I think the problem is in how the question is framed. The App Store has always been revenue neutral [1]. It's not a profit center for Apple. It's not about "getting their cut". It's about having one billing statement to look at. It's about eliminating shady billing tactics a la gym memberships. It's about keeping your address out of some developer's mailing list.
You'd be surprised about the extent of this problem. I get e-mails all the time from people who are worried that they have a monthly payment for my app, for example. There are just an awful lot of people who don't "get" software at all and derive real value from simplified one-party billing.
So if you start from the premise that billing for iOS apps has to be brain-dead simple, we arrive at the present rule: any payment that looks like it happens on an iPhone must [2] run through IAP at whatever rate Apple can break even. If your payment collection process consists of people using their fingers on the screen of an iPhone, then it is potentially confusable with IAP by Grandpa and he might get mad at Apple; this is unacceptable. But monetizing your pizza ordering app by handing money to a pizza delivery guy who shows up at your house is not confusable, so it's A-OK.
Now, it's perfectly debatable whether or not consumer confusion is really that big of a problem, or a problem big enough to justify the negative externalities of solving it. But if it is, then the result follows: the solution is to run all the billing through a break-even single party. If you accept the premise, then the rule that is fairest and best and also solves the problem is the rule that we already have.
It's unfortunate that we live in a world where the economics of Dropbox, Skydrive, Amazon et al seemingly don't allow enough profit margin to pay Apple's overhead to process payments. But I'm not really sure who is to blame for that: the consumers, for being confused about billing; Apple, for trying to fix it for them; Skydrive etc. for not creating a two-tiered pricing structure to charge IAP customers at 30% more; or consumers again for being unwilling to pay an extra 30% for single-party billing.
Potential consumer confusion has nothing to do with the size of Apple's cut or how it is structured.
Clearly, a 30% cut is fair for the average $1.5 purchase because it includes fees for payment processing and fixed cost per app.
But Apple will have to decide whether or not they want people to sell more expensive stuff on their platform. Taking a 30% cut on a $100 purchase is not economically viable and it is unnecessary if the goal is to avoid consumer confusion.
> Taking a 30% cut on a $100 purchase is not economically viable
The market for a $100 app isn't very large, and that price point is also a target for fraud / scams / accidental purchase complaints. This risk is offset by additional review scrutiny, but the cost for that additional scrutiny is amortized over a small number of potential customers.
The result of all this is that $100 purchases are expensive for Apple to run, and Apple as a rational actor should discourage them. I wouldn't be surprised to learn that the whole $50+ market runs at a loss that is covered by the cheaper apps.
Even for a $20 item 30% cut is not acceptable either, considering what Apple actually did is simply app hosting + payment processing. App Store did a really bad job on app discovery and promotion, so I don't think they deserve anything on marketing. However, they can charge developers for being featured on the front page.
> App Store did a really bad job on app discovery and promotion
You think most app buyers found their apps outside the app store? Unlike folks reading HN or tech sites and trying new apps thanks to app launch news, the normals I know find their apps only within the app store (other than the occasional app roundup in a mainstream printed magazine).
If you look at the CC processing industry, ranging from 5% fees for the most basic service (transaction + cc + merchant + bank) to 15% fees for an end to end service that cuts you a check, the 30% to also manage the user authentication and customer service is a reasonable deal, completely aside from marketing.
Finally, as a user, I don't want featured apps to be the ones paying to be featured. Not cool.
15% for an end to end service? Citation Please! Paypal, Stripe, Braintree and those guys don't even come close to that. If you are getting charged 5% in fees in this day and age then you are doing something wrong... at least here in the USA.
Apple has a cost of no more than 2.5% for credit card fees, and its probably even a few tenths lower than that. That I will guarantee (seeing as how I have seen companies in the $5million/year range get that percentage from an end-to-end provider, and Apple is quite a bit more than that in volume).
What I think is really ridiculous is that they want to charge 30% for subscription type services. One time app purchases... ok, maybe I can see that. But for a $5/month or more subscription being bought through there its absurd and making it more of a pain for the user because the app developer is forced to break with the single-billing system due to costs. So, simplicity actually hinders the experience here.
My company has developed a CC gateway server, and has processed as much as $80M a year in transactions for a single client. This is a business I've spent a lot of time in.
Also note that digital goods and physical goods are different categories. A full service provider of "digital goods only" processing for clients without merchant accounts charges much more than a company like Paypal, Braintree, or Stripe, which process for physical goods as well.
From my own experience and friends I know, users rarely go the app store and search for a term. What they do there is check out the high ranked apps. The most effective way of discovering an app is still recommendation by mouth or websites. There are a lot of app review blogs out there for a good reason.
