In Defense of Apple’s 30% Markup

2020.06.18   prev     next

APPLE’S coming under a lot of fire lately for its App Store policies, and in particular its 30% cut of end-user sales (revenue). Here, I’m going to argue for the position that Apple isn’t doing anything wrong, and hopefully won’t be forced by courts, or other governmental bodies, to radically alter its policies. I know that if Apple wins this conflict, some people will be forever angry about it, and I’ll have a bit to say about that too, at the end.

Of course, I don’t speak for Apple. But here goes: my take on the whole argument over Apple’s 70-30 revenue split.

Markup

When an end-user buys a third-party product on Apple’s iOS App Store, Apple keeps 30% (sometimes 15%, but most often 30%). This is equivalent to a brick-and-mortar retail store’s markup.

It’s actually precisely equivalent to the developer choosing how much Apple will pay for each end-user license (wholesale), and Apple adding on 43% more to to get the end-user (retail) price. (That’s 43% because 100/70 = 1.4286, which is called a “30% markup” in the retail business.) But to keep end-user pricing simple (e.g. whole dollars in the USA), Apple says, “You (the developer) pick the end-user price in whole dollars — Apple will keep 30% of that, and you will get the other 70%.”

So, for example, if you’re a developer, and you think you should get about $5 per license for your app (wholesale) then you multiply $5 by 1.4286 and it becomes $7.14. So you set your app’s price at $7 — Apple will keep 30% ($2.10), and you will get the other 70% ($4.90).

The Store

30% is Apple’s fee to the third-party developer for all the platform/infrastructure things that Apple does, that the developer doesn’t have to, including:

• the App Store
• the development system (X­code etc.)
• custom features like Metal that require special hardware co­op­er­a­tion
• vetting of all apps; keeping the shopping environment free of junk/crap-ware
• app hosting/serving
• the OS itself including constant maintenance, bug fixes and enhancements
• the hardware on which the OS runs, and its ongoing de­vel­op­ment
• beautiful, super-friendly brick-and-mortar retail stores to strengthen the user base
• securing the whole system (effectively) against piracy and malware
• unparalleled user privacy, strongly enforced across third-party apps
• lots of advertising, public presentations, etc. to bolster public awareness of the platform
• convenient in-app purchase using already-set-up payment in­fo (not dealing with a third-party payment site)
• securely handling all payments via credit, debit, or Apple Pay

In other words, Apple provides an unparalleled, long list of things to do with constructing a top-quality app shopping experience for the end user, and a hyper-positive environment for third-party app authors to focus on their apps, and flourish.

Store-Brand Products

Like most retailers, Apple sells some of its own apps (and services) in its own App Store. When it does so, naturally it gets all the money:

But how is that 100% spent? We know how much third party iOS developers spend on the platform (the above infrastructure bullet list) — exactly 30% — because Apple does all that stuff for them, and charges them 30% of sales for doing so. But what if the app is also from Apple? What percentage of that app’s revenue goes toward the development of the app, and what percentage goes to support the platform?

It’s hard to say. But one thing’s for sure: It’s not 100% and 0%, respectively! When you see people comparing an Apple app getting “100% of revenue” to a third party developer’s app getting “70% of revenue” — with the direct implication that this puts Apple at some sort of unfair competitive advantage — be aware that the comparison is bogus. Nobody provides the iOS platform for Apple: Apple has to provide it entirely itself. When Apple is providing both the app and the platform, why wouldn’t it get all the revenue?

Reader Apps

Apple has made a pseudo-exception to its 30% fee, for a category called “reader” apps. The basic idea is that if a service that provides a library of purchased or rented content, such as Kindle, Netflix, or Spotify, wants to create a strict “reader” app — a free app for the users of that service to consume their content on an iOS device — then Apple will allow it, and get no money at all from the use of that app. However, the app must meet strict conditions: spe­cif­i­cal­ly it may not in any way (not even sneakily) direct the user of the app to find the non-Apple store where the content may be purchased.

