App store taxes are good, actually
Photo: The New York Public Library/Unsplash

App store taxes are good, actually

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Good morning! If you want your app to reach millions of people, it’ll cost you. But that’s not necessarily a bad thing. I’m Owen Thomas, and I still buy music on iTunes just to be difficult. Mostly RuPaul songs.

Don’t step on the rake

There’s a full-on assault on the app store model, from the European Parliament in Brussels to a courtroom in Oakland. There are legitimate questions being raised about anticompetitive behavior by Apple and Google to keep the hefty fees they charge developers in place. The problem is that a lot of the arguments being thrown around ignore the realities of, y’know, capitalism: Sometimes distributors bring a lot of value.

If you want to play the game, you’ve got to pay the rake. Or fee, commission, toll, vig, tax. Whatever. Shut up and pay!

  • Venture capitalist Bill Gurley looked into the phenomenon of rakes charged by app stores, marketplaces and other middlemen in 2013.
  • Rakes vary enormously depending on the business and the nature of goods sold. Ecommerce marketplaces might charge 10% to 15%. Most ticketing sites charge more. Apple and Google charged 30% in their app stores then, as they mostly do to this day, with some exceptions.
  • Gurley’s conclusion: A lower rake is generally correlated with higher odds of long-term success. But what’s crucial is that “the value of being in the network clearly outshines the transactional costs charged for being in the network.”
  • For most developers selling through Apple’s App Store, that’s proven true. The access to hundreds of millions of relatively wealthy iPhone users who have grown accustomed to one-click app downloads has created a thriving app economy.

There’s a lot of talk about payment processing, and it’s a total red herring. Don’t get it twisted.

  • The rake Apple charges covers the totality of the value it provides: security, quality checks, access to customers, and, yes, payments processing.
  • Let’s talk about that, though. The roots of the 30% fee come from the iTunes Music Store. When Apple was selling songs for 99 cents, a 30% fee was actually pretty reasonable, given the outsized cut credit card companies take from small transactions. Apple didn’t make much profit on those charges.
  • When the App Store launched five years later, Apple kept the fee. And nearly half of the most popular paid apps charged just 99 cents, same as an iTunes single — a proportion that’s still true today.
  • Companies from Amazon to eBay to Patreon wrap the cost of payments into a larger fee that could be thought of more as a marketing cost. Breaking out payments doesn’t do much to the overall cost picture, but it does add a lot of software development and customer service headaches.
  • When a Dutch court ordered Apple to allow alternative payment systems for dating apps, Apple said fine. It discounted the App Store commission to 27%. That’s a good way of thinking of how much value is in the payments piece, which is not a lot.

The subscription economy changed everything. Suddenly, those app store commissions based on one-time purchases got applied to recurring bills.

  • That’s why Netflix doesn’t let new customers sign up through its iOS app, and why Spotify lodged an antitrust complaint against Apple over the fees.
  • In-app purchases are a sore spot, too. That’s the heart of Epic Games’ complaint over how Apple treats Fortnite.
  • What’s happening is that the business logic of the 30% rake is falling apart as the app industry evolves.
  • By the way, Apple isn’t a big fan of app store fees when it has to pay them. That’s why Apple TV users found they couldn’t buy movies or TV shows on Android TV devices starting last week.

The right fee may not be 30%, but it’s not 0%, either. Apple already cuts subscription commissions to 15% after the first year, and gives a similar break to developers with revenue under $1 million a year. Microsoft cut its PC game store fees to 12% last year. And what about the economics of micropayments, which seem to mandate Apple’s 30% cut just to break even? Well, Apple’s making some interesting moves in fintech which could make payments a lot cheaper all around. If that means we can stop nattering on about alternative payments systems and start debating the real value of distribution, all the better.

— Owen Thomas (email | Twitter | dog Instagram)

A MESSAGE FROM CLARI

"To win more revenue for your sales teams, start with the customer. Understand what your customers need, and make sure that those needs are aligned to clearly defined internal success criteria. Build trust across the teams that what you sold the customer is what is being delivered." - Pilar Schenk, COO at Cisco Collaboration

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People are talking

Elon Musk said he came down with COVID again:

  • "I supposedly have it again (sigh), but almost no symptoms."

Musk also spent part of the weekend thinking about creating his own social media platform:

  • “Am giving serious thought to this.”

Apple thinks the Digital Markets Act will create privacy obstacles:

  • “[The DMA] will create unnecessary privacy and security vulnerabilities for our users.”

Coming this week

President Biden's 2023 budget proposal is coming today. Among other things, it will reportedly include a minimum tax on billionaires and their assets.

SHARE started yesterday and includes sessions on DevOps, IT operations and professional development.

The first-ever LA NFT conference begins today at several locations across the city. It’ll feature presentations from Mark Cuban, NBA player Baron Davis and others.

Data Center World also starts today in Austin. Execs from Dell and Autodesk are expected to speak at the event.

Sundar Pichai is meeting with Margrethe Vestager on Wednesday to talk about competition, among other topics.

The Intuit Trans Summit is happening on Thursday with Intuit workers, members of the GenderCool Project and special guests.

In other news

Apple won its first Best Picture Oscar. CODA won three awards last night in all, as Apple TV+ became the first streaming service to win Best Picture. (Though that was ... decidedly not the most interesting thing that happened during the Oscars.) Classic Apple, really, to show up late to the race and still somehow come out on top.

The U.S. and EU came to a preliminary deal on data privacy that would let information about Europeans be stored in U.S.-based data centers.

Mike Frazzini is leaving Amazon to focus on family, according to Bloomberg. Frazzini helped launch Amazon Game Studios.

Spotify stopped services in Russia. The company had already closed its offices in the country earlier this month.

The Apple versus Epic feud continues. Apple wants a federal appeals court, which is mostly on its side, to dismiss Epic’s appeal.

A former worker is accusing Microsoft of firing him for uncovering corruption. Yasser Elabd published an essay on the whistleblowing site Lioness with claims that Microsoft fired him for asking too many questions about bribery and corruption.

Google Fiber workers unionized, becoming the first to do so among Google Fiber employees and the first recognized bargaining unit for the Alphabet Workers’ Union.

Apple’s handing out six-figure “special retention grants,” worth between $100,000 and over $200,000 in restricted stock units, to help retain a group of engineers.

Follow the oil, and see where it goes

If you know where to look for public information, you can make a Twitter bot out of anything. Most recently, a group of data scientists at Greenpeace created a bot that can track where tankers are carrying Russian oil around the world.

The goal is to hold governments accountable for their bans on Russian oil and gas, which will be enforced after a 45-day grace period in the U.S. In just a couple of weeks, the Twitter tool has already deflected a tanker heading into Sweden and helped Greenpeace organize protests against the import of fossil fuels coming from Russia at other locations.

A MESSAGE FROM CLARI

"Trying to make every deal as big as possible often adds complexity and extends sales cycles. To accelerate growth, sellers should focus on landing faster, and then expanding, and expanding again. Getting customers into your solution sooner helps you solve their initial problems, then later, you can grow together." - Michael Megerian, Chief Revenue Officer at Yello

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