Digital storefronts and digital cuts

The outcome of the Epic v. Apple lawsuit will set precedent for years to come around digital storefronts (primarily Apple’s and Google’s) and the fees they collect from developers. Unrest has been brewing for years around the fees charged by digital storefronts that allow users to buy or rent digital goods like apps, games, books, music, and video.

Let’s look at digital storefronts that are more comprehensive in their offerings. The two big ones are the Apple App Store and the Google Play Store. Both these stores take a 30% cut of all app purchases and also in-app purchases if they’re exclusively digital like subscribing to Netflix or Spotify or removing ads.

Of course, nobody knew how gargantuan these kinds of stores would become when Apple first introduced the App Store way back in 2008. I don’t think even Apple expected the scale that it would operate at more than a decade later. Google launched the Android Market soon after and the stage was set. Initially, nobody thought much about these 30% cuts, but as the stores grew and more and more people bought iPhones and Android devices, this duopoly soon became the de facto online storefront for mobile devices depending on your platform and every digital good you bought on them funneled a 30% cut right back for the purpose of operating and maintaining these said stores.

The question in our current landscape therefore is, “Is this fair?” Critics claim it stifles innovation and that it is like the cartel or the mafia where you must give them their cut or face consequences. And proponents rightly affirm that the app store model has supercharged innovation and has opened the floodgates in terms of both users and revenues for developers big and small alike.

Well then, which is it?

I think that it is a bit of both. This is a blog of reasonable discussions and not hot takes so let's take a balanced look.

In part, the biggest problem is the lack of precedent in this sector. Apple and Google are some of the first purely digital storefronts with a broad market. The closest I could think of are online marketplaces like eBay and Amazon. Their fees are lesser for a storefront that deals in physical goods! Yes, Apple and the like also manage infrastructure for app downloads and distribution but Amazon, for instance ships goods. And charges less than 30%.

So, should Apple, Google, and the rest of the storefronts take a cut? Yes. Should the cut be as all encompassing as it is today? Probably not. It should target app sales and a few categories of in-app purchases but not be too greedy. A line should be drawn somewhere. Consider the new family of apps supporting the creator economy. Let's take a look at Fanhouse which was recently in the news. Fanhouse lets creators share exclusive content with their fans for a fee. Fanhouse splits the revenue 90:10 - they keep 10%. Apple wants 30% of the pie - hurting both the startup and the creators in the process. It is not hard to spot the mafia parallels here.

Oh, and fun fact. A similar app, Patreon, pays no cut to Apple. Why? Even Patreon doesn't know. ¯\_(ツ)_/¯. Not only are they draconian but also inconsistent. These inconsistencies don't end here. Subscribe to Netflix on the iOS app and Apple gets 30%. Rent a movie on Amazon Prime Video's iOS app however, and Amazon gets 100%. Why this backroom deal with Amazon? ¯\_(ツ)_/¯. The differences don't end there. While subscribing to Netflix requires you to use iTunes for payment, renting a movie on Prime Video allows you to use your stored payment on Amazon. For both Patreon and Prime Video, you are not just bypassing the cut, but Apple's entire payment infrastructure. Apple's argument of protecting its customers from fraud by forcing payments through Apple for everything falls apart right here. Stop babying your customers.

Apple even prevents apps from mentioning that purchases can be made directly from the website to get around. Spotify cannot say on its app that you can subscribe on their website for a lower rate to avoid the Apple tax being passed on to you. And no, the argument that Nike shoes in a Target can't advertise lower prices from Nike.com is ridiculous. Because once you buy the shoes, the box inside can tell you whatever Nike wants but Spotify can't even after you download the app.

Most of these points apply to Google as well, especially after they said that they will start enforcing their policies.

Both companies started to offer some concessions of late. Google had the more sensible approach of giving an extra 15% of the developer's cut on the first million every year. It works like a progressive tax system and is simple to understand. Apple of course had to complicate it. If your annual revenue is less than $1 million, you can apply to the program to take advantage of the lower 15% cut. Make even a dollar more and you get kicked out of the program and pay 30% on the entire amount. Absolutely ridiculous. Amazon's concession took the cake in weirdness as they reduce the cut to 20% for developers making under a million bucks and offer an extra 10% in AWS credits.

The worst part is that these revenue streams are not even that important to the respective companies. It is hard to see why they are choosing to die on this hill. Apple sells a silly amount of iPhones every quarter and Google has the most expansive ad business. Both these businesses would benefit if the cut was lower as it would definitely help even more in ecosystem lock-in. Especially all those apps that charge their Apple customers higher prices.

Games are of course a whole other discussion. But I'll say this and this is for Apple. Not letting Stadia and xCloud bring their platforms to iOS because you want to protect Apple Arcade is shooting yourself in the foot. There's also the antitrust angle but that's a topic for another day.

In conclusion, what is it then? Should Apple and Google take a cut? Yes. There is significant benefit provided by the centralized nature of app stores in a capitalistic economy and they deserve a cut of the proceeds. However, 30% is too high a cut and digital storefronts should start passing on the benefits of scale economics to the developers who make the store possible. Thought must also be given to what activities warrant taking a cut and whether allowing developers to use their own payment systems is a benefit to the ecosystem.

If you truly want to democratize software development and distribution and empower the developers, don't let it be mere lip service.

Hope you found my thoughts on this topic worthy of your time and let me know what you feel below. If you would like to read more such posts in the future, subscribe! It is free!