Apple begins the Great App Store cost negotiation

The focus may be on Apple, but decisions made around App Store commissions could impact every retail business.

Apple, App Store, developers, iOS, mobile, apps

Apple has begun the Great Negotiation for App Store commissions, providing a slight concession to developers seeking payment systems other than its own – but for now, only in the Netherlands — and only for dating apps.

We need to settle on a price

Apple has been told by the Netherlands Authority for Consumers and Markets (ACM) that it must permit developers selling dating apps via its stores to offer consumers the chance to use third-party payment systems that are not run by Apple.

It is under pressure to do a similar thing elsewhere, including in South Korea. It is important to note that what Apple has proposed is only for dating apps in one nation, but it perhaps reflects where the company is putting its line in the sand as it negotiates app store commission rates with regulators everywhere.

Apple’s model for the Netherlands has now been made available. Under this model, Apple will discount its standard 30% commission by 3%. It means sales (of dating apps, referred to as apps from now on) made via the App Store must still pay 27% commission, with up to 3% available to secure third-party payment and billing systems.

An Apple support note states:

“To comply with an order from the Netherlands Authority for Consumers and Markets (ACM), Apple allows developers distributing dating apps on the Netherlands App Store to choose to do one of the following: 1) continue using Apple’s in-app purchase system, 2) use a third-party payment system within the app, or 3) include an in-app link directing users to the developer’s website to complete a purchase.”

App commissions beyond dating

It’s important to note that most developers don’t pay a 30% commission. The company sliced commissions to 15%  for developers who generate less than $1 million in sales in 2021 — and developers who don’t charge for their apps/services pay no commission at all. Apple also charges a reduced 15% for subscription commissions after the first year.

That means that if Apple were to extend this new Dutch model into other app categories, most developers would probably pay just 12% commission for doing business at Apple’s store, plus a 3% charge toward whichever payment process they choose to support.

That 3% charge must also cover administration, refunds, subscription management, and more. Apple takes cash to build developer tools and fraud control systems, in addition to the costs of monitoring available apps for quality and fraud. In 2020 alone, Apple prevented more than 3 million stolen cards from being used to purchase stolen goods and services.

Who is really affected?

So, assuming the Dutch model is Apple’s negotiating position, those developers that are most affected will be those with larger businesses. The number of developers paying 27% will be relatively small, though the amount of cash they generate will not be.

Developers are, of course, already complaining about Apple’s decision to require a 27% commission on sales made through its App Store — even though only one category of app is currently included.

But do they have a point? Apple’s fee is still far less than the commission (up to 60%) computer retailers once levied on boxed software sales. It matches the commission levied by most game console platforms and is in the same region as the “slotting fees” charged by supermarkets for inclusion on their shelves (which can be up to 50% of the retail cost).

[Also read: Triumph in adversity: Apple’s payment system opportunity]

Apple’s critics know this, of course. And this whole debate is about what it has always been about, a business negotiation around how much Apple should charge developers for sales made via its store.

Nickels and dimes

Apple has more than enough available real-world evidence to show that almost every retail platform levies a fee for products it stocks, so it seems indisputable that it should be permitted to do so as well. That means the only question that matters is what is a reasonable fee to charge.

Apple’s current answer to that question seems to be 27%, assuming a developer makes over a million a year in software sales and offers its own (or a third-party) billing/payments service. The other side of that view is that Apple is also effectively saying its own billing/payments service costs the equivalent of 3% — watch out for this in the event the company decides to make its own external service offer based on these systems.

The rest of the fee reflects the cost of running its stores, and the cost of developing developer tools — and a slice of profit to justify the whole thing.

Now, I don’t believe the Dutch authorities will accept Apple’s proposed model. But if they don’t, they will be hard pressed to find any retailer — online, or offline — who charges less. They will also need to reflect on the fact that Apple charges most developers around 15% (conceivably 12% under these proposals).

They also need to identify a framework that leaves a sustainable business for the App Store. The store is a very big business. Developers earned more than $60 billion through the store last year.

Regulators won’t want to shoot the goose that makes those golden eggs, will they?

These are complex questions with major repercussions

Finally, regulators everywhere must consider the consequences of whatever fee they may declare appropriate: after all, that fee must surely also be respected by every other retailer, digital or otherwise. After all, you can’t define a competitive playing field around laws that govern the behaviur of just one firm. A rule applied to one must equally be applied to all, or the competition is not free at all.

In the event regulators declare Apple must accept a 15% fee (or 50%, or whatever), then any retailer in any other industry will be under pressure to match that fee. It doesn’t take a genius to realize the number of businesses that may be affected — or to predict how many challenges will be raised from multiple enterprises across a multitude of nations in the event regulators get that pricing wrong.

So, this is a far from a cut-and-dried issue. And while many attempt to cast the decision in emotive terms around “right” and “wrong," it really isn’t as simple as that.

The only legitimate question at the root of the whole debate is how much any platform, or any retailer, can reasonably charge for inclusion of third-party products on their platform.

That’s a fundamental business question with potential impact across multiple industries and across every nation, not a ‘good versus evil’ mystery play that needs some knee-jerk response. And don’t even get me started on sideloading.

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Copyright © 2022 IDG Communications, Inc.

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