Price-Value Equation with App Store & Google Play

Price is what you pay, value is what you get!

– Warren Buffett

With over 3.5 billion smartphone users and 1.26 billion tablet users worldwide, in Q3-2020, consumers spent $29.3 billion in mobile apps across Apple’s App Store ($19 billion) and Google Play ($10.3 billion). Apple and Google take their fees before disbursing the rest to App Developers. Both Apple and Google have the exact same fee structure – 30% for one time purchases. For subscriptions, the fee is 30% for the first year and 15% for subsequent years.

This fee structure has become a bone of contention in the recent months as Epic Games dukes it out with both Apple and Google. Are these fees outrageous and unfair? Are Apple and Google monopolies that bully App Developers to extract their pound of flesh? Should their fees be lower, should it be zero?

Business arrangements are simply a matter of “price and value” (i.e. the gives and gets) – you give a price and get value in return. The price App Developers give to Apple & Google in the form of fees is quite clear. What value do they get in return for that fee? Let’s look at that:

1. Developer Platform: Both Apple & Google have hundreds of people on their payroll (engineers, QA, product managers, designers, program managers, developer support, evangelists, etc.) building world-class iOS & Android developer platforms (XCode/AndroidStudio, APIs, SDKs, Play/AppStore, infrastructure for app beta testing, submission, management, distribution, monetization, etc.). These development platforms make it easy for App Developers to build, market and monetize their products.
2. App Discovery, Visibility and Customer Acquisition Cost: In a centralized App Store & Google Play, consumers often organically find and discover apps. If an app is in the Top 50-100 of any category, the visibility and the organic downloads that the app gains from hundreds of millions of eyeballs is priceless – App Developers cannot buy that sort of a visibility. For App Developers, to the extent they get organic downloads for zero acquisition cost, that’s a huge value – it lowers the overall cost of customer acquisition.
3. Payment Processing: Building products is actually fun. Processing payments, refunds, risk management, fraud handling, compliance, regulations, etc. – not much fun. For most businesses, payment processing is a necessary pain-in-the-butt. To start with, businesses pay 2.5% – 3.5% transaction fees to process credit cards. In addition, businesses incur substantial development and ongoing maintenance costs associated with payment processing, refunds, risk management, fraud handling, compliance, regulations, etc. In the apps business, App Store & Google Play take care of those nasty issues and App Developers get one direct deposit into their bank account at the end of every month – simple. This allows App Developers stay focused on their core job – building and marketing products.
4. Piracy Protection: Revenue losses due to software piracy is real ($46.3 billion in 2018). For every dollar a Software ISV rakes in, they lose cents/dimes to piracy. With App Store & Google Play, there are mechanisms in place to prevent piracy. As a result, consumers get vetted malware-free apps while App Developers don’t lose money to piracy.
5. Enabling Free/Freemium: App Developers launch free/freemium apps (e.g. Facebook, Tiktok, OpenTable) that either don’t monetize or monetize via external mechanisms (e.g. advertisements). Both App Store & Google Play support this model with their distribution infrastructure and that costs real money.
6. Tax Compliance: When you sell anything (not just apps), depending on where you are and where you sell, the revenues are subject to all sorts of local/state/country taxes – a hot mess that makes the head spin (see this and this). There are companies (e.g. Avalara, Digital River) whose bread-and-butter is handling this sort of tax compliance and their fees are not cheap. When App Developers sell their apps on App Store and Google Play, Apple and Google take care of all tax collection, remittance and compliance issues. Yes, this is an arcane issue but it’s real. True story – I used to work for a large multinational company that had a billion dollar revenue base. When it came to tax compliance, we decided to sell our mobile products only in those countries where Apple and Google took care of tax compliance and turn off the other countries where the tax handling onus was on us. Despite having our own finance department, our analysis showed that it wasn’t viable for us to handle the tax compliance!

So, what’s the cumulative worth of all these values? How does value compare to the price – i.e. fees paid to Apple and Google? As they say, “beauty is in the eye of the beholder” and this is my experience…

Apple launched iPhone SDK on 6-March-2008 with a customary keynote event. After I saw the keynote that day, I was so inspired and energized with the App Store platform, I literally ran to Valley Fair Apple Store that same night and bought my first MacBook Air. That very night, as I was messing around with Xcode and iPhone SDK, I launched my app startup SpiceLoop. Between March-2008 and April-2012, I launched 4 apps across App Store & Google Play and drove a few million downloads. During those 4 years, I paid hundreds of thousands of dollars to Apple & Google – their 30% fees. Would I have been happier with a lower fee structure? Hell, yeah! Did I resent Apple & Google for the fees I paid? Hell, NO. I was convinced that the value I was getting out of the App Store ecosystem was beyond fantastic. Apple (& Google later) made it so easy for me to build, launch, market & monetize my apps, I had no hesitation in launching an app startup the night the iPhone SDK was launched and I had no qualms sharing the 30% fees. As an entrepreneur building apps for iOS & Android, I felt that my price and value equation was fair and equitable!

For 4 years I walked many a mile in App Developer shoes. Should Apple/Google drop their fees to zero – hell, NO. Both Apple and Google took huge risks and spent massive amounts of money to build and nurture their platforms over the years. What they built provides livelihood and tremendous value to App Developers and for that they deserve to be compensated. Apple and Google have every right to enforce their monetization policies and protect their revenues.

It’s important to have some historical perspective. Prior to 2008, to do anything in the mobile space, Developers had to bend over backwards and pledge their firstborn to the likes of Nokia, Blackberry and telecom carriers. In March-2008 Apple came along and opened up the playing field to all Developers. When Apple set their 30% fee structure in March-2008, it was nowhere as powerful/successful as it is today. Later Google Play followed suit with the same fee structure and App Developers happily flocked to App Store and Google Play. That 30% fee has stayed same since day one. Today when Apple & Google are accused of highway robbery, monopolistic practices and putting a stranglehold on innovation, I scratch my shiny dome in wonder (and exasperation)!

Should the fees be lower than 30%? Like I said, beauty is in the eye of the beholder! App Developers need to examine their price and value equation and make their own judgement!