Anyone reading tech blogs today were probably unable to miss the latest development in Apple’s iOS ecosystem. For those just tuning in, Apple stated that starting now, every app that sells content using an external method must make that same content available using Apple’s own in-app processing system. For example, if Amazon sells a book on their Kindle platform, they must make that same book available using Apple’s purchasing mechanisms.
So, what’s the problem?
The fundamental issues are conditions of listing that book through Apple’s service. There are two important conditions that Apple is enforcing:
- Apple takes 30% of the price of the purchase as a fee.
- The vendor must sell the content at the same or better price through Apple’s service.
Given that content-selling apps must implement the in-app purchases as per Apple’s instruction (or risk being booted from the App Store), this means that the vendor’s profit margin on in-app purchases just became X – 30%. If the vendor previously had a 45% profit margin, it’s now 15%. If the margin was 30%, the vendor makes no profit. If the profit margin is less than 30%, the vendor is now losing money.
Given that the Apple cut is a hefty chunk of any sale, some content vendors like Amazon and Barnes & Noble elected to not participate using in-app purchases and to implement and manage their own payment and delivery infrastructure. This was a useful compromise: the vendors kept their original profit margins and customers enjoyed lower prices. Other companies like Comixology elected to use the in-app purchases and passed onto their customers a simple and easy-to-use purchasing option tied to an iTunes account.
When the story broke a couple of weeks ago that Apple rejected Sony’s Reader app because of these new conditions, I assumed that someone reported the story incorrectly. Given the new e-book agency model that Apple pushed with the introduction of iBooks, for any book sold, a fixed 70% of the purchase price goes to the publisher (Del Rey, for example), and the remaining 30% goes to the bookseller (Amazon, for example). Now, I’m not privy to the negotiations in progress at the moment, but the combination of Apple’s demand for 30% and the agency model suggests that under the standard agreement, Amazon, Sony, and Barnes & Noble cannot make a profit on any content sold through the in-app purchasing. Thus their nonparticipation up to this point.
As an e-book reader, I’m very pleased that both the Kindle and Nook apps are available on my iPad. The iPad isn’t my preferred reading device, but I like having my books available there when I leave my dedicated reader elsewhere. I’ve bought into the Kindle and Nook ecosystem primarily because of the contents’ ubiquity. In contrast, I’ve avoided Apple’s bookstore because I like reading on other devices more than the iPad.
So, what’s going to happen to these apps? If Apple’s recent policy changes take effect, there are three options:
- The third-party content vendors keep their apps and prices as is, and surrender the 30% to Apple.
(status quo outcome for users, bad outcome for vendors.) - The third-party content vendors raise their prices by 43% to maintain their existing profit margins.
(Bad outcome for consumers, status quo outcome for vendors). - The third-party content vendors abandon their apps and users on Apple devices.
(Bad outcome for consumers, bad outcome for vendors.)
Given that I think no business will accept the first option, we’re left with two remaining possibilities: one that’s bad for consumers and retains the status quo for vendors, and the other that is bad for both consumers and vendors.
Apple fans explain the rationale for this change by arguing that in-app purchases will be better for users by being tied to their existing iTunes account and there will no longer be a need to leave the app to buy content. They also argue that Apple is entitled to a “finder’s fee” for bringing the user to the content in the first place. Let’s look at these two rationales:
“In-app purchasing is more user-friendly.” First of all, let’s recall that the original reason that apps like the Kindle required bumping out of the app to buy content was because Apple prohibited vendors from implementing an in-app purchasing mechanisms of their own. Despite Apple’s erection of this artificial barrier, Amazon and Barnes & Noble created sufficiently usable mechanisms of purchasing the content that the platforms have flourished on the iOS devices.
