Written by Jonathan

The battle against the App Store and Google Play 30% fee

Since late 2018, large developers have started to take a stand against the, as they refer to it, App Store and Google Play tax. This ‘tax’ is the 30% fee that the platforms charge on most revenues that flow through their platforms.

The ethics and supposed fairness of this fee has long been debated but the first public swing against it was thrown by Epic Games. It was the middle of 2018 and Fortnite was about to launch on mobile. Due to the fact that the Android operating system allows for apps to be downloaded directly to a device without going through the Google Play store, Epic’s CEO, Tim Sweeny, decided to exploit this side-loading capability. Fornite circumvented the store and the 30% fee altogether by asking users to download the app’s file (APK) directly from Fortnite’s website instead.

In a similar move, Netflix has stopped allowing users to subscribe and pay for its service through the App Store and Google Play by sending them to their mobile website to complete the purchase.

Tinder has also gone down the same road for it’s Android app.

So what’s going on here?

These developers represent the world’s most successful and profitable app businesses and that 30% tax represents hundreds of millions of dollars a year for Apple and Google.

Small developers could justify the fee as consisting of both platform services as well as the marketing exposure that comes with it. Big well-established brands don’t have the same reliance on exposure as the smaller guys do and so the fee seems unjustly high for pure platform access (which is their only perceived need).

The Developer’s Argument: Who owns the users?

At the end of the day, developers believe that the users who download their apps through the app stores are their users, not Apple’s nor Google’s. These users already know the brands and have a very high-intent to install irrespective of internal platform promotions or featuring opportunities from top charts, categories, or search results.

If these users’ install decisions aren’t driven by the platforms, why should the developers pay the tax? They don’t need promotion or visibility. Users will go the extra mile to find these apps if necessary because they’re an integral part of their mobile device experience (music, dating, high-profile games, etc).

But it was Epic Games that took the most extreme step by only allowing side-loading. This ensured Google Play can’t get any revenues but also created significantly more friction for users to install the game.

Was it worth it?

After about a year and a half of executing the side-loading strategy, Epic Games has caved and asked Google Play to again list Fortnite on its store but with one caveat; they wanted Google to waive the 30% fee and allow them to use their own payment solution.

When Google Play refused on both counts, Sweeny turned up the heat declaring the practice illegal.

“Epic doesn’t seek a special exception for ourselves; rather we expect to see a general change to smartphone industry practices in this regard.

We have asked that Google not enforce its publicly stated expectation that products distributed through Google Play use Google’s payment service for in-app purchases. We believe this form of tying of mandatory payment service with a 30% fee is illegal in the case of a distribution platform with over 50% market share.

We note that Google Play’s Developer Distribution Agreement does not require developers to use Google payments. It merely references a number of non-contractual documents asking developers to do so.

Further, Epic operates a major PC storefront and payment service and we do not force developers using our store to use our payment ecosystem.”

Epic Games had existing users on PC and PS4 (and other platforms) and already had a significant volume of users that they considered rightfully theirs. Because of this, it’s reasonable to assume that they originally bypassed Google Play so as to not have to share the revenues generated by these users with the platforms. But once they exhausted the growth from that segment of their audience, they now wanted to target new Fortnite players where the mobile app installs acts as their entry point to the game and so arose the need to be relisted on Google Play.

That being said, if even an app the size of Fortnite needs the exposure and distribution potential of the platforms, who wouldn’t?

The Platform’s Argument:

Google and Apple claim that the app stores are developer-funded operations and the continued development thereof is dependent on developers paying their fair share. Their success was enabled through the existence and success of the platforms after all.

In truth, there is a lot of tension hidden behind this argument. Apple is clearly pursuing a services-based revenue growth strategy with the introduction of Apple News, Apple Music, Apple+, Apple Arcade, and more. Waiving the developer’s fees will directly hurt their revenues where it hurts the most.

Google is no different from Google Play, driving significant revenue growth to the company as a whole.

Their logic is simple, they view this fee as the cost of creating and maintaining a platform that allowed these developers to be successful in the first place.

Our Take

Is it an attribution debate?

Who drove the users that made the purchases, the platforms or the brands themselves?

If we employ a last-click attribution mindset, the platforms win. If we employ more complex models, brand recognition and general marketing efforts play the most significant role in what drives these users. They go to the stores simply because they have no other way to install the apps on their devices.

Is it a tax debate?

Each side of this argument has a strong case. Whether the tax is justified or not is heavily influenced by the brand in question. Even these massive brands were small once and needed a push by the platforms to get their products in front of billions of users worldwide.

It’s similar to how debates on taxes on the rich occur almost in every country around the world. Countries argue that this high-tax is owed to maintain the infrastructure (education, security, roads, etc.) that helped these people become successful and wealthy in the first place. Wealthy citizens generally claim that they are self-made and the country’s infrastructure had very little to do with it.

The sweet spot

Smaller developers are still happy to pay the 30% fee in exchange for the exposure they receive. For them, directly distributing their apps is a death-wish. They need the app stores.
It’s only when a brand crosses a certain threshold in terms of revenue and size that the tax seems unjustified because the sheer scale (reaching in the hundreds of millions of dollars) of revenues are hard to justify with the marketing argument above.

Could a potential solution include capping the dollar amount one single publisher/app can pay the platforms? Is there a certain figure that’s simply too high? Would $200M be too high? $300M?

The 30% fee debate is a dead-end one

At the end of the day, both sides have a valid argument. By becoming such an important part of a mobile device experience, these large brands can claim they are one of the factors getting users to purchase these devices. What would an iPhone be without Spotify, Tinder, or even Netflix?

It’s Game Theory 101. A bunch of large brands can organize and come to Apple and Google and demand: “Either drop the fee, or we’re taking down our apps”.

Apple and Google, in turn, can say: “Go ahead, we’re driving most if not all of your revenues so you’ll lose everything”.

It’s an app store story of mutually assured destruction. Either the brands make the devices much less appealing or the platforms kill these brands’ businesses.

And as with every situation of mutually assured destruction, what happens is that the status quo remains in place for years. The cost of doing anything becomes so high that no one has any incentive to change anything. The risk is too high for all concerned.

Given this dynamic, we don’t see this discussion concluding anytime soon. It seems the only potential solution on the horizon is if governments get involved and treat this as an antitrust issue on a country-per-country basis.

But the question still remains:

Can one marketplace (with almost 100% market share and controlling access to said market) force sellers to pay any fee they see fit or should such marketplaces be regulated to ensure fees are fair and represent the real value that the platforms provide?

It’s not about having a fee, it’s about finding a market agreeable price. Why should it be 30% and not 20%? Or 10%? Or 40%? Only a third-party above and distinct from any corporate interest could force a change.

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