App Store | Learning by Proxy

The App Store is under attack from those who are required to pay to use it.

In January 2007, Steve Jobs announced the iPhone at the MacWorld. The announcement would cause seismic shifts in the entire computing world, but nobody realised it at the time. In an era where Nokia was selling $150 dollar phones; a $500 phone seemed like it was meant for the nerdy enthusiast. Steve Balmer, then CEO of Microsoft laughed during an interview saying nobody would buy the device. It took that kind of confidence to ensure Microsoft had no role to play in the mobile revolution.

The success of Apple has been, in not only making the entire world accept, and buy a device at that price point; but also to refresh that device every 2 - 5 years. Within the first year of the launch, 1 Million devices had been sold.

The next year, with an intention to make the device accessible to developers, Apple launched the App Store. They created the development framework and made it possible for any developer to jump into the fray and develop software for the iPhone and monetise their skills. In the following years, they introduced the concept of In-App Purchases (IAP). Prior to the internet, software developers would develop applications to be sold once. Gaming companies sold the cartridge or CD of their games once and that was the most money they were going to get out of it. They had to also develop mini versions of the game or software called Trial versions with restrictions.

The In-App Purchase model did away with the whole thing. It made it possible for the user to download the app, try it out and then pay immediately to upgrade. For game developers, this made it possible to monetise their product at every step through virtual goods, power-ups, etc. This gave birth to a whole new economy. More importantly, it unbounded the development business.

Prior to the App Store, if you wished to develop software and distribute it, you had to hire developers, you needed to build the product, test, perfect and then figure out the distribution - offline. This was expensive and even the simplest product would require a couple of million in upfront investment to get started. The App Store took away the distribution problem. Further, since Apple had millions of iPhone customers, it was possible for app developers to sell their products to 10s of thousands of customers, if not millions of them. App prices which used to be in the range of $30 - $300 crashed to $1. This ensured more people bought and tried out the apps and many silicon valley successes were born out of this.

Source: Statista

Game Developers have been the biggest beneficiaries of the App Store economy. Developing a game is like making a movie. It could be a hit or a flop. It is a concept, a creative process; people may or may not end up liking it. Taking on that risk was not easy for game developers before the App Store. The number of games in the market has sky-rocketed after the app store. From a few dozen it peaked at about half a million games. Every tom, dick and harry could develop games. Also, Apple developed and provided powerful tools to bring the best out of those games; providing a global platform at the WWDC and the launch events for many of these developers to showcase their games.

But a decade is a long time and a lot can change in that time.

When the App Store launched in 2008, one of the rules that Steve Jobs insisted on, to be a part of their App Store, was that they used the Apple In-App Purchase (IAP) API if you wished to bill anything on the iPhone. The thinking within Apple was that since they were providing the distribution they should be able to benefit from that distribution. The company fixed its commission at 30%. Apple at the time had barely averted a near-death a decade ago and this was needed to bolster revenues and grow. Also, the distribution that Apple was providing was impossible to recreate all by themselves.

The rule while disallowing the use of any other means of paying for the apps, also forbade developers from steering the user out of the App Store. So even today if you open the Kindle app on the iPhone, you will see books which you just cannot buy. It will not tell you why OR where and how you can buy it. This may have been okay in the early days of the App Store but is a veritable dick move - today. Further, e-commerce was okay but anything which involved digital goods had to pay the commission. Take an e-book that costs $10 and has a retailer margin of $4. If they were to give 30% to Apple, Apple gets to make more money than the retailer. And what if the margin on a book is only $2?

The IAP API would store the details of the customer’s credit card on its file. It would bill the customer on behalf of the app developer and manage their subscriptions. It would also be the middle layer to clean up any fraud that takes place. And as the middle man would charge the commission. From a meagre footnote on the apple financials, the services business has grown to become a $50 Billion dollar juggernaut with a growth rate of 20% per annum.

If you take 30% of a 10 dollar transaction, nobody will bother, but if you take 30% of a 1,000,000 dollar transaction it is bound to hurt someone. Apple is taking 30% of a 200 Billion dollar app economy.

Let us start lobbying the government and troubling the courts.

It all began with a lawsuit filed by Epic Games against Apple. They wanted the courts to allow them to run their own app store on the iOS platform. This was never going to be easy to pull off.

Today, developers who list their apps in Apple’s mobile app marketplace must not only use Apple’s own payment system, but are prohibited from redirecting users to sign-up or payment pages bypassing Apple’s transaction fees. Ruling for Fortnite developer Epic Games, Judge Yvonne Gonzalez Rogers found Apple had violated California’s Unfair Competition Law, issuing a permanent injunction striking down Apple’s prohibition on external sign-up pages. The case has widely been seen as a crucial battle between developers and the mobile operating systems they rely upon. It also comes at a time when antitrust regulators in the US and around the world are looking closely at the largest US tech companies.

Apple won on all other fronts with the judge ruling that Epic breached its contract with Apple when it introduced its own payment system. Yet today’s ruling means Apple will surely lose revenue with developers who find the convenience of Apple’s system not worth its de facto tax. The company will have to change a long-held method that has previously allowed it to collect 15-30% of user payments to developers.

Source: Quartz

While the order does not grant permission to the developer to float their own distribution system on a proprietary platform, it allows what is called the Steering Clause which allows the developer to steer the buyer away from the platform if they choose to. For the developer, this can potentially mean 30% more revenue (although that would perhaps never be true - You will have to offer a discount to the user to make them do something that is harder). For Apple, this would mean a dip in the revenue that they generate through the app store.

