DDM Games Investment Review – Sep 23, 2021

The Pressures on Apple and Google’s Store Policies and Fees

The Walled Gardens of Apple and Google are Being Chipped Away
By Peggy Twardowski

 

The store policies and commissions from Apple and Google are under increasing legal and regulatory pressure. As we review, pressure is coming from a multitude of angles to which they have responded with piecemeal solutions. While Epic Games v. Apple is the most high-profile and consequential for the games industry, it is one more layer in the intense scrutiny over these companies’ market power.

Epic Games v. Apple
When Epic Games updated its blockbuster game Fortnite on mobile in August 2020, it offered an alternative payment method outside the Apple App Store and Google Play Store. In response, Apple and Google removed Fortnite from their stores, as this was against the tech giants’ store policies which require the use of their proprietary payment systems for digital products and services where they receive a 30 percent commission. Epic Games sued both over alleged antitrust practices. While the case with Google is still pending, the resulting Epic Games v. Apple court case concluded at the end of May and the verdict was announced on September 10th, delineating between monopoly and anticompetitive practices:

“the court cannot ultimately conclude that Apple is a monopolist under either federal or state antitrust laws… Nonetheless, the trial did show that Apple is engaging in anti-competitive conduct under California’s competition laws.”

Effective December 9th, Apple must allow for alternative payment methods:

“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.”

While the ruling affects U.S. companies, it leaves in place the App Store as the sole place to buy or download iOS apps and does not affect the rate of Apple’s commission. Apple’s App Store revenues may take a hit as 70 percent of App Store revenues come from gaming apps and that 70 percent is generated by less than 10 percent of app store users. Sensor Tower reported 95 percent of the App Store’s revenue comes from the top 2 percent of developers, so changes by a few larger developers could have an outsized impact.

Furthermore, Epic Games was found in breach of Apple’s policies. As a result, Apple is not forced to restore Fortnite to the App Store and Epic must pay Apple 30 percent on the $12 million revenue it made when it routed Fortnite players to its separate payment system as well as revenues earned through the date of judgment since November 1, 2020. As of this writing, Epic Games is appealing the ruling.

30 Percent Store Commissions Were Once Acceptable
Sensor Tower estimates the App Store and Google Play revenues reached $111 billion across all apps in 2020. As a standard, Apple and Google each take 30 percent of purchases made through their respective stores – the App Store on iOS devices and Google Play on Android devices. At the time their stores debuted, 30 percent was unquestioned. For game developers, it was a common platform fee as the PC distributor Steam and the console manufacturers all charged 30 percent. Apple and Google have justified their store policies and platform fees saying it offsets the cost of running their stores which provide privacy, security and marketing benefits while maintaining a quality of experience for their consumers. In recent years, these store policies and platform fees have been questioned, seen as both high and monopolistic.

Scrutiny and Pressure from Developers, Lawmakers and Regulators in Multiple Regions
Outside of Epic Games v. Apple, a number of developments affecting Apple and Google’s store and platform fees continue and it remains to be seen how the court case may affect these developments. In case you have not seen the latest headlines, the walled app gardens of Apple and Google are being chipped away by lawsuits and legislation that affect Apple and Google’s rules to use their proprietary billing systems and their 15-30 percent platform commissions.

Multi-state antitrust lawsuit filed against Google over its Google Play fees
A 36-state lawsuit alleges Google maintains a monopoly on both the distribution of Android apps and Android payment processing while also engaging in deceptive conduct that misleads consumers “in order to ensure that users exclusively use the Play Store to download apps and thus keep users within Google’s walled garden.”

Apple settled class-action lawsuit, allows developers to advertise alternative payment methods
Subject to final court approval, Apple settled a class-action lawsuit from 67,000 developers that will allow developers to use alternative payment methods and advertise these methods to their customers through their channels such as e-mail. App developers still cannot advertise alternative payment methods within their iOS apps. Additionally, Apple will allow 500 different price points (an increase from 100 price points), create a $100 million fund for payouts to small app developers and release an annual transparency report on the apps that are rejected to ensure it is not favoring apps using Apple’s systems. Apple also agreed to not raise its platform fee for small developers, currently 15 percent, for at least three years. The judge who will approve or disapprove this proposed settlement is Judge Yvonne Gonzalez Rogers, the same judge presiding over Epic Games v. Apple.

South Korea banned Apple and Google from blocking third-party payments
South Korea became the first country to pass legislation that bans major app store operators from requiring developers to use their proprietary billing systems. The legislation still needs to be signed into law by President Moon Jae-in whose party has been supportive of the legislation. Once enacted, developers will be able to bypass Apple and Google’s 15-30 percent platform fees by offering third-party payment methods. Apple responded that the bill “put users who purchase digital goods from other sources at risk of fraud, undermine their privacy protections, make it difficult to manage their purchases and features like ‘Ask to Buy’ and Parental Controls will become less effective.”

Apple settled with Japan regulator, allows developers to link to external websites
Apple settled with the regulator Japan Fair Trade Commission (JFTC) and will allow developers of “reader” apps to include an in-app link to the developers’ own websites where users can set up and manage their accounts. Reader apps are subscription media without in-app digital goods and services for purchase. These include magazines, newspapers, music and video apps like Spotify and Netflix. The change will be applied globally by Apple and will go into effect in early 2022. Macworld speculated that with the careful wording from Apple’s announcement, the impact may be diminished as the in-app link may be limited to “Account Management” or “Set up your account” without being able to advertise “Subscribe for $9.99 a month.”

