Mobile app stores are economic engines. Should policymakers be redesigning them?

By Matt Au and Bret Swanson

In recent weeks, at least nine US states have introduced legislation to regulate smartphone software platforms such as Apple’s App Store and the Google Play Store. The bills follow the lead of the EU, which unveiled its proposed Digital Markets Act in December 2020.

via Twenty20

There are several forces at play here. Conservatives and free
speech advocates are angry about suspensions, banishments, and suppression of
voices on digital platforms based on political viewpoints. Critics are also
upset with the cut app stores receive on in-app purchases (usually 30 percent),
arguing that big, dominant firms are extracting excessive tolls.

These complaints highlight what has become a central policy
question of our age: What, if anything, should we do to regulate the behavior
of giant digital platforms? The scale of the platforms delivers huge benefits
to consumers as well as content and app creators. Yet their size also means
consumers and creators need to be on these platforms, which are increasingly
exercising their power to approve or disallow access. We will leave the
political-viewpoint question for another post, but for now, let’s address the
in-app fee question. 

Last year, Epic Games, developer of the popular Fortnite game,
launched a high-profile legal attack against Apple and Google, accusing them “of
monopolistic behavior over how they distribute apps to devices and process
payments for digital content.” Epic’s suit — the
latest salvo in the battle between app developers and the tech giants over app
marketplaces — “stems from its attempt to add its own in-game payment
processing system, which would bypass Apple’s native payment processing
platform,” resulting in Fortnite’s removal from the App Store. Last spring, the
EU announced it was opening an antitrust investigation against
Apple in response to a similar complaint from
Spotify. Rep. David Cicilline (D-RI), Chairman of the House Subcommittee on
Antitrust, Commercial and Administrative Law, has called the 30 percent fee “highway robbery.” 

If critics are correct, then why are billions of users and
thousands of app developers so enthusiastically participating in this exploding
market? An Analysis Group study found
Apple’s App Store ecosystem generated at least $519 billion in billings and
sales globally in 2019. It does not appear the tech giant’s App Store
practices are much different from the rest of the digital content market, and
consumers and the economy are winning big.

The 30 percent commission charged by Apple and Google is also
close — if not equal — to rates for other types of digital content distributed
on platforms, according to the same study. The
commission for app stores run by Google, Amazon, Samsung, Microsoft, Apple —
and video game marketplaces such as Xbox, Playstation, Nintendo, and Steam
— is typically 30 percent (interestingly, the figure has its roots in
the 1980s and Pac-Man). Both Apple and Google reduce their rate to 15 percent
when a user has subscribed to an app for over one year. Epic Games charges 12
percent for purchases made in its store.

The study also found that “marketplaces that distribute digital
content such as videos, podcasts, eBooks, and audiobooks generally charge
commission rates of 30% or more. Commission rates charged by e-commerce
marketplaces vary by industry but sometimes exceed 30%.” In fact, prior to the
popularization of digital software downloads, the study notes that “60–70% [of
the retail price of software] went to distributors and retailers.” 

It turns out app makers do far better selling on app stores than
they did in the “boxed” software days. Consumers are better off too because of
the extraordinary number, diversity, and update-ability of apps. Just a dozen
years ago, there were essentially zero mobile apps. Today, consumers have
access to nearly two million iPhone apps and have downloaded them nearly 200
billion times. The numbers are even larger for Android.

Debates over the 30 percent fee often ignore the fact that most
apps (85 percent, in fact) are free for consumers, and nearly free for
developers, who pay a mere $95 per year for App Store access or a one-time $25
fee for a developer account on Google Play. (Remember, app makers only pay a
commission if they charge for the app or if they sell products or services
within the app.) Last November, Apple even introduced a new small business
program that charges a 15 percent commission for app developers that earned $1
million or less in the previous year. 

Some consumers and app makers want the ability to bypass the App
Store and “sideload” apps not approved by Apple, but there might be good
reasons why Apple insists on controlling its ecosystem. And $65 billion of
iPhone sales in the last quarter suggest consumers not only don’t mind — but
like it. 

Importantly, Apple’s integrated platform is far more resistant to
malware. One analysis estimates
the incidence of malware on iPhones is just one-fiftieth compared to more open
platforms such as Android. So why doesn’t everyone choose iPhone? Because these
are trade-offs. Android can argue it allows nearly unlimited choice to install
untested and experimental apps, and Android-based phones tend to have lower
price points. In contrast, Apple’s more premium offerings — which deliver a
curated user experience by integrating hardware and software — limit
product choice at the margin in return for better security. Some consumers
might value unlimited choice and lower prices over malware resistance. Others,
just the reverse. 

The chances that state legislatures, Congress, or EU policymakers
could devise a better system that optimizes app store quality, developer fees,
consumer prices, and hundreds of other design features in hypercomplex
smartphone ecosystems seems low.