App Store Versus The EU Commission

• 27 January 2024
• bzamayo.com/app-store-versus-eu-commission

Firstly, I do not consider the policies introduced this week as the end of the conversation. In many ways, it is the opening gambit. The Digital Markets Act leaves much to interpretation and the EU regulators have essentially left it up to companies to apply the law, and then assess whether the changes that companies implement is sufficient. I view the published Apple rules as a working proposal, very much subject to change. Apple would rather it wasn’t weakened from here, of course, but I think the EU has shown that it is operating proactively and will follow up with addendums of legislation and enforcement action, as it sees fit.

As it stands today, here’s what iOS developers inside the European Union are facing. They can either keep the status quo, stay on the App Store and pay the traditional 85%/15% and 70%/30% commission split on digital purchases, or choose to adopt so-called “alternative business terms”.

These terms deconstruct the commission structure into two components and instate a new Core Technology Fee; an annual levy payable on a per-install basis. The commission is actually less. Apps listed in the App Store are subject to 10% commission for small developers, or 17% for larger developers (those that exceed $1 million in annual revenue). That’s down from 15% and 30% respectively.

However, for use of Apple’s In-App Purchase payment system, there’s an additional 3% fee. So, really, it is 13% or 20% to deliver the same end-to-end store experience.

Developers have the flexibility to use alternative payment systems, in which case the 3% is not due. If they don’t want to use the Apple App Store, they can list their app in a third-party app store (Apple refers to these as an “app marketplace”) and not owe any commission at all.

So far, so good. Spotify, Epic, and the rest will never be fully satisfied, but if that was the terms, I think they’d come away very happy.

The snag is the Core Technology Fee, priced at €0.50. The CTF is paid the first time an app is downloaded (or updated) by a user in a twelve month period. The next twelve month period, the fee is due again. Apple has essentially instated an annual fee for every active user of an app, whether the developer is able to monetise that user or not. You could also argue it has wider scope, as active installs does not correlate to active users necessarily. An iPhone user may stop using an app altogether and simply forget to delete it from their device. But it will keep receiving automatic updates in the background, and that will invoke the CTF, even if they never opened the app themselves. A downloaded app that is never launched a single time results in an annual bill to its maker.

The impact of the CTF on the cost-benefit calculus depends on the popularity of the application. For smaller developers, it’s actually not too bad, at least with a surface level examination. Apple gives you a million free installs before the CTF comes into effect. That’s a sizeable figure and many apps will easily stay inside that threshold, even accounting for some bloating of the numbers due to inactive users and whatnot.

But, Apple stacked the deck well. The upside is relatively small. Assuming you are switching away from the 85%/15% split of the Small Business Program, you’ll now be paying 13% commission (10% App Store + 3% IAP). That’s only a saving of just 2% compared to the status quo. In exchange, you bear a huge downside risk of CTF fees if your app grows and crosses the million install mark. You are basically betting your app will never get big, for the entire lifetime of your company, in exchange for 2% extra revenue. That doesn’t sound like a very compelling proposition. You might argue that taking this route allows you to set up a shop inside an alternative app store, and forgo Apple’s commission altogether. That is true, but smaller developers are unlikely to have the marketing budget and inertia pull to beat the might of distribution through the Apple App Store.

For bigger developers, the costs of the CTF are significant, but perhaps surmountable in some cases. I mean, the costs are immense. Averaging 50 cents in revenue per user, including a ‘user’ that may never open your app at all, is really hard. If you have 2 million installs per year, that equates out to almost a half a million euros in CTF fees alone, notwithstanding App Store commission or any other marketplace charges.

Apps supported by advertising will never take these terms. Why? They can live for free in the App Store. In the 70%/30% model, Apple takes no money earned from advertising so these apps pay nothing to Apple at all. If they want to venture out, they are slapped with a 50 cent per user fee. They’ll never take it.

Freemium apps, like games with micro-transactions, are also going to struggle. A free-to-download game with ten million users has got to find €4.5 million to give to Apple each year, solely for existing. You are going to need some big money spender whales to offset the costs of all the people that pay nothing, to have a chance at breaking even.

Apple remarks that it estimates less than 1% of developers would pay any CTF fees, because most apps don’t clear a million annual installs in the EU. But it’s the 1% that are really driving these changes. It’s precisely that 1% that lobbies governments and motivates the creation of the Digital Markets Act in the first place. Spotify, Epic, Netflix, Tinder, etcetera.

These ilk of companies do have high average-revenue-per-user, and I think probably could afford the CTF rates. But they aren’t going to be happy about it. They will argue why do they have to pay Apple anything. It’s almost ironic that Spotify has been pushing for Europe to crack down on the App Store monopoly, and the offer on the table actually has them paying more to Apple than they do now. Right now, Spotify pays zero. But Apple’s new terms sees Spotify paying 50 cents per user per year to them, if they leave the App Store and make themselves available elsewhere.

The other big gotcha here is that iPhone app sideloading is not a free for all. Spotify cannot simple host an app binary on its website, like Mac apps can. You can only install Spotify through an app marketplace. That means Spotify has to educate users to install the alternative app store that Spotify is contained in, then find and install the Spotify app from that store. It also implicitly entails Spotify into some kind of business arrangement with this third-party app store, possibly involving some form of commission revenue sharing on top of the mandatory Apple CTF. By the way, Apple also imposes the CTF on the app marketplaces themselves, which conveniently prevents these alt-stores from being open season charities. By necessity, the marketplace will need their own intermediary business model to at least afford the Apple fees for every user that installs them.

My current prediction is that almost nobody will actually make the leap of faith into the “alternative business terms” as they are written. Small developers don’t have the leverage to experiment and will stay put. Out of the big companies, Fortnite might be the only one, with Epic seemingly insistent on launching an iOS Epic Games Store, although that may not be viable in a 50 cent CTF world. Spotify, Netflix and the other constituent members of the aforementioned 1% will remain in the App Store, and appeal to the EU to make Apple make more changes. These companies will push for the abolishment of the CTF altogether; only time will tell if the EU commission is receptive to that.