If Apple is only acting on behalf of the user, they can eliminate the third-party in-app purchase prohibition and iOS developers can build a better native experience without the need to pay prices inflated by Apple’s “tax”. I believe that Apple’s in-app purchasing functionality is valuable for developers who want it. 30% is a reasonable fee to pay if you are unwilling or unable to set up your own payment infrastructure. The major problem is making that mandatory for everyone, regardless whether someone else can process payments better (e.g. Amazon).
Consequently, I believe that Apple is trying to address a problem that is entirely of their own making. If the goal is user-friendliness, offer the in-app purchases, but also allow third party to roll their own within their apps.
“Apple deserves a finder’s fee.” Apple is currently justifying their new policy by claiming that since they have such a great platform, they deserve a reward for bringing the user to the app. They’ve stated that vendors can keep their own external processing systems and keep all of the profit from users referred to from outside.
I would actually be fine with that, if a couple of things were different. If Apple allowed vendors to inflate the price of their in-app purchases to cover Apple’s commission, I wouldn’t be writing this blog entry. Similarly, if vendors were able to opt-out of any Apple promotion in exchange for a waiver for the 30%, that would be kosher to me as well. The problem is that by dictating that apps must be delivered through their App Store (& subject to Apple’s final approval) and that prices can’t differ, Apple is basically imposing their “finder’s fee” on everyone else. In some cases, the vendor will keep that fee, and in others, the vendor will surrender it to Apple. In all cases, prices for the consumer will go up to cover that “fee”.
Furthermore, I find Apple’s assumption that the App Store is a great marketing vehicle to be a bit wrong. As I’ve documented before, app stores are terrible markets. The limited screen real-estate combined with an overabundance of apps and a poor search interface makes the App Store useless (as a discovery tool) for the vast majority of apps out there. Sure, a handful of apps will rise to the top and rake in the riches, but I’d sooner bet on a random actor becoming a superstar in Hollywood than make a similar bet on a random app becoming a hit in Apple’s marketplace.
Since the App Store is a poor vehicle for marketing and promoting an app, developers still have to set up external resources to bump the app up into people’s attention. This means (at a minimum) an external website and lots of promotion outside of the App Store. If Apple’s store was as good as they claim, none of this would be necessary. So, for the average app, what is it getting for that 30% fee: basically nothing. This is why I’ve chosen to opt out of the Mac App Store altogether – a choice that I don’t enjoy with the mobile platform.
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Looking a little closer to home, at Audacious Software, I have two projects in the pipeline that will be going out to iOS users in the next month or two: Shion Online and Fresh Comics. Given my disdain for the App Store revenue model, I’ve built both apps with an eye towards generating recurring income using my own payment and marketing infrastructure. Shion Online will be monetized using monthly subscriptions, while Fresh Comics will be ad-supported in a very novel way.
When crafting these business models, I did so under a certain expectation that the app market rules were somewhat settled. I doubt that Apple will be coming after me in the next couple of months for their cut of Shion subscriptions (it’s not considered content – yet) or their cut of the Fresh Comics advertising revenue. However, a couple of weeks ago, I also thought that they weren’t going after Sony’s Reader app. Since I think Apple’s being very disingenuous with their reasons for the need to make these policy changes, I don’t trust them as a reliable business partner. If Apple is successful in extorting their fee from Amazon and the other vendors, I don’t see what would stop them from extending that policy further and trying to take a 30% cut of ALL commerce and economic activity on iOS devices.
“But, Apple built iOS and they are entitled this,” some have been arguing. I disagree. I paid to join the iOS ecosystem by purchasing Apple hardware. Fine. As a developer, I pay Apple a yearly fee for the right to submit apps to their App Store. Fine. However, at which point are the iOS applications I purchase or build considered “mine”? I’ve paid my fees and my dues – is Apple ever going to get out of the way?
In recent months, I’ve been recounting to friends that I really miss the days when I could be a genuine Apple fan. I miss Apple, the computer maker, but now I’m rooting for the rest of the market to smack them down over this greed. I never thought that this day would come, but I’m now wishing for Real Networks to knock some sense into Apple.
Sad.