Free the apps

(NYTIMES) – Like most app developers, Mr John Botte wants his work to end up on some of the 1.5 billion active iPhones on the market. But when the software engineer did the maths on a photo-sharing app he hoped to create for wedding guests, he decided against it.

The impediment, said Mr Botte, co-founder of the marketing agency Digital Natives Group, was Apple’s 30 per cent commission in its App Store. He said the fee would be the largest contributor to taking in barely US$1 (S$1.40) in revenue from a planned US$10 monthly subscription fee. “I couldn’t see how we’d make any money,” Mr Botte said.

Those fees, which affect the minority of apps that charge for subscriptions or virtual goods, are at the centre of a US federal court hearing tomorrow that could set the stage for a protracted fight over how app stores run by both Apple and Google operate.

Mr Botte’s experience mirrors that of a number of developers I’ve spoken with over the years. Smaller developers who cannot absorb losses during their first year or two on the market often shy away from Apple’s digital storefront, dissuaded by its shifting rules, fixed fees and capricious approval processes. (Many refused to identify themselves publicly for fear of reprisal by Apple over any future apps or business.)

I believe Apple when it says it wants to allow more apps in its store. But if developers aren’t even applying because of the lousy economics, then the company is doing a disservice to both developers and customers.

The question of whether Apple wields too much power over its digital bazaar has come to a head in recent weeks after Epic Games, maker of the enormously popular role-play fighting game Fortnite, sued Apple and Google over their fees. Epic took up the battle after Apple and Google removed Fortnite from their stores when the company encouraged users to pay for the game directly rather than through app stores where they would be subject to the levies.

At the hearing, a judge will consider whether to compel Apple to allow Fortnite back into the App Store.

The Supreme Court last year allowed to proceed a consumer-driven class-action lawsuit charging that Apple violates antitrust laws with its App Store commissions, thus inflating app prices. European officials have opened an antitrust investigation into Apple over its App Store operations. Apple’s chief executive Tim Cook – along with other tech titans – was hauled before Congress over the summer to talk primarily about the App Store as part of a panel on antitrust issues.

Apple says the fees and use of its proprietary payments system are necessary, not just to make a profit but also to pay for safeguards in the App Store that prevent bad actors from entering and compromising user security. The company has also noted that its 30 per cent fee is equal to Google’s and less than the fees companies were compelled to pay when software was sold in physical stores. (It said those fees were at least 50 per cent.)

And the company notes that the commission gets developers access to Apple’s customers. Though, of course, if no developers offered apps in the store, customers would likely eschew Apple’s iPhones.

Apple has shown a willingness to adapt its fees, dropping the commission to 15 per cent after a full year of subscriptions. But that raises the question of how Apple can justify the higher fee if 15 per cent is enough to pay for all the things the company says it supplies app developers.

Apple does not disclose how much it collects annually in fees from the App Store, but estimates range from US$15 billion to US$19 billion – it is clearly huge and hugely profitable.

A former App Store executive told The New York Times last month that “we’re realising that 30 per cent is way too much”, and that the commission should be closer to 3 per cent.

By comparison, Epic’s chief executive Tim Sweeney told Times Opinion that it costs the company between 5 per cent and 7 per cent of sales to operate its games stores, and it collects 12 per cent from developers.

I don’t know what the right commission should be – Apple had once considered an even higher rate of 40 per cent – but as Apple has designed it, it will never face competitive pressure to change. That’s where the real problem lies.

Apple could increase its commission tomorrow and there would be no competitor to jump in and offer a lower price. The free market should decide the fee. Apple notes that a small minority of apps, 16 per cent, pay the commission, but might that be higher if the fee was considered more reasonable?

Apple’s central argument that it faces competitive pressure from Android loses much of its weight when you consider the cost and hassle of switching mobile operating systems – photos, passwords, text messages and video game high scores can all be lost with a new device. Consumers switching to Google will find an operating system that has mirrored Apple’s fees and is facing antitrust allegations of its own, though at least on Android, other app stores are allowed to compete, and there are alternative means to downloading an app onto a device.

Before the congressional antitrust panel, Mr Cook had argued that “Apple does not have a dominant market share in any market where we do business”. But it faces no competition on its own devices. It’s akin to Ford designing cars so that only Exxon nozzles fit its petrol tanks. You may want the lower prices offered at the Chevron petrol station in town, but you’d have to switch to Chevrolet to get them.

And there are other seemingly arbitrary rules governing the App Store. Amazon, for instance, is allowed to avoid paying the fees by directing Kindle e-book buyers to its website, the kind of workaround that raises Apple’s ire against other app makers. Apple doesn’t mind because e-books are digital versions of physical goods, which don’t trigger the fee, an Apple official confusingly explained to me.

Uber and Lyft don’t pay the commission either, even though arranging rides is an entirely digital act.

Mr Sweeney, in an interview, said his US$17.3 billion company can certainly afford to keep paying Apple hundreds of millions of dollars per year from the sale of digital goods within Fortnite, but he views the fight as a matter of principle. “Apple makes more profit from most games than the developers themselves make,” he said. “And that just sucks.”

His challenge to Apple and Google has attracted the attention of Microsoft, which argued on Epic’s behalf in a court filing, as well as a coalition announced last Thursday that includes 12 companies siding with Epic, such as Spotify and Match Group, parent company of dating apps Tinder and Hinge.

“Markets function properly when developers and consumers can make free choices between each of the different components they want to use in running their lives”, like smartphones, apps and how they pay for things, said Mr Sweeney. “Each component of the ecosystem should be able to compete with each other freely.”

It would be better for Apple to compete on an even playing field with other app stores and payment systems, and prove that its is truly the best. That way,

Mr Botte’s app might be ready in time for the post-pandemic wedding rush. 

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