So, for example, if I have a collection of ten Kindle e-books that I purchased on my Kindle device, and I want to read those books on my iPad, I can download the Kindle reader app for iOS, log into my account, and there are my ten books, ready to read. (But if I didn’t already have an account, I wouldn’t know what to do at the app’s login screen.)

Criticism

From the get-go, there has been criticism of the App Store’s business model. One idea is that credit cards charge only 2 or 3% per transaction, so why should Apple be getting 30%? This argument was made three years ago by Epic Games founder and CEO Tim Sweeney:

The system is pretty unfair at the moment. These app stores take 30% of your revenue ... That’s strange because Mastercard, Visa and other companies that handle transactions take 2% or 3% of the revenue.

And again this year, by Basecamp co-founder David Hansson:

As I said in my testimony before congress, why is it that credit card processing fees hover in the 1.8-2.8% range, while Apple’s App Store have sat steady at 30% on the high end? Because there’s no competition! And they have a monopoly grip!

This argument pretends that the last bullet in the above platform bullet list — payment handling — is the only bullet in the list! All those other bullets are irrelevant and/or worthless, and can be ignored.

Another idea is that Apple should rightly let individual developers decide whether to force their users off to an outside payment method (from which Apple will get 0%), or let their users purchase the same items via in-app purchase (from which Apple will get 30%). In this theory, some developers might choose the latter, and 30% of those is the justifiable amount that Apple should be getting. John Gruber, an extremely successful blogger whose work I generally admire, advanced this argument just the other day:

The price that Basecamp pays for not supporting in-app purchase in their iOS app is that they lose whatever number of users would have signed up in-app but won’t sign up out-of-app. That’s competition.

His periodic podcast guest Ben Thompson made the same argument about a year-and-a-half ago (Exponent #156):

If you’re in the middle of a game, you wanna add some virtual money or you wanna buy a dance, or whatever it might be, you don’t wanna be kicked out to a web page, and buy something, and have to create a new account, and go through all that sort-of rigamarole. There’s tremendous benefit that come from those in-app purchase APIs. And Google and Apple have earned the right to have that superior user experience because of all the innovation they’ve put into the platform as a whole. And so I’ve no problem with them offering that, and I think they will continue to make a whole bunch o’ money doing that. However, I think they should win on the merits! They should win, and developers should use them, and should pay the 30% tax, because they’re better, not because they made a rule.

This argument pretends that the second-to-the-last bullet item (convenient in-app purchase) is the only one that matters, and all the other bullets can be reasonably assumed to be irrelevant/worthless.

Apple has built something fantastic here, and the 30% markup is simply their price of participation. If it’s just not socially tolerable that Apple, of all companies, could come roaring back from ’90s defeat to be the one to do this, then by all means, slap them down. But please, let’s not kid ourselves that forcing Apple to allow all developers to take Apple’s 30% markup for themselves has anything to do with protecting fair competition. In no other business would that be considered a remotely valid argument.

Basecamp’s Hansson tried to get a full-fledged e-mail app into the i­OS App Store under the “reader” rules, so Apple could get 0% of his app’s $8.25 monthly end-user fee. Apple mistakenly allowed it onto the App Store for a brief period, then realized what was going on and told Basecamp it won’t be allowed to continue. Hansson publicly made his displeasure crystal clear:

Apple just doubled down on their rejection of HEY’s ability to provide bug fixes and new features, unless we submit to their outrageous demand of 15-30% of our revenue. Even worse: We’re told that unless we comply, they’ll remove the app. On the day the EU announced their investigation into Apple’s abusive App Store practices, HEY is subject to those very same capricious, exploitive, and inconsistent policies of shakedown. It’s clear they feel embolden [sic] to tighten the screws with no fear of regulatory consequences. ... it’s hard to see what they have to fear. Who cares if Apple shakes down individual software developers for 30% of their revenue, by threatening to destroy their business? There has been zero consequences so far! Most such companies quietly cave or fail. We won’t. There is no chance in bloody hell that we’re going to pay Apple’s ransom. I will burn this house down myself, before I let gangsters like that spin it for spoils. This is profoundly, perversely abusive and unfair.

