusions* from the store.

    Apple dropping the rate for the small fry is meaningless PR fodder. The real money comes from the big companies (and that isn’t changing) and the enforced exclusion. Especially the latter.

    When the trustbusters come down on Apple (yet again; this would be their third strike) it will be for their policies, not the tax rates.

    The iOS world is totally locked down, with no sideloading and no competition.
    That makes their appstore different from the Kindle store, where authors can sell their books anywhere they choose, even off their own website. There is no equivalence between a competitive market and a closed one.

    I have both a Kindle and a FireTV stick and neither forces me to only buy books or Apps just from Amazon; they merely *allow* it. That makes the economics totally different.

    It would be nice is Amazon gave indies a better deal but as is they’re already getting as good as the tradpubs, who generate more money for Amazon (albeit grudgingly). They are hardly abusive.

    Try this, PG:
    Amazon, Google, Nvidia, and Microsoft have streaming subscription services for Games, much as KINDLE UNLIMITED.
    Google allows the Microsoft app into the Android store. (They too charge 30%). They allow the Nvidia app. Amazon doesn’t need to go through the Google store because they have their own Android app store that can be installed on Android devices.
    PCs have a Microsoft store but the biggest store of digital games is STEAM, fully independent of MS. And MS distributes their games through their store as well as Steam, where they are typically among the top sellers.

    Apple allows none of that.
    They did allow MS to develop and beta test an app for iOS.
    Once it was finished and working well, they said, nah. You can’t distribute it. Even at 30%.

    Once the users complained, Apple “relented”: tbey would allow MS to stream games to their (captive) users…if they submitted one separate application for *each* game to be streamed, each one to be approved or disapproved *individually*.

    Microsoft GamePass offers 200 games to subscribers, about half from MS and permanently available anf half licensed from other developers, rotating in and out. Obviously creating and managing 200 apps is neither viable for MS nor GamePass subscribers.

    The whole move was disingenuous PR fodder to hide the fact that Apple won’t allow any game service to compete with their own subscription service of lightweight phone apps.

    The ongoing war with EPIC has drawn trustbuster interest so Apple is belatedly offering minor tweaks to pretend they’re not abusing their monopoly. It’s not going to work.

        • Right.
          And their ethics have always been questionable.
          As evidenced by their two previous antitrust suits.
          Particularly the one about conspiring to depress employee salaries.
          Every last penny matters more.

          https://www.cnet.com/news/apple-google-others-settle-anti-poaching-lawsuit-for-415-million/

          Apple, Google, Intel, and Adobe will shell out $415 million to put to rest an antipoaching civil lawsuit that accused the companies of conspiring not to hire each other’s employees.

          On Wednesday, US District Judge Lucy Koh ruled that the settlement was “fair, adequate, and reasonable” for the thousands of plaintiffs involved in the class action suit. The $415 million settlement was proposed by the four tech companies in January after Koh had rejected a previous attempt to settle the case for $324.5 million on the grounds that the employees harmed by the antipoaching policy deserved more money. In March, Koh already appeared to be leaning toward approving the $415 million settlement.

          Filed by former employees of the companies involved, the lawsuit shed a light on the practice of some major tech industry players of allegedly working together to agree not to poach employees from each other. The affected employees had argued that such agreements limited their ability to rise up in the industry and stifled their attempts to earn higher salaries. Email exchanges among such top executives as late Apple co-founder and CEO Steve Jobs and former Google CEO and now executive chairman of Alphabet Eric Schmidt revealed how requests were made not to hire certain employees away from each other.

          One email exchange recounted how Jobs asked Schmidt to stop Google from trying to hire one of Apple’s engineers.

          “I would be very pleased if your recruiting department would stop doing this,” Jobs wrote to Schmidt on March 7, 2007.

          They are what they are and a change in CEO hasn’t changed the corporate culture.

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