We are talking about different business. apps/ebooks generally don't have a high margin.
> App Store did a really bad job on app discovery and promotion, so I don't think they deserve anything on marketing
I have never understood this argument. It's a bit like saying "WalMart does a bad job promoting milk discovery, so I think they should sell it at cost."
This post is not about the price for an app, but the price for a service (SkyDrive) provided through an app. The market for services is huge. If you deliver a service paid through an iOS device, Apple wants a 30% cut.
They are providing the service of making your money available for payment without you having to think about the logistics of moving the money (plus credit facilities, chargebacks, fraud protection (If I have a wallet full of money and someone spends it I'm down that cash. If I have a wallet full of cards and someone spends with them, I'm covered.)). It only seems fair that they get paid for their work.
Whether the amount they charge is worth the services they provide is another question entirely.
You are completely missing the point.... I at no point suggested that they shouldn't charge.
That it is a percentage of the transaction amount is what I have a problem with. If their business was truly about "credit" they shouldn't need extra charges as they claim back more value from bigger loans/transactions.
Debit cards provide the same service without a percentage charge but without the payment protection. Its a rigged game.
Remember that you can put money onto your iTunes account using gift cards bought at retailers. Those retailers will get a cut (someone here probably knows but lets guess 10-15%).
That doesn't reduce it to a zero profit operation but at least on that portion of the revenue it looks like a lot than 30%.
If it's merely a break-even proposition for Apple, then perhaps a flat fee per purchase (or at least a maximum) would make more sense and allow services like Dropbox, Skydrive, and Amazon to participate.
Okay, let's do some math. Apple has paid $6.5b to developers [1], which would make the App Store gross $9.3b. This means their operating budget is $2.8b.
About 49% of app revenue comes from IAP [3] rather than paid downloads, so let's assume that's still the case in our flat-fee world. We still need to come up with 51% ($1.4b) of our budget from paid downloads.
Users have downloaded 35 billion apps [1], but the free-paid ratio is somewhere between 11:1 to 15:1 [2]. This would put the number of paid downloads between 2.3b and 3b.
Result: Apple charges a flat fee between $.47-$.61 per paid app to maintain their current operating budget. A developer who is trying to stay below the $1 magical price point (most developers) is now making 50c or so, whereas they were making 70c before. Does this still sound like a good idea to you?
Just thinking it through logically, a flat fee is effectively a decrease on expensive purchases, and (if the books are to be balanced) must be matched by an increase on cheap purchases.
That reasoning assumes that the number of subscriptions is going to be the same regardless of the change in their policies. If including a more reasonable plan for higher priced purchases allowed a greater volume into the store, then that could help make up the difference.
I also question the assumption that they continue to need this level of revenue. If the app store was a little more than breaking even two years ago, they should be able to take advantage of growth and better efficiencies since then.
> If including a more reasonable plan for higher priced purchases allowed a greater volume into the store, then that could help make up the difference.
As the old saying goes, if you lose money on each sale, you can't make it up in volume. If it is indeed true that Apple makes no or very little money from the App Store, it would require a huge, order-of-magnitude-shift, 10x, 100x, in purchase behavior to translate into raising $2b.
> I also question the assumption that they continue to need this level of revenue.
You and I can sit in our comfy chairs and question it, but unfortunately neither of us are in a position to run app stores, and the people who do don't provide a lot of transparency about how much it really costs. I do think if it was possible to do it for less, that Amazon or Google would undercut Apple (Amazon, in particular, has an incentive to run their store below cost). Seeing as how they don't, I'm inclined to believe 30% is very close to the actual cost.
I also think that solving the multinational billing/legal problem is much more difficult than many developers realize. The iOS app store recently opened in Chad, which is consistently ranked as one of the most difficult countries to do business with according to several international organizations [1]. Forget "formalities" like it taking 63 days to start a business or an effective tax rate of 65% that takes 732 hours per year to calculate [2], and worry about "informalities" like the government officials openly soliciting bribes to get electricity turned on to your office. Or try operating in India, where it takes 1,420 days to enforce contracts [3] or in the Congo where it costs 7x what it does in a Western country to import a shipping container [4]. I have customers in all of these countries through the iOS app store.
I bring up the cost of doing business in foreign countries, not only because it's expensive, but also because it's the factor to which Apple attributes its 2011 App Store growth. In a SEC-audited filing, the line item including the app store went up "primarily [due] to increased net sales from the iTunes Store, which was largely driven by App Store expansion into new countries that contributed to strong growth in all of the Company’s geographic segments." Basically, Apple's growth in the App Store is driven mostly by selling the product of first-world payment transactions to second and third-world countries. For this reason, the legal and accounting infrastructure behind Apple's various stores are probably among the most complex business processes that exist anywhere in the world.