Baseless, misleading criticism of Apple’s 30% markup is hardly a recent pheneomenon. Seven years ago, Chris Dixon of Andreessen Horowitz commented:

App stores ... take 30% of revenue, which scares away most big companies (e.g. Microsoft) and also startups/venture capitalists. Not many businesses can survive an immediate 30% haircut.

Besides conjuring up disturbing images of slicing someone’s head off (whereupon the rest of their body collapses to the ground, instantly dead), the idea that the typical app developer can’t survive giving up 30% of revenue to Apple is based on the assumption that that developer’s competitors somehow do not have to pay 30% to Apple. But that’s never been true; Apple has always charged the same 30% to all third-party app developers. Figure out how much you need to get per sale, multiply by 1.4286, then pick the closest end-user price to that, and you’re done. It’s not rocket science. Retail markup has existed for centuries — usually much higher than 30% — and it doesn’t strike down most businesses dead.

The Fantasy of Free

What do these people want? Do they want 30% of Apple’s own apps’ revenues to go somewhere other than Apple? No, of course not. They want none of their apps’ revenue to go to Apple. They want Apple to provide its unprecedentedly secure, piracy-proof, malware-proof, junkware-proof, revenue-generating, vibrant platform to them for free. Apple’s not unaware of that, responding to the latest EU developer complaints:

It is disappointing the European Commission is advancing baseless complaints from a handful of companies who simply want a free ride, and don’t want to play by the same rules as everyone else.

What motivates the bitter complainers against Apple’s 30%? Maybe they’re just greedy. Or maybe they mentally vest themselves in the idea that they’ve figured out a really clever way to dodge Apple’s 30%, and then go into dashed-expectations rage when they discover that their clever trick won’t be allowed. Or maybe their anger is an act, designed to convince Apple to give them a special exception.

But I lean towards a more charitable interpretation: They simply remember when all computing platforms were total free-for-alls, with no platform fee, and no control over what kind of app can be installed, and they want it to stay that way forever, even on iOS — but somehow (magically) without all the bad stuff that plagued pre-iOS platforms: the mass casual piracy, the malware and the anti-malware, the poor distribution and massive distributor fees (80-90%!), the junkware that bred user cynicism, etc. They want to have it both ways, and they’re hoping, with feverishly utopian delusion, that the government can force Apple to give that to them.

Very bad news, guys. The government absolutely does have the power to ruin what Apple has built in iOS. But it does not have the power to rewrite the laws of economics. It can’t create the quixotic conditions in which you get to have the good things about iOS, and not have to pay for them. When the government forces Ap­ple to stop charging for them, all those good things will simply go away.

Update 2020.08.02 — Horace De­diu on The Critical Path #248 “Business as Usual”:

Roger Shepherd has a question that says, “Is there a danger that regulatory issues will distract Ap­ple’s management team from taking care of business?” Actually I don’t think so, and I think the reason they’re comfortable is that they realize that regulators haven’t a leg to stand on. I mean, you might go bend over backwards and contort yourself into thinking that Apple has some kind of unfair advantage — and the only thing that comes up is that, yes, Apple does put forward its own apps on the App Store, and is effectively acting as a monopolist on the App Store. But that is rather a minor point to be made. Stores are able to sell their own brands in the store; so you can have: Walmart has its own brand, Target has its own brand ... To suggest that just because you own the retail shop, you cannot put your own product on the shelf, or that you cannot dictate what is the margin, or markup, that you’re gonna charge ... This is entirely at the prerogative of the merchant, and it’s always been so, forever and ever, and it’s always been so everywhere. I think it’s such a red herring to me, that no one at Apple’s really losing sleep over this.

See also:
Judos vs. Pin Place
&
iBook Price-Fixing Lawsuit Redux — Apple Won
&
When Starting A Game of Chicken With Apple, Expect To Lose

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