Brands Bypassing App Stores and the Value of a Marketplace

An important debate is brewing. Along with this debate, an interestingly strategic arc for brands may be emerging. The discussion of how much a marketplace holder should receive is not new. It has become more heated as of late as reports that Netflix is looking at ways to avoid Apple’s cut of subscriptions generated from within the Netflix App. This move is not surprising as Amazon has been doing this year with digital content (only place Apple’s cut is applicable). I’m reminded of this every time I purchase a Kindle book on Amazon, which is about twice a quarter, and I have to leave the Amazon app, go to on Safari, buy my book for Kindle, then go back to iOS app to download and start reading my book. There is much friction in this process, and it is annoying, but I do not blame Amazon one bit.

I remember having discussions with executives about this early on in Apple App Store’s life. Most remarked that they wished Amazon and Apple would work out their differences. Ideas were thrown around that if a company already had a large and functioning marketplace, they should not be subject to the same cut that a new or upstart company should about digital sales. The logic was, Amazon already had tens of millions of customers, an established marketplace, and brand, and didn’t need Apple’s help as an arbiter of connecting buyers to sellers of digital content.

I resonate with this argument because it observes that Amazon does not, and never have needed Apple’s marketplace. Because there is no other way for a consumer to download an iOS App than through Apple’s App Store and to do so requires meeting Apple’s guidelines. For this reason, Amazon created a, and while it is annoying, I seriously doubt it has impacted their sales of digital goods in any way. Amazon has that strong of a brand and marketplace and avoiding Apple’s cut on digital products has not and will not create any issues for Amazon.

With the rumors around Netflix doing the same thing, I have a strong suspicion that if they do, they similarly will not be impacted. Consumers are not going to find having to go outside the Netflix app to sign up a barrier to getting the service. Netflix has too strong a brand and product offering for this to be an issue and if consumers want it, they will sign up.

In the small business services world, it is not uncommon for companies to follow a similar strategy of offering a subscription but requiring customers to purchase it online via their website and then log-in with an active account from the app. I fully expect this trend to continue for small to midsize businesses offering services to the business world. These companies often have their marketing and sales channels, and since that is the main value of Apple’s store and the reason for their fees, it is unnecessary for them.

This is where the central part of the debate lies. What is the value of a marketplace and what should be a fair cut by the marketplace provider.

Marketplace = Retail
In the case of Apple and Google’s App stores, their marketplaces are a form of digital retail. For millions of developers, this is the only avenue of hope they have to get connected to potential buyers. Amazon, Netflix, even Fortnite, are the exception due to the strength of their brand and product. Companies who can successfully bypass Apple or Google’s marketplace fees will be few and far between.

Acknowledging that the type of company who can successfully avoid Apple and Google’s fees are the exception to the rule the question must then center on what is fair for a marketplace provider to charge for those businesses who depend on the marketplace to survive.

I tend to agree the 30% fee is quite steep, but both Apple and Google have made changes to these fees, with subscriptions in particular where the initial charge for the subscription is 30% but then following recurring fees bring the percentage down to 15%. Interestingly, I conducted a Twitter poll (so take it with a grain of salt), but the vast majority of respondents believed that something less than 20% was a fair cut. To be exact, 35% said 10-20% was fair, and 36% said 0-10% was reasonable. In doing some reading on different forums on Reddit, and a few others where developers spend time, it seems that 5-10% was the most common expectation that developers thought was fair.

These numbers are subjective, and no one selling something wants to share their money with someone else, but the value of a marketplace should still be established. In the case of Apple and Google, the size of their marketplace is truly unprecedented with both providing commerce opportunities to a billion plus potential customers. They also provide curation, features, and editorials, improving technology like search/recommendations, all in an attempt to connect buyers with sellers.

The fees collected by Apple and Google and the debate of what is fair will always be subjective. Someone will always be unhappy. Having a few powerful brands and services get around sharing revenue with Apple makes for interesting proof cases, but as I noted, these examples are few and far between. That being said, in many cases I do believe 30% is steep and would like to see some further alterations made to how developers share revenue with Apple, and both have a win-win situation.

Potential Paths Forward
A few things may end up happening if this continues to be an issue. The first is more developers, once they reach size and scale can follow Netflix and Amazon’s lead and look for workarounds to avoid sharing revenue with Apple.

The other, and one I think more companies may try is to pass those fees onto consumers. Not too long ago, when a music streaming service called Rdio existed, they had two pricing options. One was $10 if you signed up directly from their website and if you decided to sign up through the app, it was $13. They essentially passed Apple’s 30% fee onto customers. This is an interesting tactic and one that I think strikes a decent compromise if Apple’s charges remain the same. For the consumer for who price is an issue, they will be more willing to jump through the hoops to save money even if they are a bit inconvenient. For the customer who prefers the convenience and is willing to pay a little more for it, the seamlessness of in-app purchase could be worth the extra cost.

This debate is not ending anytime soon, but it is a worthwhile conversation since these platforms, and their economies are going to be around for a long time, and it is worth working all of this out now for the good of the industry.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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