Is Apples App Store commission cut actually a good thing for smaller developers?

Last week, Apple announced that it would be cutting the commission it takes from developers who earn $1m or less on the App Store each year from the sale of apps and the virtual items within them. This reduction, which kicks in from January, will see the tax reduced from 30 per cent to 15 per cent for these developers.

Apple’s announcement has been met with a rather mixed response. A mixture of praise and anger with a sprinkling of cynicism.

“As a business that works with a huge number of start-ups and with services catered to bring them to the market successfully, we see the reduction of the App Store commission structure as a positive shift in the ecosystem. Developers have historically been at the mercy of the big tech providers, with stringent, and at times arbitrary, rules imposed on developers. One of the biggest obstacles for any app entering the market is sustainable business growth and revenue generation. The 30 per cent commission structure is a big hurdle that impacts many app businesses’ ability to make a profit,” says Megan Dean, Associate Growth Director at Yodel Mobile.

“Apple has historically tried to cater to the pleas of indie developers, such as the redesign of the App Store with iOS 11 to offer further opportunities for discovery. In tandem with this new policy change, it is definitely a step in the right direction, and we would love to see them keep making more of these positive changes in order to be more in line with the demands of the developers.”

The cynicism around Apple’s decision stems from the timing of the announcement – in relation to legal challenges faced by the company over its App Store practices – and the fact that reducing commission for small developers does very little damage to the tech giant’s App Store revenue.

Data from both App Annie and Sensor Tower suggests that around 98 per cent of iOS apps generate less than $1m in annual revenue, but these apps only provide between five and eight per cent of Apple’s App Store revenues.

“Apples App Store bottom line stays healthy, because 95 per cent of Apples App Store revenues are generated by less than 20,000 developers and publishers who will not be participating in this reduction of the App Store tax,” says Kristan Rivers, CEO of AdInMo. “This was a cynical but also typically brilliant move, a way for Apple to generate goodwill with a large number of developers and allow the company a plausible defence in conversations in courtrooms and with regulators, all while taking a very minimal hit to margins.”

Liz Waldeck, Regional Lead of Client Partnerships at AdColony sees this as a “great move for smaller developers” and feels the move will “tamp down anti-competitive rhetoric coming from some corners”.

But, as you’d expect, certain major developers – namely Spotify, Match Group, and Epic Games – aren’t so happy, showing that Apple continues to be seen in this unfamiliar role as the “bad guy of the industry,” as Rivers puts it.

Currently, we know very little about the ‘App Store Small Business Program’ that Apple will introduce in January, other than its plans to reduce the commission for small developers. From what we do know, Apple’s application of the $1m threshold could cause some problems for the small developers it’s intended to help.

Developers who qualify for the program are those who made up to $1m this year. Should any of these developers exceed $1m in revenue, Apple will apply the standard commission rate of 30 per cent for the remainder of the year and it will automatically also apply to the following year. Should sales fall back below $1m in that year, the developer can requalify for the program in the next calendar year. So, for example, if an app makes over $1m in 2021, it would be paying 30 per cent on all sales throughout 2022. Should sales fall below $1m in 2022, it would be able to return to the program in 2023.

“The $1m revenue line isn’t hard for a successful publisher with a good monetisation team to cross either,” Waldeck adds. “Is it possible some smaller hyper-casual publishers move to more in-app purchases without a 30 per cent Apple tax? Maybe. It will be interesting to watch advanced publishers’ behaviour as they get close to that line in the sand. Turn off in-app purchases? Crank up ads? Change in-app purchase prices?”

Apple’s decision to reduce App Store fees for smaller developers may also help other developers in a way many may not have considered, providing a “lifeline” for those who make most of their revenue from ad-supported free apps, according to Ionut Ciobotaru, Chief Product Officer at Verve Group.

“Apple’s announcement certainly helps smaller, indie developers who make their money from subscription-based models or in-app purchases. But it’s also a bit of a lifeline for developers that make the majority of their revenue from ad-supported free apps, especially in light of the upcoming IDFA deprecation on iOS,” says Ciobotaru.

It’s a still a little too early for us to predict the full extent to which Apple’s commission cuts will benefit or hinder smaller developers, but the general outlook is a positive one for small businesses.

Apple will continue to face scrutiny from regulators in the US and Europe, and continue to be criticised by the likes of Spotify, Match Group, and Epic, though the introduction of the App Store Small Business Program will go toward placing the company in a better standing in its legal disputes.

“Small app developers can often feel straightjacketed because of the amount of commission taken from them by the app marketplace,” says Aude Barral, Co-founder of CodinGame. “The announcement means that smaller developers will now enjoy a bigger slice of the Apple pie. And giving more money back to small businesses, particularly with so many struggling to keep their heads above water during the global pandemic, can only be a positive development.

“On the other hand, cynics will say this announcement was conveniently timed, diverting attention away from ongoing legal disputes that Apple is tied up in,” she concludes.