Antitrust case filed against Apple in India over in-app payments issues
Filed by a small non-profit group in India, Together We Fight Society, the lawsuit alleges Apple’s platform commission is anticompetitive as its 30 percent fee increases the costs for app developers and customers and acts as a barrier to market entry. The Competition Commission of India (CCI) will review the case and determine if it lacks merit and should be dismissed or warrants further investigation. Cases reviewed by the CCI are not made public.

These developments are in addition to prior announced legal, lawmaker and regulatory scrutiny. European Union antitrust regulators are investigating Apple’s App Store and Apple Pay policies as well as Google’s ad-tech business. Last fall, the U.S. Justice Department filed an antitrust lawsuit against Google alleging it operates as an illegal monopoly in its search and ads business with a trial date set for September 2023. In the past year, Apple and Google defeated state legislation in Arizona and Georgia that would open up their store policies and allow for alternative payment systems.

Apple at Forefront of Standards and Scrutiny
Apple has been particularly targeted by protests because it has been historically stricter: not only were all paid apps and in-app purchases required to go through the App Store but developers were also forbidden to offer or advertise alternative payment systems through their own iOS apps. Furthermore, iOS users cannot install apps via means outside of the App Store, whereas Google has allowed users to add apps outside of Google Play. To avoid paying Apple its commission, Spotify and Netflix removed the ability to subscribe or renew in their iOS apps, forcing users to transact via their websites and desktop apps. Until recently, Google had been lax in enforcing the use of its billing payment system, but that changed in fall 2020 when it announced it would begin enforcing its policy effective September 30, 2021.

Apple leads as not only a primary target of regulation and lawsuits but also in setting store policy standards and the reduced commission fee at 15 percent. In 2016, Apple reduced its fee on subscriptions like news apps to 15 percent when an individual user passes the year threshold, keeping the 30 percent commission in effect for new subscribers. In November of last year, Apple also announced its App Store Small Business Program that took effect earlier this year on January 1. App developers who earn less than $1 million annually can apply for a reduced store fee of 15 percent, but if their revenues exceed more than $1 million, the fee reverts to 30 percent. Similarly, Google dropped its subscription fees to 15 percent after the subscriber’s first year, but in contrast to Apple, Google allowed developers to apply for a reduced fee of 15 percent on the first $1 million made each year with its standard fee of 30 percent applying to revenues above that. Whereas Google announced, “With this change, 99 percent of developers globally that sell digital goods and services with Play will see a 50 percent reduction in fees,” Apple did not comment on its program’s potential impact. Mobile app analytics firm Sensor Tower estimated if the 15 percent cut had been in effect in 2020, Google would have missed $587 million, or approximately 5 percent of $11.6 billion in Google Play fees, and Apple would have missed $595 million or approximately 2.7 percent of $21.7 billion in App Store fees in 2020.

Additionally, Apple has made further exceptions to its store or platform fee policies to bolster its content. At the end of August, Apple announced its News Partner Program, targeting news publications that provide content to its Apple News. Under this program, news publishers must “maintain a robust Apple News channel” and in exchange, Apple’s commission on in-app subscriptions is reduced from 30 percent to 15 percent, including first-year subscribers. In April of last year, as a result of an undisclosed private deal, Apple and Amazon worked out an arrangement whereby payment buttons were added to Amazon’s iOS Prime Video app, allowing current subscribers to use payment methods tied to their Amazon account while new subscribers were routed through the App Store. Amazon fully integrated Apple TV features into its Prime Video app.

Future of Mobile Stores
Much is at stake—not only are store revenues affected but also the very policies that built the stores into the behemoths they are today. It has been interesting to see that prior and current approaches have varied from specific categories of apps to lawsuits and legislation targeting the ability to use and advertise alternative payment systems. The focus seems less on Apple and Google controlling the apps that are added to their ecosystems but more on their store policies that deliver guaranteed commissions to the tech giants. If alternative payment methods can be implemented and advertised by developers, then the store commission rates become less of a sticking point. Perhaps this leads Apple and Google to lower their rates to be competitive to alternative payments, but with an unknown impact on maintaining their stores which keep apps secure and user information private.

With scrutiny of Amazon’s practices and pressure on other tech giants like Facebook, there is little chance that tech giants will escape some regulatory oversight in an effort to keep pace with technology. All of these developments have also exposed fragmentation in their policies—the unevenness with which Apple and Google have varied their commissions and policies by types of apps or developers. It remains to be seen if regulation and legal pressure will result in cohesive policies and commissions and if these will be fair and consistent for all developers.

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More articles on the video game industry from the Data & Research Services division of DDM can be found online at DDM’s News Resources.

Additionally, the Data & Research Services division oversees the DDM Games Investment Review, the only source of investment, acquisition and merger data specific to the video game industry that has been gathered and rigorously tracked for well over a decade. The Q2 2021 report is now available for purchase: $399 per single quarter or $999 for an annual subscription. In addition to our industry forecast, the report contains a complete list of investment/M&A transactions from the quarter as well as expanded lists of the quarter’s top transactions and investors. For more information about our Q2 2021 report or the DDM Games Investment Review, visit www.ddmgamesinvestmentreview.com or email data@ddmagents.com.

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