Breaking the mobile walls
Cause and effect of App (& Play) Store's growing protests
Hello everyone,
A lot of buzz has been happening around Play Store and App Store. Google recently announced that it will enforce a 30% cut for all apps selling digital goods (albeit not right now for India). Spotify, Epic Games, Tinder and a few other companies have been protesting against Apple's app store policies, citing them as unfair. There's also a widespread dissent saying that the 30% commission these app stores charge is too high.
Why do App Stores exist?
The first problem that app stores solve for developers is distribution, making those apps available to everyone on iOS or Android. On the top of that, it provides services like advertising, payments and reconciliation. For the users, Apple's strict security and privacy norms ensure that nothing happens to their phone or data if they download the app. Play Store doesn't offer this level of privacy and security, because of openly downloadable APKs.
As the shift to mobile happened, this service has augured well for the companies.
There are three questions about monetization underlying the recent buzz
Is 30% justified?
Should it be same for everyone?
Should IAP be mandated?
Let's compare this with Amazon.
Downloading an app from an app store is very similar to buying something from Amazon. For the buyers, Amazon acts as a symbol for trust and single-stop for all services. For sellers, Amazon gives them new customers, handles their logistics, payments and returns and offers them advertising avenues to grow their brand. Amazon charges a commission for each sale, which subsumes all their costs of services.
Does Amazon have the same commission for all types of sellers? No, because different categories have different margins available based on their value chains. E.g. Smartphones is a thin margin category with ~5% commission vs apparel, a high margin category, at 17%.
The same marginal cost concept applies to App/Play Store as well. An Uber ride has a different economics than a Fortnite game and so on. Considering this, App Store and Play Store, divided the types of businesses into two types - digital and physical. Physical transactions, like Uber, are exempted from the 30% fee, and can have a separate payment mechanism. Digital transactions, like PubG, Tinder and Fortnite, aren't.
However, this leaves out an important nuance - goods distributed digitally but produced physically (or with physical cost structures). For companies like Spotify & Netflix, at least 30% goes into licensing content. Spotify earned a revenue of $7 Bn and paid out $15 Bn to music creators and publishers. Similarly, for Audible. In a world dominated by AI, may be computers will start generating music or writing books and the marginal cost of content will come down, but right now, the 30% fee is too heavy on these apps.
What happens when a brand becomes mammoth on Amazon?
They create their own website and sell to customers directly, bypassing Amazon's commissions.
And the same is now happening with Fortnite, Netflix etc. One way to curb that problem is to have a regressive margin structure i.e. as an app does more revenue, reduce the % cut to Apple. However, this is ultimately penalising the smaller apps and hence, stifling innovation. Regressive rate structures ultimately penalise the poor at the benefit of the rich. In that regard, companies spinning off and owning distribution as their brand equity rises, is eventual. This does not come without costs though as the company has to develop capabilities for payments & reconciliation, fraud prevention, security and privacy (all of which will still make up way less than 30%).
Consider this email from Epic Games' CEO, Tim Sweeney…
Jobs had decided to build a gated system, way before Apple and iPhone became this big. And Epic Games now just wants to leverage its brand to save the 30%. And it is not even in a position like Spotify where the publishers take a big cut. The game economy has goods that are produced digitally with software, with near zero marginal costs. So this request is just a way to increase profits — the same argument that Epic is accusing Apple of. However, Epic does add that this should be made available to all developers, which faces the resistance of security scrutiny by Apple.
However, because these policies are not exhaustively defined, they are open to interpretations leading to a lot of inconsistencies in their implementations. E.g. Basecamp's email service Hey was not allowed because it did not offer in-app purchases. The company added a free version and Apple approved, still without in-app purchases. The theoretical argument for mandating IAP is ensuring security of transactions, privacy and efficiency. The practical, of course, is preventing revenue leakage. The optimal answer seems not mandating it but building incentives for using it.
The big players can create a ruckus and get their way through. But…
What about the smaller developers?
For iOS, there is no way apart from App Store to download any apps (in secure phones). For Android, other OEMs have their own app stores (albeit less popular) and standalone APKs can also be downloaded.
Paytm just launched a third option, a mini-app store (like Sweeney was talking about earlier). A super app like WeChat has always been missing in India and since long, Paytm has been trying to be that. Similar to WeChat mini-programs, Paytm now allows web apps to be accessed from within Paytm, without any payment charges. It helps that this trends well with the zeitgeist of Atmanirbhar Bharat.
Considering Google's massive distribution, it is unlikely Paytm will become as big as Play store. Even if it tries to, it's own downloads are dependent on Play Store, which can ban the app anytime (like it did). Ultimately, it might end up becoming a just another distribution channel for larger apps, rather than a launchpad for new ones. But till then, it could definitely be a preferred ground for new developers to launch their apps.
Apple and Google will need to amend their existing rate structure, to make it more attuned to the margins in different categories, and most importantly, not stifle innovation by squeezing smaller developers.
While there are fierce battles fought for making apps accessible, a fundamental question is - why do we need to install apps on our phones? Is there an alternate, faster and perhaps, even more reliable way of having app-like experiences on mobile web? That is also something Apple and Google should be thinking about.
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If you are new here and are looking for recommendations, you’ll like this article on Edtech and this article on a Chinese giant’s unique approach to healthcare. Cheers!
Learnt something new today. Thanks Nishad!