Beneficiaries of App Store Changes
What companies benefit from the slow then perhaps sudden changes to the Apple App Store
Earlier this week, Apple was issued an injunction against anti-steering in the Epic vs Apple case. They have 90 days to appeal, but it essentially states that they need to allow developers to link out to other forms of payment.
Apple is permanently restrained and enjoined from prohibiting developers from including in their apps and their metadata buttons, external links, or other calls to action that direct customers to purchasing mechanisms, in addition to In-App Purchasing and communicating with customers through points of contact obtained voluntarily from customers through account registration within the app.
This came only a few weeks after the recent decision to allow “Reader Apps” to link to an external website to set up their account, which was prompted by the Japanese Fair Trade Commission Investigation.
While we don’t know exactly what changes will play out and when, in this piece I’ll cover some of the beneficiaries of the potential changes to the App Store fee model in the coming years. Funnily enough I’ve had this post in my draft for a few weeks, but this is as good a time as any to finish writing it.
It is worth covering the beneficiaries across a few categories:
The large fee payers. Companies that pay a lot in “taxes” today
The avoiders. Companies that have to offer suboptimal experiences today to not pay fees.
The platforms. Companies that can’t build some of the experiences they want.
The creators. The people a lot of these companies serve.
The payment processors. The other side of the stack.
1. The large fee payers
Close to $75B is spent on the Apple App Store each year on digital goods, with Apple taking a 30% cut of that.
Over 60% of that is spent on gaming related purchases, meaning that the gaming companies in aggregate pay over half of the Apple tax.
The companies that pay a lot in these fees today are the consumer subscription apps (with dating being a primary category) and the large gaming companies, which should benefit from the increasing pressure and future changes.
For Match Group for example, App Store fees which are over $500M/year are the single largest expense. Similarly, Bumble pays ~30% fees on essentially all its revenue to Apple.
On the gaming side, Zynga, Roblox as well as the likes of Activision and EA should benefit from future changes. Roblox for example, makes 34% of its revenue from Apple app store purchases, and another 18% from Google’s Play store, on which it has to pay a 30% cut. In essence, over 15% of its overall revenue is paid out in App Store Fees.
How might they benefit?
This set of companies should benefit directly if alternative payment methods are allowed. While all users may not take them on alternative approaches, given their brands and their ability to lower prices for alternative payment methods, enough users may take them up on it, that the average fees drop quite significantly.
The market reaction to the Apple hearing for these stocks echoes this sentiment:
Roblox stock was up ~4%
Zynga stock was up ~8%
Match Group stock was up ~4%
Bumble stock was up ~6%
2. The avoiders
The “avoiders” is my term for the set of companies those which don’t allow for signing up to subscriptions on their mobile apps, in order to not pay fees.1
Netflix and Spotify are probably the best known examples of this. Both of them don’t allow users to sign up to a premium plan through the mobile app.
One way of thinking about it is that given these companies only have 30-50% gross margins given the content costs of their service (compared to the 90%+ gross margins of selling digital packs for gaming etc.), and that they have large enough brands, they rely on users getting past the friction of signing up.
How might they benefit?
These companies have pretty suboptimal experiences to sign up on their apps, in order to comply with Apple guidelines and not pay fees. It is possible that with some of the coming changes, they will be able to link users to sign up for a premium plan within their app, and perhaps in that way reduce friction and reduce the drop-off in signups.
To the extent that most users first install these apps before buying a premium plan (especially the case for Spotify) it should lead to more opportunities to directly upsell users on the phone, which could improve paid conversion rates. Similarly, for Netflix, it could improve the ROI on marketing spend on App Install Ads and similar products aside from reducing the friction to sign up.
3. The platforms
The platforms here refer to companies such as Twitter, YouTube and Tik Tok among others, that in certain cases are the ones that truly add the value of discovery and facilitation of a purchase, but end up having to “split that revenue” with Apple and pay a 30% tax.
One example of this is Twitter’s Ticketed spaces and Super Follows product. For both of these, Twitter ends up making less money than Apple, even though it is doing the lions share of the work.
There is also likely countless examples of products these companies might have built or want to build which doesn’t make sense for them to because of the 30% cut.
How might they benefit?
These companies benefit in two ways if alternative payment methods with lower fees become an option.
Firstly, on some of their existing products which facilitate discovery and purchase, they can either reduce the overall take rate charged to creators / users while still earning a higher take rate themselves.
Secondly, because of the 30% cut today, there might be features which are difficult to build or don’t make financial sense or haven’t really taken off, which might change if alternative payment methods are allowed. Twitter or Tik Tok could offer purchases to other digital products (or tipping, etc.) discovered through their platform either in the form of advertising (today they can’t close the loop) or just through taking a cut. For example, signing up for a paid newsletter through your Twitter app.
4. The creators
In some ways, the other side of the platforms beneficiary are creators.
Creators here is a pretty broad term and encompasses anybody that makes money in part through digital content / subscriptions.
Today, most creator monetization apps pay the 30% to Apple, and then take their own fees, leaving creators with something like 50-65% of what the user pays them.
For example, this is what creators earn from a transaction on each of these platforms:
Twitter Super Follows: 68%
Twitter Ticketed Spaces: 56%
Alternatively, some of the best discovery platforms don’t have the close-loop monetization features / purchase built in, because then they would be subject to the Apple cut.
How might they benefit?
The increase in popularity of alternative payment methods could result in the share for creators increasing by up to 15-20% (while still being a net positive for the platforms).
In addition, a reduction of fees or the presence of alternative payment methods at lower fees should result in more creator monetization / purchase type features and a greater likelihood that some of these take off because of more native purchasing experiences.
5. The Payment Processors
One other thing to think about when considering any potential App Store changes is that Apple processes >$75B in digital purchases through in app purchases.
Today, all of that is essentially provided by Apple, and while most developers will agree the service from Apple is useful, they would probably say it should cost 3-7% and not 30%.
If developers and apps can provide alternative payment methods, they are unlikely to build those completely from scratch, and that’s where companies like Stripe and Adyen could stand to benefit.
How might they benefit?
We know the current processed volume is over $75B on Apple alone (for digital products), and given that some have been avoiding using this route, that number might increase when alternative payment approaches are allowed since it leads to the avoiders also wanting to accept payments in their apps.
Adyen is on a ~$500B TPV run-rate and Stripe is rumored to be somewhere similar. So while a ~$100B opportunity isn’t really that huge, if you consider that a lot of this payment volume processed by Apple may be from existing Stripe/Adyen customers who might switch immediately, these companies could see an acceleration in payment volume processed from existing customers.
In addition, it’s possible that the take rates on iOS in-app purchases that Stripe and Adyen can charge are slightly higher than their typical rate given what the alternative costs (30%).
For some additional reading on the topic, here are a few recommendations:
Matthew Ball’s tweetstorm on the recent Apple vs Epic hearing
Li Jin’s essay on Apple and the Creator Economy
The Coalition for App Fairness website, a nonprofit organization which advocates for freedom of choice and fair competition across the app ecosystem
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Note, by avoiders I don’t mean to suggest that they’re skirting the rules in any way. Just that they have made a decision to require users to sign up elsewhere in order to not pay fees.