>Just thinking it through logically, a flat fee is effectively a decrease on expensive purchases, and (if the books are to be balanced) must be matched by an increase on cheap purchases.
I think that sounds fair in terms of where the value is coming from. For a $1 app, Apple probably did provide 50% of the value. For a $20 app/book/etc., Apple's contribution is likely minimal.
I'm pretty sure Apple's policies prevent developers from charging a different rate on iOS than they do on other platforms (specifically for subscriptions, but maybe also for one-time IAPs). This definitely protects their platform, but I'm sure there's a shady billing trick that this prevents as well.
As someone who's an Apple user and will soon be an iOS developer, I'm all for a curated App Store (I actually think Apple should reject more apps! Some apps have been rejected unfairly, and I think they should change their policies slightly to include them), and I'm 100% for this 1-party payment. My only gripe is the 30% cut. Why not make that 15%, or 10%? It would make things sooooo easier for everyone. That %20 is so negligible (for Apple) that I'm sure it falls within error margin...
30% is just too much for a lot of developers/companies.
I'm recalling this from memory, but if I remember correctly, Apple's argument for the 30% charge when they first launched the app store is that traditionally you'd have to publish through a telco, and telcos used to charge way more than 50% of the revenue in order to place your application through their portal. Not sure how true that is but now, because of Apple, 30% seems to be the new standard.
> " Apple's argument for the 30% charge when they first launched the app store is that traditionally you'd have to publish through a telco, and telcos used to charge way more than 50% of the revenue in order to place your application through their portal."
That logic doesn't work though because phone and PDA apps have been available to download from 3rd party websites since even before 3G. You could set up a download portal for Windows Mobile or whatever OS the "dumb phones" from Sony Erricson's K-series featured using free hosting if you really wanted to. Granted it wouldn't be a centralised repository like Linux distro's feature (which are also free), but it certainly wouldn't have cost you >50% of your budget.
Apple do this sort crap all the time, they deliberately merge vaguely related statistics to promote whatever prejudice they're trying to peddle at that time (eg classing their notebooks as tablets when talking about their dominance on the mobile space. Or including iPod figures when talking about the dominance of the iPhones).
Smart phones, feature phones and PDAs have been around a long time before the iPhone; central software repositories have also been around a long time before the Apple App Store; and there's never been a precedence to take >50% (nor even a 30%) cut from transactions and nor has setting up independent 3rd party portals cost that much either.
Plus lets not forget that Apple also charge developers for the privilege of developing software (even just for your own personal iOS device) via their developers subscription (note I said subscription; not a one off payment) and (if I'm not mistaken) again for just adding your application to the App Store.
> That logic doesn't work though because phone and PDA apps have been available to download from 3rd party websites since even before 3G. You could set up a download portal for Windows Mobile or whatever OS the "dumb phones" from Sony Erricson's K-series featured using free hosting if you really wanted to. Granted it wouldn't be a centralised repository like Linux distro's feature (which are also free), but it certainly wouldn't have cost you >50% of your budget.
Using a 3rd party website (or your own), you are unlikely to get the exposure of an app store or a telco portal.
"Using a 3rd party website (or your own), you are unlikely to get the exposure of an app store or a telco portal."
I don't agree with that either as most app store-published applications get next to no exposure anyway. That privilege is reserved for a very few that either pay for promotion or go viral. So you're back to the old model of users either searching for a specific application to suit their needs (search engines existed before app stores) or "word of mouth" (which these days include forums / blogs and all of those existed prior to app stores as well).
There is this misconception among some (and I'm by no means saying that you're under the same illusion) that developers only need to upload to Apples App Store or Google Play and they'll see thousands of downloads and "PROFIT" (to quote a meme). The reality is the vast majority of apps do not make any money and uploading to central repositories does not mean people will stumble across your application or game. And what's more, anything you do upload is not only subject to the same limitations of users stumbling upon your product as before, but with the influx of new developers sold on this rose-tinted vision, you're now competing with significantly more software than ever before. So just the additional signal-to-noise ratio alone makes it harder than ever to make your application visible.
So I really don't believe the notion that app stores increase exposure for the average developer.
Where app stores excel is making content easier to find and install for the average user; one search interface with inbuilt download and install functions. That's a huge step up from Googling from your PC, downloading then either manually copying the .jar to your phone or installing an EXE locally on your PC with your handset connected via activesync. However I wouldn't say that user convenience guarantees developer visibility.
