Lately I have been following the news of in-app purchases (IAPs) from Apple and Google. There have been many changes to app store rules regarding IAPs and the use of 3rd party payments. Continuing from my last article where I went through the various livestreaming monetization models that power the creator economy, today I want to double click on mobile app monetization.
What are IAPs?
Creators can reach their fans these days through various digital channels, from the web, to mobile apps, to smart TVs, and more. They can monetize their mobile apps in app stores either by charging for the app itself, or by making it free with the option for IAPs. IAPs use payment methods provided by the app stores. Since IAPs are part of the Apple or Google ecosystem, they are known for their privacy, security, and seamless user experience.
Because the app store only hosts apps developed with their software development kit, creators need to register a developer account. For Apple, that costs $99 per year ($299/year for an enterprise account), while for Google there is only a $25 one time fee. The app store will then take a commission of developers’ app revenue which ranges from 15% to 30% based on below criteria:
- 30% if the developer makes more than $1 million annual net app revenue
- 15% if the developer
- Makes less than $1 million annual net app revenue, or
- Offers subscription, app store will drop their commission from the 2nd year (Google recently announced subscription commissions will be 15% from day one, beginning in 2022)
Until quite recently, the Apple and Google app stores enjoyed a 30% commission.
So what’s the problem?
App stores have a big user base which will keep growing. Apple gives creators access to over a billion users in 175 countries, and Google has over 2 billion users in 190 countries. If an app is monetized via subscription but users are not able to subscribe in the app directly, it will lead to negative user experience and the creator may not be able to acquire the user from other channels.
That being said, there are some exceptions. Netflix turned off Apple IAP in late 2018. Spotify also restricts IAPs. Both companies require users to visit their websites to purchase or renew subscriptions. Can other apps all follow suit? Not really. Apple guidelines require content that is available on multiple platforms to enable IAPs if they charge on other platforms. While some apps might get away with skirting the rules for a while, playing in the grey area here can lead to creators’ apps getting rejected by the app store.
What Apple and Google charge for IAPs are about industry average. The Chinese app platform Huawei charges much higher commissions, especially for in-game IAPs – around 50% on average. Additionally, Apple and Google have made recent efforts to nurture smaller developers by taking less commission.
It seems the problem is that app stores treat all creators the same, whether an up-and-coming app with just a few thousand downloads or big developers, like Epic. That doesn’t make sense, considering that the top 1% of developers generate 93% of the revenue, based on app analytics from Sensor Tower. App Store revenue is a major part of Apple’s services business, which generated $18 billion in the quarter ended in September, accounting for 22% of the company’s revenue for the period. In-game spending accounts for more than half of App Store sales, $26 billion of $41.5 billion of consumer spending in the first half of this year. Apple said in its annual filing with the SEC that reducing its App Store commission could hurt the company’s financial results.
What can app stores do differently?
Everyone would agree that app stores bring value to the developer community that is much bigger than IAPs alone. Therefore, the app stores should be compensated for the value they created. The problem is app stores tie almost their entire revenue to IAPs. Hence, they can’t just keep reducing their commission given the broader financial impact.
Free market rules will push the app stores to open up their payment systems inevitably, because there are cheaper and better alternatives out there. Therefore, app stores should embrace these changes and consider the following reforms:
- Separate billing wof the app stores from IAPs. Developers can choose which service is most relevant to them and pay the app stores accordingly. The app store in turn doesn’t need to force everyone to use their IAPs, and create guidelines that would constantly be challenged by developers across the globe.
The app store is a fixed cost (aka sunk cost) that all developers have to pay in order to reach consumers who are using smartphones, tablets, smart TVs, or other app-based devices. IAPs are a variable cost. By separating these two costs, it not only gives developers choices but also allows them to better control their variable cost. Apple claims that doing so will make their billing more complex. But app store billing has room to improve, and opening up these services could encourage competition and help the app store to be better at everything they do.
- Differentiate their pricing between bigger and smaller developers. Lowering app store commission based on revenue generated in the app is a great start. To build on the previous point, app stores could consider charging a higher cost to bigger developers based on service level agreements. It would be understandable that app stores accommodate the needs of the most popular apps on their platform with technical support, elevated app review etc. by charging them more.
Apple says that all developers are treated equally. However, a platform where every client is truly treated the same is just impossible. We already know Apple has special terms with Amazon, for instance. The importance is to be transparent about this, not disingenuously claiming everyone is treated equally.
App stores bring enormous value to the developer community. They should be compensated accordingly. But the current practice of tying everything to IAPs is not sustainable. App stores should consider separate billing of the app store from IAPs, and be truthful that they can’t treat every developer equally. By doing so, they will encourage openness and competition which in turn will bring more innovative content to the app store in the long run.