Apple Cuts App Store Commission to Fifteen Percent for Small Developers

image credit: Apple

published by Chand Bellur
November 19, 2020 at 2:01 p.m.

 

  • Apple’s thirty percent App Store commission attracts scrutiny from lawmakers, third-party developers, and consumer advocacy groups.
  • Congress is currently working to reform Big Tech by reining in monopolistic abuses.
  • Apple recently announced the App Store Small Business Program, cutting its commission down to fifteen percent for developers earning less than one million dollars a year.
  • Apple determines the small business program’s eligibility based on the previous year’s revenues, ensuring that some developers won’t realize the commission savings.
  • Developers aren’t automatically enrolled in the program, further diminishing participation for those who forget to comply.

The App Store Small Business Program

Currently, Apple takes a thirty percent cut from most developers in the App Store. If this seems like a lot of money, it is. Developers have no choice, as the App Store is the sole distribution channel for iOS and iPadOS apps.

Other app markets, such as Google Play, impose similar commissions. It’s an industry-standard fee. The difference is that Android developers can (and do) distribute software over the Web. I recently installed Fortnite on my OnePlus 8 Pro directly from Epic Games’ website. Apple does not permit sideloading apps from the Web on the iPhone, iPad, and iPod touch.

The Mac allows sideloading apps, and major developers such as Ableton have skipped the App Store to sell directly to consumers. Ableton Live is one of the most popular digital audio workstations (DAW) on the planet. Ableton and other developers gladly forgo Apple’s 30% commission, handling distribution on their own. It’s irrational for a large software company to fork over almost a third of their revenues just to have a file hosted in the App Store.

In addition to third-party developers and consumer groups, U.S. and EU lawmakers mount growing opposition to Apple’s heavy-handed practices. Apple recently attempted to diffuse the situation with a mostly symbolic gesture. The company reduced its commission for developers making under $1 million a year to 15%. Dubbed the App Store Small Business Program, Apple seeks to improve optics and ease its revenue squeeze on small developers.

App Store Small Business Program Details

Going into effect on January 1, 2021, the App Store Small Business Program will reduce Apple’s commission on developers earning less than one million dollars to fifteen percent. Developers must apply for the program, with eligibility determined by the previous year’s earnings.

Developers in the program earning over one million dollars will pay thirty percent on revenues above that amount. Profitable developers experiencing a sales decline can apply for the program if earnings are below one million dollars. Reduced commissions, however, won’t go into effect until the next year.

The way the program is structured seems to indicate that it’s more about optics than helping small developers. The App Store is a closed ecosystem, and Apple is aware of developers’ revenues. The entire program could be automated; however, this would reduce both optics and profitability by streamlining and minimizing the process.

Apple’s Small Business Program Less Generous Than it Appears

Suppose a developer makes $800,000 from an app in 2020. They apply for Apple’s small business program for 2021 and earn approval. In 2021, they make $1.2 million and have to pay thirty percent on $200,000. In 2022, they will no longer be eligible for the program. If they earn below one million dollars in 2022, they must re-apply for the program but still have to pay a thirty percent commission on revenues below one million dollars.

The way Apple’s program is structured ensures that some, if not many, developers earning less than one million dollars a year will still pay a thirty percent commission. The lag between eligibility and commission reduction ensures that even developers earning less than one million dollars may still end up paying thirty percent to Apple.

Developers must also be aware of this program to reap its rewards. Apple could make the commission decrease automatic, but they don’t for good reason. Applying for the program increases awareness, boosting optics. It’s also an opportunity for some to forget about the program. In either case, Apple earns more value without harming revenues.  

Most App Store Revenues Derived From Large Developers

The conversation around Apple’s App Store Small Business Program reveals a shocking revelation — two percent of software developers account for 95% of App Store revenues. In other words, 98% of app developers don’t really generate significant revenues. Their apps, buried in the App Store, don’t attract customers.

The revelation also underscores how little value the App Store provides to third-party developers. The vast majority of developers pay exorbitant fees, only to have their apps buried among myriad offerings. Apple’s excessive commission doesn’t provide much to third-party developers, who must market their product to stand out in a crowded landscape in addition to paying a thirty percent tribute to Apple.

Forgoing the commission on the least lucrative developers has little impact on Apple’s profitability. It may help some small developers, but it may also be an attempt to appease lawmakers and third-party developers currently battling Apple over App Store shares.

Epic Games Only Charges Developers a Twelve Percent Commission

Epic Games, developer of the smash-hit game Fortnite, hosts its own market for game developers. The company only takes twelve percent from developers and still makes five to seven percent profit. Apple’s thirty percent take produces far more profitability; however, developers must often pass costs on to consumers. If they attempt to bypass the App Store, as Epic Games did, they’re banned.

Clearly, Epic Games isn’t hypocritical in this situation. They’d likely accept a 15% commission from Apple; however, it’s unlikely the company will budge. As iPhone sales decline, the App Store and other intangible services become core to Apple’s profitability.

App Store Small Business Program Unlikely to Appease Lawmakers, Developers and Consumer Advocates

Apple’s reality distortion field may deceive consumers; however, developers are more astute with business practices. The vast majority of major software developers feel that Apple’s thirty percent cut is beyond unreasonable. In fact, a whole new organization, The Coalition for App Fairness, materialized specifically to counter Apple’s massive App Store commission.

Lawmakers aren’t fooled by this deception either. Between monopolistic abuses and haphazard moderation, Congress and state legislatures have an appetite for reform. Apple seems to be one of the biggest targets for change, as their business model appears to hinge on limiting user choice by leveraging a monopoly. iPhone, iPad, and iPod touch customers can only install apps from the App Store. This is unlike any other computing platform, including Apple’s own Macintosh lineup.

If Apple succumbs to reform, lawmakers will likely end the App Store monopoly by forcing Apple to open iOS and iPadOS apps to sideloading. Apple’s new small business program seems to be an inexpensive way for the company to appease lawmakers. With declining iPhone sales, opening its most popular devices to third-party software markets could be devastating.

Being a complacent bunch, Apple users will most likely stick with the App Store’s convenience for most purchases. If the largest developers defect from the App Store, however, Apple’s users may go with them.

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