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Apple’s In-App Purchase Policy Should Put Customers First

August 25, 2016

People with iPhones should be able to use the music services they want on their devices. Unfortunately, some of Apple's App Store policies make this difficult. Spotify, for example, is at a serious disadvantage on Apple devices, when compared to Apple's own music service. There’s currently no way to subscribe to Spotify through its iOS app, and when it did offer this feature, Spotify had to charge more than what Apple charges for its own music subscription, just to account for the 30% cut that Apple takes of in-app transactions.

Apple should fix this problem — not as a favor to Spotify, but for its own customers. iOS is a stronger platform when its users can easily choose between competitive services. Apple only needs to get out of the way, and let third-party media apps handle their own payments. To understand why, it's necessary to walk through some of what these policies are.

Apple's App Store allows developers to submit apps and distribute them for free or for sale. When the apps are for sale, Apple takes a 30% cut of the transaction. Naturally some people have criticized this 30%. It's much higher than what payment processors charge, but Apple is also doing a lot more work than payment processors do, in terms of hosting and delivering large amounts of data, maintaining customer accounts, and reviewing apps. 30% is also a much lower percentage than what traditional retail stores typically make from a sale. But let's take this number as a given, because it allows us to get to the real issue with third-party media services on iOS: in-app purchases. For some transactions that occur within an app, Apple also requires that app developers use its payment system, where it again (usually) takes a 30% cut.

(As a side note, for those developers who don't want to use Apple's store at all, and for the users who want their apps, Apple could also make it easier for people to “sideload” as well — that is, to get apps onto their phones without going through the app store. It can maintain security by continuing to require, by default, that all apps be cryptographically signed by known developers. Although fixing the “Spotify problem” doesn't require going this far, the fact that the only way for most users to get apps on their phones at all is through the App Store makes Apple’s App Store policies all the more important.)

Again, some people don't like that Apple has an in-app purchase system at all. But it makes sense for some purposes. For example, because Apple allows developers to post free apps, there's a chance that without in-app purchase rules, developers might post apps where, to unlock certain app functionality, users would have to enter a credit card. Whether or not users would object to this is one thing — but there is no reason for Apple to volunteer itself to host and deliver paid apps it makes no money from.

At the same time, Apple does not require that developers use the in-app purchase system for physical goods and services. This is why when you order from Amazon or call a Lyft with their iPhone apps, you're not using Apple's in-app purchase system. (Just to make things more complicated, Apple also has “Apple Pay,” which apps like Uber use. But this is a normal payment service, not one with a 30% premium.)

So, there is a spectrum. App features, game levels, and things of that nature that are clearly part of the app seem well-suited for in-app purchases. But it would be absurd for Apple to try to take a 30% cut of online dog food purchases, or of car rides.

Between those two cases, there is a grey area: media purchases. This includes everything from music subscription services, such as Spotify and Tidal, to ebook and comic downloads to video services like Netflix and Hulu. Apple, effectively, considers these equivalent to video game levels or premium app features. To sell them through the app, it requires developers to use its in-app purchase system. Developers are free to sell these things outside of the app with whatever payment systems they choose, and users who buy ebooks on the Amazon website or subscribe to Netflix on its site can access their media on iOS. However, within the app, Apple prevents developers from linking to or mentioning these ways of purchasing content from outside the app. Thus, there are many media apps on the App Store that are free to download, but nonfunctional unless the user already has a paid subscription to a service, purchased elsewhere — and the app is not permitted to inform users about those options.

It doesn't have to be this way. Google, on the Google Play store for Android, has very similar policies to Apple on paid app downloads and in-app payments. But it considers media purchases and subscriptions to be more like purchasing physical goods. So just as Amazon can sell you a paper book through its app without Apple or Google taking a 30% cut, Google allows Amazon to sell you a Kindle book without taking a 30% cut. Apple does not.

These rules hit companies selling media particularly hard, because in some cases, the majority of what they charge is already passed along to rightsholders. So adding another 30% cut on top of that may leave them with nothing — hardly a viable business model. As a result, these services frequently charge more on iOS than on the web or on other platforms, or else don't offer in-app transactions on iOS at all. Either way, users lose out. It is hard to see how a policy that causes either missing features or higher prices is good for users. Meanwhile, Apple's own apps and services do not labor under this surcharge.

The solution here doesn't necessarily require that Apple lower its cut of in-app transactions (although doing so can make sense — it recently dropped the percentage it takes on in-app subscriptions to 15% after a year, for instance). Instead, Apple could recognize that music, video, and ebook purchases are more similar to buying physical goods and services, and for those things, allow apps to handle their own payments. It's not like handling your own credit card payment systems, billing, and account management is easy — but in many cases, services would gladly take on the burden rather than paying a 30% fee to Apple.

It’s important to emphasize that this is not special treatment — nor do services like Spotify want to “free ride” on Apple’s app store. Companies like Uber host their apps on Apple’s app store, and transact billions of dollars through their apps. Apple doesn’t see a penny of this directly — rather, these businesses provide services that make customers more likely to buy iPhones. This is not free-riding: it’s a mutually beneficial relationship.

In addition to this rule change being an improvement for Apple customers (thereby making iOS a stronger platform), there are competitive implications as well. In the US, Apple's market share and customer base could make it a “must-have” platform for media services. These businesses need scale, and Apple has many paying customers. If Apple weren't involved in media businesses itself, then services might just cost more across the board or be unavailable on Apple devices — hardly a great situation for consumers, but not necessarily an issue under existing antitrust law.

But Apple now has its Apple Music service, its iBooks store, and is constantly rumored to be interested in streaming video (as opposed to the current iTunes on-demand service). Its own services don't have to worry about the 30% cut, meaning that its own services have a competitive advantage on its platforms. This could cause legal and regulatory headaches for Apple, and it makes sense to address the issue now — especially since the solution doesn't actually require that it do anything. Rather, Apple simply needs to get out of the way, in a way that benefits its own user base and makes its devices more attractive to consumers.

 

Image credit: Flickr user Wolf Gang