Apple yesterday published its long-awaited guidance around its compliance with the Digital Markets Act (DMA) in the European Union. I have written extensively about the DMA and its sister legislation, the Digital Services Act (DSA) since they were both passed in 2022: see this podcast episode for a deep-dive on both. The DMA was designed to stimulate market competition across the digital landscape by imposing restrictions on so-called “gatekeeper” companies that operate at a certain scale. The restrictions of the DMA go into effect in March 2024, six months after the so-called gatekeeper companies were designated as such.
Concerning app store usage specifically, the DMA dictates two important stipulations for gatekeepers:
- On the provision for alternative in-app and out-of-app payments: “The gatekeeper shall not require end users to use, or business users to use, to offer, or to interoperate with, an identification service, a web browser engine or a payment service, or technical services that support the provision of payment services, such as payment systems for in-app purchases, of that gatekeeper in the context of services provided by the business users using that gatekeeper’s core platform services.”
- On the provision for alternative methods of installing apps: “The gatekeeper shall allow and technically enable the installation and effective use of third-party software applications or software application stores using, or interoperating with, its operating system and allow those software applications or software application stores to be accessed by means other than the relevant core platform services of that gatekeeper.”
Android is an open platform and supports sideloading and alternative app stores. As a result, Google’s compliance with the DMA centers around alternative payments. Google introduced a program called user choice billing in March 2022 that allows for alternative in-app payment methods in jurisdictions that mandate them by law, such as India, South Korea, and in the EEA when the DMA goes into effect. User choice billing allows developers to offer alternative payment methods for in-app purchases but still extracts a platform fee on those transactions, reduced by 4%.
Similarly, Apple allows payment alternatives in South Korea, the United States (which is recent — see my commentary here), and for dating apps in the Netherlands. Apple applies a platform fee to transactions facilitated by alternative payment methods in each of these countries, reduced by 4% in South Korea and 3% in the United States and the Netherlands.
I make the point in Epic v. Google and the future of alternative app payments that the imposition of such high fees on alternative payments mostly negates their utility, rendering them merely cosmetic. Alternative payment options generally incur more conversion friction, and the overhead (and expense) sustained in implementing and using them may undermine the platform fee reduction.
Apple’s compliance with the DMA necessitates a more complex approach than Google’s given that it must introduce support not just for alternative payment methods but also for alternative app stores. And indeed Apple’s new policies in the EU, which it published yesterday, are somewhat dizzying: Apple introduced broad changes across the entirety of its ecosystem. For app distribution and monetization, the changes are implemented in what Apple describes as a “new set of business terms.” These new terms unlock new functionality for app developers and are presented as a choice: developers can either abide by existing App Store policy, in which case, nothing changes for them. Or they can opt into the new terms, in which case they’ll be able to utilize alternative app stores and alternative billing methods under a new set of commercial conditions.
The chart above compares the two sets of business terms in the EU. Note again that developers can choose the terms under which they operate — and in fact, a developer must affirmatively opt into the new terms. These terms apply to installs and transactions made of apps distributed on the App Store.
If a user opts into the new business terms, they are free to distribute their apps through alternative app marketplaces, which can be installed directly from a website, and to utilize alternative payment processing systems inside their App Store-distributed apps and via “link-out” (linking to an external website). The new business terms are comprised of three components:
Commission (platform fee). Developers that adopt the new terms will pay a reduced commission from the legacy terms for payments made on their apps distributed from the App Store. Note that the legacy terms are already tiered:
- Participants in Apple’s Small Business Program pay a 15% platform fee on all IAPs and subscriptions. To be eligible for the Small Business Program, a developer must earn less than $1MM on the App Store (across all of their apps) within a calendar year;
- Subscriptions renewing past one year are charged a 15% platform fee;
- One-off IAPs and initial subscriptions pay a 30% platform fee.
Under the new terms, these fees are reduced:
- Participants in the Small Business Program pay a 10% platform fee on all IAPs and subscriptions;
- Subscriptions renewing past one year are charged a 10% platform fee;
- One-off IAPs and initial subscriptions pay a 17% platform fee.