Apple is trying to project it as a win because of - share price. Epic is trying to project this as a loss because of - the possibility of appeal. The reverse is actually true. Apple was forced to bend and Epic has won, they put an outside link in their game last year which started this fight.

From across the globe

Apple Inc will loosen App Store rules that have banned companies like Netflix Inc from providing customers a link to create a paid account to bypass Apple's in-app purchase commissions, the company said late on Wednesday.

It is the second concession to regulators and companies in less than a week as the iPhone maker faces legal, regulatory and legislative challenges to the App Store, which forms the core of its $53.8 billion services segment.

[...]

Apple said it agreed with the JFTC to let developers of those apps share a single link to their websites to help users set up and manage their accounts. Although the change is part of an agreement with the JFTC, Apple said it would be applied globally.

Source: The Hindu

The Japanese regulators have gone after the exact same provision that prohibits steering customers away from the platform.

South Korea has become the first country to impose curbs on Google and Apple's policies that force developers to only use the tech giants' proprietary billing systems.

Those policies require developers to pay Google and Apple a commission as high as 30% in every transaction.

Media reports last week said the legislation and judiciary committee of the National Assembly approved revisions of a bill aimed at stopping app store operators from forcing developers to use specific payment systems.

Source: CNBC

South Korea is also doing the same. Here it was not a judgement but a law that has been passed effecting this change in the policy.

The Alliance of Digital India Foundation (ADIF), which was formed earlier this year to protest Google’s move to impose a hefty commission for in-app purchases on its proprietary store, is of the view that there is now a “precedent” that will find resonance within government circles. The 350-member strong grouping, which counts the likes of Paytm, GOQii, Innov8 and BharatMatrimony as founding members will reengage with the new leadership at the ministry of electronics and IT (Meity), executives said.

“(Indian) companies are planning to approach the government to bring in a law like South Korea, Google and Apple are misusing their monopoly and it is hurting the startup ecosystem,” Murugavel Janakiraman, chief executive officer of BharatMatrimony, told ET.

Source: Times of India

The Indian government has a difficult needle to thread here. On the one hand, they want apple to invest in manufacturing in the country, they cannot possibly be holding a dagger behind their back at the same time. The startups are making noise nevertheless.

Why fight it?

On the one hand, there is the money that is there for the grabs. Companies like Epic have grown on the back of the distribution that Apple provides but at their scale parting with 30% of the income seems unfair. If you are turning over $1 Billion and are forced to hand over 30% for little value that is being added (today), you feel like it is scalping.

There is also the consumer protection angle to it. Gaming companies are unscrupulous when it comes to making money and manipulating kids into spending more and more on their games.

I have a 22 year-old disabled son, who has cerebral palsy, complex epilepsy, autism, learning difficulties and the approximate cognitive ability of a seven-year-old child.

He is unable to do any bilateral activities so relies heavily on his iPad and PlayStation for entertainment and educational activities.

He has recently been playing a game on his iPad called Hidden Artifacts which involves finding various items and matching them to the description.

He has been charged £3160.58 between 18 February and 30 May 2019, clearing out his entire savings.

Source: BBC

Jessica Johnson, 41, a stockbroker, did not realize while working at home from the pandemic that the youngest of her children had gone shopping with her iPad. It all happened in the month of July when George bought accessories, starting with red rings for almost two dollars, all the way to gold rings for 100 dollars. These allowed him to access new characters and more speed, so this was gradually accumulating thousands of dollars to his mother's account.

There was one day, July 9, when George racked up 25 charges totaling $ 2,500. Jessica commented to the half joking that it was "as if my 6 year old son was taking lines of cocaine, and achieving bigger and bigger hits".

Source: Entrepreneur

My 11-year-old daughter made more than 300 in-app purchases over five days on Roblox, the online games platform, resulting in a £2,400 bill on my wife’s PayPal account.

At the time, my wife was in ICU recovering from a 15-hour operation to remove a brain tumour. Incapacitated, and without access to her phone, she was unable to authorise or monitor this spending.

The first I knew about it was when our bank informed us that we had exceeded our overdraft limit.

Source: The Guardian

In a bizarre incident, a teenage boy from Punjab spent a whopping Rs 16 lakh on popular battle royale game PUBG making in-app purchases. The 17-year-old spent money from his parents’ account to buy in-game cosmetic items, artillery, passes for tournaments, and virtual ammunition. According to the parents, the money was set aside as savings for the Kharar-based boy’s father’s medical expenses.

Source: The Indian Express

I think the parents are idiots to give their kids access to accounts with that kind of money but that is beside the point. Gaming companies are some of the worst offenders when it comes to exploiting children for money. They are known to even have "account managers" assigned to specific users when they find them to be high spenders.

In the case of gaming companies, 90% of their income comes from less than 1% of their users.

Imagine having given your card to one of these companies for a subscription. Best of luck getting it cancelled. I had written more about the kind of techniques they use in the edition Dark Patterns.

This would ultimately result in a lack of consumer confidence and therefore a reduction in spending on these apps. In the meantime, get ready to see a lot of steering within apps, offering a 10% discount if you click on a link and visit an outside page to make a payment.

Content companies are the real winners here. Spotify does not allow you to buy its subscription on the app because it would be forced to part with 30% to Apple, it gives away close to 70% to the music rights holders; what is Spotify to do then? Similarly for Netflix and Kindle and Audible and many others.

Gaming companies will try their best to steer customers, but how many will jump off the platform?

Ultimately, I think this lays the groundwork for many content companies to thrive in the app ecosystem while at the same time sowing the seeds for the demise of a lot of gaming businesses.