Apple Inc. Changing Fee Structure for Smaller Developers

Companies like Google, Apple, and Facebook are facing increasing scrutiny from American and European lawmakers and regulators. The Cupertino, California-headquartered Apple has announced a policy shift regarding its App Store. The rule change appears to be a direct response to a Supreme Court-approved lawsuit.

The Lawsuit

Apple has been embroiled in a major antitrust suit, Apple Inc. v. Pepper, for some time. The lawsuit centers around Apple’s massively profitable App Store, the marketplace for downloading applications for its products. The suit alleges the 30% commission—which Apple charges developers who sell apps through the store—drives up prices for iPhone users, who in turn foot the bill.

Apple has argued about being shielded from an antitrust suit by Illinois Brick Co. v. Illinois, a court case where Illinois alleged price fixing on the part of numerous brick manufacturers, who argued the state could not sue them because their direct customer was the contractors who purchased directly from them, not the state. The Supreme Court agreed, and the Illinois Brick doctrine, which prevents indirect purchasers from pursuing antitrust damages, was born.

Apple has since argued that developers, not App Store customers, were the only group with the legal right to bring an antitrust suit, but the Supreme Court disagreed, allowing the lawsuit to proceed in a mid-2019 decision.

Apple Makes Changes

Perhaps because of the looming antitrust suit, Apple decided to reduce its commission on smaller developers by 50%. The company “will collect 15% rather than 30% of App Store sales from companies that generate no more than $1 million in revenue through the software platform, including in-app purchases. The fee will remain 30% for developers whose sales through the App Store, excluding commission payments, exceed $1 million,” reports The Wall Street Journal.

According to The New York Times, app analytics firm Sensor Tower estimates “the change will affect roughly 98 percent of the companies that pay Apple a commission,” but that those “developers accounted for less than 5 percent of App Store revenues last year” – a total of “almost $54 billion… in fiscal 2020,” says Bloomberg. In a press release, Apple CEO Tim Cook framed the decision as one to aid small businesses, allowing them to “fund their [companies], take risks on new ideas, expand their teams, and continue to make apps that enrich people’s lives.”

While an olive branch (of sorts) to developers of a certain size, a significant portion to Apple’s business do not fall under the less-than-$1 million threshold. Analyst Shannon Cross of Cross Research told Bloomberg that the fee changes will “reduce Apple’s by about $600 million in 2021, or just 3% of her firm’s projection for App Store sales”; Gene Munster of Loup Ventures cited a “$1.6 billion, or 0.5% of Apple’s total annual revenue” figure in the same story.

Many of Apple’s fiercest critics fall outside the threshold for reduced fees. Basecamp’s David Heinemeier Hansson and Fortnite-developer Epic CEO Tim Sweeney were among the dissenting voices, with Hansson calling the move a “cynical, Machiavellian ploy by Apple to split developers with selective handouts…[that] shows they’re sweating [under antitrust scrutiny]”; Sweeney also accused Apple of “hoping to remove enough critics that they can get away with their blockade on competition and 30 percent tax on most in-app purchases.”

What Now?

The Wall Street Journal says Apple “will roll out comprehensive details of its [program] early [in January] and implement the changes starting Jan. 1.” New developers and companies under the $1 million threshold for 2020 will receive the reduction but will be charged the normal 30% rate “once they clear [$1 million].”

Antitrust law is notoriously slow, and its cases difficult to prove. The Supreme Court’s 2019 decision “merely found that under the law as written, App Store customers do have a direct purchasing relationship with Apple…because Apple prohibits people from buying iPhone apps anywhere other than its own App Store,” according to Valarie Williams, a partner at antitrust law specialists Alston & Bird.

But pressure is mounting, and fast. Epic has been especially outspoken in its calls for a more reasonable rate, citing “its own online marketplace for games, taking 12 percent of other companies’ sales — and turning a profit of 5 percent to 7 percent.” Apple says that its fees are in line with its competitors, but “bigger companies with services that Apple wanted on iPhones… have negotiated better rates,” including Amazon, which was “offered… a 15 percent commission to release its Amazon Prime Video app on the App Store in 2016.”

With lawmakers and regulators in Washington and the European Union increasingly putting the company in its crosshairs, Apple is being forced into action to ease scrutiny of its business model. The timing of the gesture may appear suspect to some observers – Jefferies analyst Ken Rumph told The Wall Street Journal, “to do this under duress, I think it robs it of the appearance of a supportive gesture to developers.” But it does assist app makers of a certain size all the same.

Genuine gesture of goodwill, or cynical ploy to ease regulatory scrutiny? Maybe a bit of both. Regardless of the move, Apple is not in the clear from antitrust action just yet. Rather than a definitive moment, a changing fee structure seems destined to be a minor footnote in the lengthy process of an ongoing antitrust case.

This article is authored by

Quandary Peak Research

Based in Los Angeles, Quandary Peak Research provides software litigation consulting and expert witness services. We rapidly analyze large code bases, design documents, performance and usage statistics, and other data to answer technical questions about the structure and behavior of software systems.