App store taxes are good, actually

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)

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