Profit-Sharing dynamics: What Apple’s App Store fee battle is really about

The impediment, said Botte, co-founder of the marketing agency Digital Natives Group, was Apple’s 30 per cent commission in its App Store. He said the commission would be the largest contributor to taking in barely $1 in revenue from a planned $10 monthly subscription fee. “I couldn’t see how we’d make any money,” Botte said.

Those fees, which affect the minority of apps that charge for subscriptions or virtual goods, are at the centre of a federal court hearing on Monday that could set the stage for a protracted fight over how app stores run by both Apple and Google operate. Botte’s experience mirrors that of a number of developers I’ve spoken with over the years. Smaller developers who cannot absorb losses during their first year or two on the market often shy away from Apple’s digital store-front, dissuaded by its shifting rules, fixed fees and capricious approval processes. (Many refused to identify themselves publicly for fear of reprisal by Apple for any future apps or business.) I believe Apple when it says it wants to allow more apps in its store. But if developers aren’t even applying because of the lousy economics, then the company is doing a disservice to both developers and customers.

The question of whether Apple wields too much power over its digital bazaar has come to a head in recent weeks after Epic Games, maker of the enormously popular role play fighting game Fortnite, sued Apple and Google over their fees. Epic took up the battle after Apple and Google removed Fortnite from their stores when the company encouraged users to pay for the game directly rather than through app stores where they would be subject to the levies. At the hearing, a judge will consider whether to compel Apple to allow Fortnite back into the App Store.

The Supreme Court last year allowed to proceed a consumer-driven class-action lawsuit charging that Apple violates antitrust laws with its App Store commissions, thus inflating app prices. European officials have opened an antitrust investigation into Apple over its App Store operations. Apple’s chief executive, Tim Cook, along with other tech titans, was hauled before Congress over the summer to talk primarily about the App Store as part of a panel on antitrust.

Apple says the fees and use of its proprietary payments system are necessary, not just to make a profit but also to pay for safeguards in the App Store that prevent bad actors from entering and compromising user security. The company has also noted that its 30 per cent fee is equal to Google’s and less than the fees companies were compelled to pay when software was sold in physical stores. (It said those fees were at least 50 per cent.)

And the company notes that the commission gets developers access to Apple’s customers. Though, of course, if no developers offered apps in the store, customers would likely eschew Apple’s iPhones. Apple has shown a willingness to adapt its fees, dropping the commission to 15 per cent after a full year of subscriptions. But that raises the question of how Apple can justify the higher fee if 15 percent is enough to pay for all the things Apple says it supplies app developers.

Apple does not disclose how much it collects annually in fees from the App Store, but estimates range from $15 billion to $19 billion — it is clearly huge and hugely profitable. A former App Store executive told The Times last month that, “we’re realising that 30 per cent is way too much,” and that the commission should be closer to 3 percent. By comparison, Tim Sweeney, Epic’s chief executive, told Times Opinion that it costs the company between 5 per cent and 7 per cent of sales to operate its games stores, and they collect 12 per cent from developers.