251-Apple Gets Crossways with App Developers

Recently, Apple rejected a digital book application from Sony. The disagreement here is over how and when Apple collects for its services. Apple is playing a dangerous game.

In theory, Apple has the right to insist, under its terms for developers, that any app, which offers customers the ability to purchase books outside of the app, offer the ability for customers to purchase within the app at the same time.

Here is the rub. In its application, Sony sends customers to its own web site where they complete the purchase of a book. By routing the customers to its own web site, Sony is able to avoid a payment of 30% of revenues to Apple.

Others, including Amazon, with its Kindle, and Barnes & Noble, with its Nook, have been able to sell e-books by sending users to the companys’ own web sites. Apple simply was not enforcing its policy requiring developers to use its in-app purchasing feature to buy new content.

A 30% charge on revenues is a high price to pay Apple. Apple may be setting itself up for future loss of market share by enforcing this policy. If the Android platform does not put the same requirement on its app developers, the developers will have a strong incentive to avoid the 30% charge by encouraging customers to purchase using an Android device rather than an Apple device. Alternatively, the application developers may charge a higher price for purchases through Apple.

Apple’s unique strength has been its superior list of available applications. Apple’s enforcement of this requirement to purchase inside the app so that Apple can collect 30% of the revenues puts at risk its major advantage. Apple needs to compromise here by charging a lower price or no price at all. After all, it already makes high profits on its hardware and software product combination. It also makes profits on many of the downloaded apps. The application developers are customers too. Why make their life difficult? Does the benefit Apple provides a seller justify 30% of revenues? Sounds pretty rich.

Posted 2/17/11

Update:

Apple prevailed over Sony in this clash.  Within the next few months, Apple began charging Amazon 30% of its on-Apple app revenues. Eventually, the company extended this 30% charge to newspapers and magazines and games. In part this move was successful because android followed the same approach. This “Apple tax” of 30% has caused the larger app developers to invest substantial efforts to discourage their subscribers from using the Apple payment system. These major app developers claim that, as a result of these efforts, a relatively small portion of their total sales go through the Apple payment system. Some large app developers have sued Apple over its pricing policies. This litigation is ongoing.  Certainly, Apple’s approach has generated resentment in the broader app developer community.

In the last few years, Apple seems to have relented somewhat in its strict imposition of the 30% charge on developer revenues. In some cases, the 30% charge can fall to 15%. It appears that this 15% charge applies to a limited number of Apple customers.

12/22

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