The IAP Mystery 📏

With all this hullabaloo about Apple’s 30% IAP (In-App Purchase) fee (read this or this if you’re not up to date), there’s something I just don’t get: Why has Apple not instituted a scaling fee structure that makes everyone happy(ish), while making them more money?

That is, what if fees went down with volume? Something like:

• $0–50M: 30%
• $50–150M: 25%
• $150–300M: 22%
• …
• $5B+: 5%

There are a million businesses that have this sort of pricing, and there are many reasons it makes sense. One of them is that the transaction cost per revenue dollar goes down. This would apply here because the costs for the approval process and other measures that Apple takes to make the AppStore safe (part of their justification for taking 30%) are at least partially linked to the number of apps, not revenue. That is, it takes the same amount of work to review and approve an update for a $1,000 app as a $1B app.

Another reason this type of pricing is common in other scenarios is, of course, that bigger customers are in the best position to negotiate. You could say that doesn’t apply here, because Apple has all the leverage. But instead, their biggest customers—Epic, Spotify, Netflix, etc. — opt out (and sue them). Instead of taking a few percentage points of all these multi-billion-dollar businesses—which the companies would likely gladly pay because it would increase their sales—they get nothing.

One concession Apple has made is lowering the fee to 15% for developers who make $1m or less per year—which is backward. For their purposes, they have to review and approve those apps, so it reduces their margins. More importantly, small developers don’t care about margins. Sure, some do, but not those hoping to get big. If, instead, Apple gave a reason to believe you could make a business work with scale, even if it didn’t work in the beginning, you’d have more attempts. To know your margins are going to go down with scale does not exactly encourage investment. There are many digital goods businesses that just can’t work with a 30% fee off the top. So guess what? People don’t build them for the app store.

Now that there’s a plausible path around the fee (by linking to the web, which was previously disallowed), developers will try to optimize for that outcome, in a zero-sum game with Apple that makes things more confusing for users (and likely increases Apple’s cost of enforcement).

I am not presuming I have figured out something the smart folks at Apple (or Google, which, amazingly, has the same anti-developer stance) haven’t figured out. So I can only presume I’m missing something. (If you know that that is, please leave a comment.)

My best guess is that it's all about games. Ben Thompson writes, “games are by far the biggest revenue drivers in the App Store (around 75% of revenue, and 98% of in-app purchases).” Perhaps the calculation is that Epic/Fortnite is an outlier, and the vast majority of games that rake in the dough simply could not survive without IAP—so they’ll never opt out of it. And so, if you’re Apple, perhaps it’s better to get 30% from them, even if the casualty is losing out on fees from Spotify, Netflix, and numerous others. That math may certainly add up.

On the other hand, how much upside and increased investment from the ecosystem might Apple see with a developer-friendly scaling fee structure? That’s hard to calculate, but I think it would be big (and maybe even stop these pesky lawsuits).