Apple and Google’s app stores have been fortresses of commerce. South Korea fired a cannonball.
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When buying apps or making in-app purchases, you’re pretty much limited to either Apple or Google’s systems. And those companies are paid a commission of up to 30% on your purchase.
South Korea this week passed a law that will force the companies to allow alternative payment systems — ending commissions where developers sell things directly. The new law is expected to be signed by the president, and it comes as Apple and Google are under pressure from antitrust regulators around the world.
It’s a topic for “Quality Assurance,” where we take a second look at a big tech story.
Nick Statt, a reporter at Protocol, says South Korea’s law is a big deal for developers. The following is an edited transcript of our conversation.
Nick Statt: For close to 15 years now, the status quo has been if you sell a digital purchase on an iPhone or on an Android device, you have to give 30% of your revenue in perpetuity to Apple and Google. And this is the first law in the world that has ever challenged that so directly.
Jed Kim: After the law passed, Google said it was thinking about how it could comply, but they also said: we’ve got to fund our development costs. If this does go through, and people avoid these fees, what kind of model might replace that?
Statt: The big store owners could offer their own payment system as an alternative alongside the third-party ones, and you might get a lot of customers that decide to go with Apple and Google’s payments, because they trust Apple and Google more than, say, a random app developer. And in that scenario, Apple and Google might retain a significant chunk of the revenue. Other options include Apple and Google coming up with other ways to charge developers for the services that they say they provide, and that that 30% is supposed to pay for. That could include a higher annual developer fee, or charging developers directly per month, a fraction of their revenues.
Kim: So then, conceivably, developers could charge our credit cards themselves and just pay Visa or MasterCard for around 2%?
Statt: Correct. Yeah, if developers were allowed to use their own payment system, they would just pay the credit card transaction fees. Or if they use say, for instance, PayPal, they’d pay the PayPal fee, which is only slightly higher than, say, Visa or MasterCard. But yeah, that would reduce the amount of money they’re paying to process that transaction anywhere from 15-30% down to between two and four [percent].
Kim: Well, if developers do pay that 2% to Visa, and maybe some new kind of fee to Apple or Google to fund their development, could this end up just being a wash?
Statt: Yeah, there’s a possibility that, once you run all the numbers, that they’re paying the same amount of money. But I think for a lot of developers, it’s this idea that they want a little bit more control over their financial livelihood and over their customer bases. In a lot of ways, Apple and Google, they control the flow of commerce on their mobile app stores, they control the information about the customers, they control what level of interaction the businesses can even have with their customers. So I think, in many ways, this is about kind of taking back some of that control. Even if it’s not necessarily going to be a huge financial boon. It could lead to better relationship-building between customers and mobile apps in the mobile app businesses.
Kim: Apple and Google say, ‘Look at the services we provide, we do fraud protection, there’s parental controls.’ If we have thousands of apps, all with their own payment systems, could we see things getting worse for consumers?
Statt: There is certainly a possibility that this could unleash a lot of unsavory tactics on behalf of some developers that want to scam users or get users signing up for subscriptions that cost a ton of money, and bill every week or every month. Right now, both app stores, for Apple and Google, they have those scams, those are those are things you can you can run into. It’s certainly a possibility, but we just have no data, and we have no precedent to go on. Because nothing like this has ever been attempted.
Kim: How can this law potentially impact the way apps get developed, or even impact developers?
Statt: I think that we’ll start to see developers experiment with more payment models, definitely with pricing, with how they distribute their apps, more probably micro purchases, smaller in-app purchases. But really, it’s just going to be more developer choice around how they want to fund their app and how they want to sell it.
Kim: I gotta know, like, why is Korea pushing this? Were they at the forefront?
