Cracks in the App Economy Duopoly

Apple and Google’s stronghold on the app economy has finally seen its first formidable assaults. Those laying siege: Netflix and Fortnite.

Unless you’ve been living under a rock — or are still using Nokia’s Symbian — you’re either on iOS or Android. Both the App Store and Google Play slap a hefty tax on developers: 30% on every transaction, reduced to 15% for subscription renewals.

In a world where most payments are processed by Visa, Mastercard, and Stripe for around 3%, that’s a heck of a lot.

Apple and Google will tell you they have plenty of good reasons for taking such a big chunk of the pie. They developed the operating systems, they vet apps to ensure quality control and keep out malware, facilitate easy access, ensure apps work seamlessly on your phone, etc.

But whether that justifies such a high toll is a different question.

Developers, who face some of the highest costs in the industry to acquire users, are feeling the squeeze. The overwhelming majority must either operate with debilitatingly low-profit margins or pass costs on to their users, lowering purchase volume.

A lose-lose situation.

And speaking of which, it takes nearly a 50% net return on ad spend to generate a positive profit margin on user acquisition, post-platform fee.

To put this in context, if you spent $1 on Facebook for an app install, and that user spent $1.50 in purchases, you’d receive a meager $1.05 when funds hit your bank account more than a month later.

What initially appears as an excellent return on investment is promptly transformed into barely breaking even. A phantom return, one might say.

But let’s get back to the battle.

Ready, Fight!

Netflix, no longer wanting to give up so much of its profits, has been directing users straight to its website to make payments there, audaciously bypassing Apple’s payments flow, and with it, the 30% transaction fee.

Fortnite has also opened fire directly on Google Play by guiding users to its own website for direct downloads of the Android version, along with internal payment processing.

If Apple allowed developers to distribute apps outside of its closed and heavily regulated marketplace, they would have done the same there.

Epic Games’ (maker of Fortnite) CEO, Don Sweeney, didn’t mince words when expressing his thoughts about the matter:

“30 percent is disproportionate to the cost of the services these stores perform, such as payment processing, download bandwidth, and customer service.”

Are these fallow words from a feisty founder, or the seeds of a revolutionary fervor aimed at upending the era of app monarchies?

And while I credit both Apple and Google for creating excellent operating systems, I’m all for these recent challenges.

Monopoly = Not Good

You don’t have to be an economist to know that this market structure, a two-company monopoly, squelches competition and innovation. In the case of the app stores, the toll forces inflationary pressure on in-app-purchase pricing (if a dev wants to maintain some semblance of profit margins).

When the price of an in-app purchase increases, there will be a disproportionate drop in purchase volume, especially when the app is considered a novelty, as opposed to an essential service.

The cornucopia of app alternatives (think puzzle/match-3 games, meditation apps, photo/video editing apps) reduces demand further. In other words, with seemingly endless options in each app category, why would I as the somewhat sensible consumer pay for a higher priced subscription when there’s a doppelganger option that’s 25% cheaper a month?

While in the past developers had the luxury of dictating prices, now they’re forced into a price war with one another. And while you may think that the winners are the consumers, that’s not the case.

App pricing is not a zero-sum game between developers and consumers.

Although the app economy continues to show robust year-over-year revenue growth, a developer is still forced to hand out 30% to the platform, whether that’s on a $500 annual subscription or 500 $1 dollar coin packs.

So while the consumer might occasionally win on cheaper pricing, and the developer might occasionally win on increased purchase volume, the platform ends up coming out on top. Making concessions is anathema to for-profit corporations, let alone illogical.

Imagine if the CEO of Cesear’s Entertainment made the following announcement on a quarterly earnings call — “We’re very pleased with our 3rd quarter results. The economy is booming, consumers have an unprecedented level of expendable income to spend at our casinos, and we’re making money hand over first. That’s why we’ve decided to adjust the house odds of all table games from 52–55% down to a flat 40% so our loyal players can join in on the fun!”

Inconceivable.

Because remember — the house always wins.

Consumers Joining the Melee

And it’s not just developers heeding the call to arms. Consumers are also rallying. Apple Inc. v. Pepper, a pending class-action lawsuit in the Supreme Court, will decide whether Apple is guilty of monopolism and inflating app prices for its users by charging such a high payment processing fee and thus forcing developers to pass costs on.

So far, Justices seem skeptical with respect to Apple’s argument.

Judgment on this case will have far-reaching implications. Since Apple created its own ecosystem, doesn’t it get to call the terms of using it? Depends who you ask, of course.

But while Netflix and Fortnite — both hauling in millions in revenue on a daily basis — are large enough to mount a direct attack, the vast majority of developers are not. Nor do they operate the same subscription-based model.

What now, then?

Cracks are forming in the stronghold that Apple and Google have built. And as the light shines through, we all get to make our own decisions as to whether what’s underneath is rotten or not.

But as to the two behemoths cheerfully relinquishing a multi-billion-dollar revenue stream, they won’t go down without a fight, that’s for sure.