These fees apply to both alternative in-app purchases as well as purchases made on an external website through a link provided within the app. For purchases made in apps distributed outside of the App Store, Apple will take no commission. The chart below distinguishes between the different options. Apple has also published a helpful fee calculator that clarifies the fees owed under different circumstances.
Payment Processing Fee. Developers that distribute their apps through the App Store and use Apple’s native in-app payments process will pay a 3% payment processing fee. Apple doesn’t charge a fee on payments processed in-app by alternative providers or on payments made on the developer’s website via an in-app link (“link-out”). This stands in contrast to the rules imposed in the United States recently.
Core Technology Fee (CTF). To my mind, this is the most controversial aspect of the new terms. All developers that opt into the new framework will be obligated to pay a “core technology fee” of €0.50 for every “first annual install” of their app above 1MM generated from either the App Store or an alternative app marketplace. Apple defines a first annual install as (emphasis mine):
The first time an app is installed by an account in the EU in a 12-month period…[resulting] from an app’s first-time install, a reinstall, or an update from any iOS app distribution option.
Critically, re-installs and app updates are considered to be first annual installs and presumably count against the 1MM free threshold. Notably, apps that serve as alternative app marketplaces aren’t granted the 1MM free first annual threshold exemptions: per Apple’s documentation, “developers of alternative app marketplaces will pay the CTF for every first annual install of the app, including installs that occur before the 1 million threshold is met.”
The Core Technology Fee effectively undermines the viability of the new business terms. First, the applicability on re-installs removes control from the developer over when the 1MM free install threshold is exhausted. Second, applying the CTF to app updates incentivizes the developer to not publish updates and penalizes them for a large existing user base. And third, the fact that the fee is paid on annual installs imposes an ongoing fine on user LTV: a highly-retained, habitual user of an app will trigger a €0.50 fee for the developer at the time of installation and then every year hence as they update the app.
Fundamentally, the CTF compromises the freemium business model, which dominates the mobile economy and is predicated on zero marginal distribution costs. As I write in Freemium Economics:
Low marginal distribution and production costs create the opportunity for a product to be adopted by a large number of people, quickly, at little to no expense on the developer’s part. This is a prerequisite condition for the freemium model; because its revenue stream is not necessarily contributed to by the entirety of the user base— that is, product use and payment for the product are not mutually inclusive—the product must have the potential to reach and be adopted by a larger number of people than if each user contributed revenue
Additionally, the fact that alternative app marketplaces don’t receive the 1MM annual install exemption means that the fixed costs of building initial awareness of alternative app stores will disqualify all but the largest possible participants: it would cost an alternative app store operator €1MM to generate 2MM first-time installs of an alternative app store, not accounting for marketing costs.
The drag on the app economy of the CTF is compounded by this fact: the app stores themselves need to pay for every install they achieve, and the apps that are distributed on those app stores must also pay for the installs they achieve above 1MM (including app updates and re-installs). Every time the CTF is applied, it reduces the LTV of that install by €0.50, meaning the developer of the app has €0.50 less to spend on user acquisition for installs. This dynamic would create an enormous hurdle to efficient marketing, especially considering that alternative app marketplaces will need to charge their own app store fees.
Apple’s compliance with the DMA is, to my mind, performative: I view these alternative business terms as another instance of Apple offering developers a “heads I win, tails you lose” proposition. Very specific categories of apps could theoretically benefit from the new business terms: high LTV, low install volume apps, especially those that monetize with subscriptions, would likely be able to absorb the CTF, even as a recurring annual cost given the applicability of app updates and re-installs, assuming alternative app marketplaces charge lower platform fees than does Apple.
But even when developers pay no Apple commission through distribution on alternative app marketplaces, they are obligated to issue reporting to Apple on their transactions, which increases their operational overhead. And the lack of an install threshold on the CTF for alternative app marketplaces burdens them with significant frictions in reaching scale, for the reasons I detail above. Finally, the fees extracted from alternative in-app payments for apps distributed through the App Store render the new business terms challenging from a commercial perspective. I view these new EU App Store guidelines as a Hobson’s choice that will perpetuate the status quo.