Statt: I think there’s a little bit of history, there. I mean, South Korea has lots and lots of Android users because they’re the home of Samsung. And this was actually a law that was not really targeted at Apple, which is game to the ire of people in the U.S. more often. It was actually aimed at Google. It was nicknamed the ‘Google Power Abuse Prevention Law’ by some lawmakers and in the media. And that’s because I think that Samsung and Google have had tensions for many, many years. Samsung sells the most Android phones, but Google creates the operating system, so they’ve always kind of butted heads, here and there. They’ve had a kind of a frenemy relationship. But last year, Google came out with a new policy clarification, where they said that they were going to start taking more money from app developers. They allowed a lot of app developers to kind of skirt the 30% commission. They had a lot of exemptions. Last year, they said they were going to close those loopholes, they were going to start collecting more money, and that seemed to be the tipping point for the app development community and the broader tech policy community in Korea, and they began moving forward with this legislation, which months later, now, has resulted in a positive vote and is preparing to be signed into law.
Kim: We’ve got some pretty recent news about Apple reaching a settlement with Japanese regulators, changing how developers can essentially talk to customers. What did that do, and how important is that?
Statt: Right. So that happened just recently, and it closed the investigation with Japanese regulators as a result, but what Apple did was they essentially agreed to start letting “reader” apps — apps that let you consume content that you would otherwise watch or review elsewhere on your iPhone — they can now start telling customers that they can sign up within the app, and they can even link to their website, which they were not allowed to do before. It’s a relatively minor concession, in the grand scheme of things. But for Apple, I think it’s kind of a major turning point, because it’s yet another move from them to try to appease regulators. And it seems increasingly clear that they’re going to have to keep making these kind of slight rule modifications and changes to kind of keep up with the environment, in absence of broader, more sweeping changes to their business.
Kim: And this doesn’t apply to games, I’m guessing.
Statt: Games do not qualify as reader apps, but it does apply to apps like Netflix, Spotify, and Amazon. So those companies, they were already not selling anything on iOS, because they were simply not interested in giving Apple any of their money anymore. So if you went to Netflix, and you tried to sign up, Netflix would say we’re sorry, you’re unable to do that. But you can sign up on the internet, on the web. Now, however, Netflix and Spotify, they can say, you can sign up on the web, and here’s a link. And before they were not allowed to do that, Apple forbid you from even including a link in your app telling customers where they could sign up. So this change won’t affect any money moving around, but it will make it less inconvenient for iPhone users to, say, sign up for a Netflix subscription or to buy a Kindle book. Or if you’ve ever tried to rent a movie on the Amazon Prime video app — you weren’t allowed to do that because Amazon didn’t want to give any money to Apple.
Related Links: More insight from Jed Kim
Nick’s written extensively — and very readably, I might add — on this. One of his articles in Protocol lays out a bunch of the legal and regulatory actions Apple and Google are facing. Catch up on some of the things that are keeping their lawyers up at night, these days.
There’s no doubt selling apps is a big moneymaker. Apple doesn’t share how much it takes in from its App store, but there are ways to figure out how much is flowing. A press release from the company in January stated that developers selling their apps through Apple had made $200 billion since 2008. CNBC did some back-of-the-napkin calculating to figure that means Apple grossed $64 billion last year and close to $100 billion during the two years before that. I’d take a 30% cut of that any day.
To get a sense of how much the big two companies care about selling apps through their stores, you can catch up on the Epic vs. Apple trial. Epic is the game company behind the wildly popular “Fortnite,” which has raked in money, hand over pickaxe-wielding-fist. Epic tried to institute its own payment system — you know, hold onto more money — which got it kicked out of Apple’s store. There was a lawsuit from Epic. A final decision is yet to come, and whatever results could be affected by Korea’s recent law.
Finally, something I decided to try. What song encapsulates this whole app store fight? I was thinking “Tax Man” by the Beatles. I asked Nick what he thought. He said Twisted Sister’s “We’re Not Gonna Take It.” Which is so much better!
Let me know your pick. I’m @jedskim on Twitter. And on TikTok. (Just kidding. I’m way too old for that.)
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