How the App Store Money Flows

on July 25, 2011
Reading Time: 3 minutes

Rosen Sharma is a guest contributor to Tech.pinions and the President and CEO of BlueStacks.

A good friend of mine recently remarked, “Apple App Store and Android App Store are completely different business models”. I casually asked, “Really? How come?”

The answer was rather interesting. When you buy something from the Apple Store the bill comes from Apple. If you order something from Android App Store the line item in the bill is from the App Developer and not from Google.

I didn’t catch the significance of that instantly, but eventually realized that it is a big and fundamental difference. This is because of the transaction fees charged by credit card companies. For example, if an App is 99c and you pay by credit card, Visa or Mastercard would charge 20-30c fees. That means that the fee Google is charging from App developers would be just covering the cost to pay the transaction fee. They are not making money from the app store. And this clearly won’t increase with volume, as the transactions are from app developer to an individual.

Apple on the other hand has the same problem but can do some optimizations, like wait a couple of days to lump transactions together so the finance charge per transaction is larger. Also as you link your TV, iPhone, Mac App Store to the same account, chances over time of you consuming more than 99c every few days would increase. It may even be useful for Apple to offer a free $3/mo service just to get on a monthly billing cycle. Better to give money to the user than as finance charges!

There is another big implication of the above: taxation. Originally some folks at SlideMe had mentioned that one of the big benefits of SlideMe for developers was that they took care of taxation. I didn’t really connect the dots, till my friend’s comment about the App Store. In the Apple model, Apple is responsible for taxation. So if a user buys an app in Switzerland or Norway or China, the app developer is not responsible for the taking care of transaction charges in that country. In the Google model it is not clear who is responsible for the taxation. If you have a popular app, are you liable for taxes in the buyer’s country. Of course this would matter only if you have a successful app!

I am not an expert on this, so if someone out there knows more, would love to learn more.

Last month I was in APAC (Asia Pacific Region) talking to a company which is big for Windows games downloads. They launched an App Store for Android about a year back, and ended up giving up on it. It took a while getting through the language barrier to ask why. The goal for their app store was slightly different as they were not trying to build a generic app store. They have 40,000+ developers who have uploaded their games (and some other applications) and it was primarily targeted to these developers. They guy patiently explained that the first generation of games for Android (or iOS) they are seeing are the popular PC games being re-written for the mobile. They may not be identical but reuse the concepts, images, assets, gaming engine etc. They are just beginning to see the first wave of games to be written for Android, for which they are no PC equivalents.

That is also interesting, but why did they drop the idea of an app store? Insight emerged almost an hour later: PC games are downloaded from Web Sites. Mobile games or apps almost never come from a website. They are from the App Store on your device. That is how the consumer is conditioned to behave and it’s very hard to change it. This has two very interesting implications. First it’s hard to leverage a web property into the mobile space, especially for download or for App distribution. Does not bode well for companies such as Yahoo, Amazon? Second, pre-bundling of App Stores on the consumer devices is critical. That’s the only way you the average user is going to use it. AT&T bundling the Amazon app store may turn out to be more significant than we think.