If your apps are not featured on the front page, the so called exposure is close to zero. There used to be a new released category which lists new apps, and honestly that is a VERY good channel for exposure, although the window is just about 3 days. Now, even that is gone.
So what apple does is basically hosting + payment. No way that is worth a flat 30%.
Certainly there's a way. I left a comment above that a number of cc payment providers, those who cut you a check instead of making you bring your own merchant account, take 15%, without any of the other things Apple is doing. Rep'ing someone's product should naturally cost more than that.
More to the point, the general idea of retail in the United States is not "flat markup", but what the market will bear. Costco claims to have a flat markup, but go into a jewelry store and you'll find they're taking a lot more than 30% over what the wholesaler charged them.
As an app seller, you're the wholesaler and you get to set "suggested retail price". You have the bonus of knowing the spread there.
Let's look at a console game: $7 console fee (call that 10%) and 25% retail markup, so you're paying 35%, which is more than the app store.[1] Before you feel bad about that, look at what the shelf space guys (aka "retailers") get as markup on a few other items.[2]
"Certainly there's a way. I left a comment above that a number of cc payment providers, those who cut you a check instead of making you bring your own merchant account, take 15%, without any of the other things Apple is doing. Rep'ing someone's product should naturally cost more than that."
Sure there are. There are also plenty that will do exactly the same thing for 3%, give or take.
We've had low margin businesses forever, that's not going to change. I agree with what you said, single party billing is great, except Apple also sells software on their platform, and is exempt from the cut.
So that means that Apple is the only one able to sell ebooks on their platform, because who would go to Amazon if they had to pay 30% than in Apple's bookstore both on the platform and off of it (note that Apple explicitly forbids charging more on the app store than elsewhere). Do you think that this is reasonable, considering that Apple has owned a major part of mobile devices over the past 5 years?
If this was just Visa, it would be fine - the playing field would be level. But it's not, and Apple uses this to give themselves a massive competitive advantage. If Toyota bought a bunch of gas station chains and said that non-Toyota cars had to pay 30% more for gas, but made the billing system really straightforward, would you be okay with that?
Let's dispel the myth that the App Store is not a profit center, that Apple are reluctantly taking a cut from developers in order to cover costs.
If the App Store is a cost center than it should be treated like other cost centers. Would it make sense if Human Resources started charging job applicants a fee of 30% to handle resumes, interviews and contracts?
If the App Store is treated as a business unit in its own right, then the profit'n'loss should take into account hardware sales (the App Store is touted as a selling point), perhaps by internal billing of other departments.
Sure, developers benefit from the App Store, but they also benefit from other departments like Marketing and R&D, who grow the potential market for apps. Should developers help cover their costs too?
The truth is Apple are taking a cut of 30% simply because they can.
I'm not sure that the App Store is still revenue neutral, the source you cited was over a year old so things may have changed.
I agree on your point about billing having to be simple for the customer. I wonder about the reverse. If Apple were to release an iCloud app on android, would Google's Rules for Android Store mean that they have to take a cut on all iCloud purchases?
You'd be surprised about the extent of this problem. I get e-mails all the time from people who are worried that they have a monthly payment for my app, for example. There are just an awful lot of people who don't "get" software at all and derive real value from simplified one-party billing.
So if you start from the premise that billing for iOS apps has to be brain-dead simple, we arrive at the present rule: any payment that looks like it happens on an iPhone must [2] run through IAP at whatever rate Apple can break even. If your payment collection process consists of people using their fingers on the screen of an iPhone, then it is potentially confusable with IAP by Grandpa and he might get mad at Apple; this is unacceptable. But monetizing your pizza ordering app by handing money to a pizza delivery guy who shows up at your house is not confusable, so it's A-OK.
Now, it's perfectly debatable whether or not consumer confusion is really that big of a problem, or a problem big enough to justify the negative externalities of solving it. But if it is, then the result follows: the solution is to run all the billing through a break-even single party. If you accept the premise, then the rule that is fairest and best and also solves the problem is the rule that we already have.
It's unfortunate that we live in a world where the economics of Dropbox, Skydrive, Amazon et al seemingly don't allow enough profit margin to pay Apple's overhead to process payments. But I'm not really sure who is to blame for that: the consumers, for being confused about billing; Apple, for trying to fix it for them; Skydrive etc. for not creating a two-tiered pricing structure to charge IAP customers at 30% more; or consumers again for being unwilling to pay an extra 30% for single-party billing.
[1] http://www.macobserver.com/tmo/article/apple_app_store_runs_... [2] there are some exceptions, I'm speaking broadly to make a point