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Apple's been criticized for charging app developers a high commission.

Image: Apple

Power

Apple defends its App Store tax ahead of antitrust hearings

Apple says its 30% App Store commission is industry standard — but Apple's the one that set that standard.

Apple's App Store commission policies are completely fair, and valid, and no worse than anyone else's on the market. At least, that's what Apple thinks.

The company commissioned a study of digital marketplaces and found that its 30% tax is perfectly in line with the rest of the industry. The study, run by Analysis Group, looked at 38 marketplaces — for apps, video games, books and even hotel rooms and plane tickets — and found that commission rates vary widely. Much of the data is unsurprising: Ticket resellers have the largest fees, and retail like Amazon and Etsy tend to have the lowest. The study also found that "sellers generally earn a substantially lower share of total revenue from the distribution through brick-and-mortar stores and marketplaces than through digital marketplaces such as the Apple App Store."

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The more interesting comparison is between Apple's App Store and others: the Google Play Store, the Samsung Galaxy Store, the Microsoft Store and the Amazon Appstore. In that case, there's remarkable consistency across the industry: All five charge a default of 30% commission on sales, with some small variance for one-off deals or subscriptions. For video games sellers like Xbox, PlayStation and Steam, the number is also 30%.

The standard's not a global one: Policies in China, for instance, tend to be very different. Tencent's Android app store charges a 55% commission for games, and the new Huawei AppGallery varies from 20% to 50% depending on the app type. But in the U.S., 30% is the magic number.

That number has become a hot topic in the tech world. Rep. David Cicilline recently called it "highway robbery, basically," and said that Apple is "bullying people to pay 30% or denying access to their market." These commissions are at the center of some of the antitrust debates currently facing Google and Apple. With a landmark hearing of tech CEOs — including Tim Cook — less than a week away, Apple may have wanted to get ahead of that line of questions. By commissioning the study, Apple's goal seemed to be to prove, to Cicilline and others, that at the very least it's not the only robber on the highway.

There's a reason 30% became the norm, though. And that reason is Apple. When Steve Jobs introduced the App Store in 2008, he ran through the revenue-split numbers. "When we sell the app through the App Store," he said, "the developer gets 70% of the revenues, right off the top. We keep 30% to pay for running the App Store." Jobs framed this as an extremely good deal, in fact "the best deal going to distribute applications to mobile platforms."

Actually, the 70/30 split actually goes back further than the App Store, to the iTunes Music Store. Apple split every 99-cent song download along the same lines. And just as with the App Store, the music industry complained for years that the terms were problematic, but that iTunes was so popular they couldn't afford to not play Apple's game. But when Apple applied it to apps, it took over the industry.

While Apple set the industry standard, it didn't necessarily invent the 30% app commission. The study's authors said they couldn't identify who used the number first, but that older stores from Nokia, BlackBerry and others charged commissions at least as high. Apple certainly popularized the terms, though.

Before the App Store, the mobile-software world was a mess of standards and prices, often negotiated individually or sold at brick-and-mortar-like markups. One early attempt to do better, though, was Qualcomm's BREW system. "The revenue split between all the companies is set up in advance," Dave Mock wrote in his book "The Qualcomm Equation," "but Qualcomm stipulates that the developer keeps the majority of the revenue from each download — usually 80% – while the carrier and Qualcomm split the rest."

Apple's one-size-fits-all approach simplified everything. In exchange for 30% of sales revenue, Jobs said in 2008, Apple would provide a number of services. "There are no credit card fees for the developer, we take care of all that. There are no hosting fees for us hosting the app, we take care of all that. There's no marketing fees." Later that year, in an interview with The Wall Street Journal, he elaborated. "It costs money to run it. Those free apps cost money to store and to deliver wirelessly. The paid apps cost money, too. They have to pay for some of the free apps. We don't expect this to be a big profit generator. We expect it to add value to the iPhone. We'll sell more iPhones because of it."

Apple's justification for the commission has changed slightly since then. It now frames the App Store commission in part as an incentive for Apple to keep innovating. The Analysis Group economists said that Apple also provides developer tools and SDKs, but also things like custom chips, cameras and security features. Developers, in other words, are now helping pay for iPhone development.

As iPhone sales growth slows, apps are an increasingly important profit generator for the company. Apple proudly announced in June that the App Store ecosystem facilitated $519 billion in commerce in 2019, and it reported $13.3 billion in Services revenue in the most recent quarter, much of which comes from those App Store commissions. Instead of adding value to the iPhone, that 30% tax has become a big part of Apple's second-largest revenue stream. And developers say that as a result, Apple is tightening the screws to get more money out of them.

But as Apple has expanded into its own services, the terms have changed. Spotify's disagreement with Apple, for instance, is not that it charges a 30% tax but rather that it doesn't also charge Apple Music the same. The antitrust fight is only in part about the highway robbery charge — it's about who's getting robbed, and who gets let go.

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