Two “studies” this week discussed in the Daily Mail purport to show a large imposition on consumers. They describe almost all the costs associated with running an app store — including keeping users safe — as a “tax”.
The value of app stores
These studies, supported by a “Coalition for App Fairness” (CAF), take the position that when mobile apps are distributed through app stores developers should pay only payment-processing costs, and all other costs should be borne by users or the stores.
App stores provide all kinds of other value to developers and users. These are services like trust and safety measures (e.g., malware and fraud protection), discovery (indexing and matching algorithms), delivery (e.g., hosting), and ongoing support (e.g., developer app-testing tools, consumer protection). App stores charge fees to support the services they provide. As the CMA recognises, if their fees were that low, then companies wouldn’t be receiving fair value for the services they provide.
There would be no accountability for bad app developers because there would be no funding to ensure irresponsible developers were not putting dangerous apps on the stores. If the CAF gets what it wants, app stores could become a wild west for consumers.
The irony is that the app developers funding these studies would be the first to complain if there were problems with apps being approved; if their apps are having to compete against copycats in app stores with malware without suitable security controls; or if they felt app discovery algorithms did not give them appropriate prominence.
Fair for consumers and smaller developers
The CAF research is intended to encourage draconian regulation of app stores under the UK’s Digital Markets, Competition and Consumers (DMCC) Act. The conduct requirement proposed by the Competition and Markets Authority (CMA) this week includes two elements: price regulation where Apple and Google would be required to show that fees reflect the costs and/or value provided; and constraints on how those companies govern steering (allowing app developers to “steer” users to off-platform payment options). This is disappointing given how much consumers and developers have benefited from the choice, security, and convenience provided by app stores. App store operators are working to provide developers with more options and, in many cases, lower fees. The CMA should have worked with that process, sticking with their promise of proportionate regulation.
While these proposals are still subject to consultation, the CAF publications this week show the risk: a small number of established developers are seeking a position where they can have a free ride, using “steering” as a workaround. Like the apps they host, these app stores are services as well and their success is contingent on a viable business model. If app stores cannot charge the fees they deem necessary for their continued operation, basic app store functions would not be funded, never mind the investment in innovation and infrastructure that benefits UK consumers and developers over the medium term. Indeed, UK-specific requirements could be particularly challenging for smaller developers if they mean that it is no longer possible to build an app once and distribute it globally, instead having to engineer for differing requirements across dozens of markets.
The CMA needs to firmly reject this approach. If they don’t, consumers will lose out on an app store experience they value. Smaller developers have the most to lose. They can thrive because of the consumer trust and convenience that robust app stores support and would be cut off at the knees if app stores fragmented. Not very “fair” at all.
The CAF calculation
All these arguments aside, the quantitative analysis is very dubious.
Their calculation in the first study is simple:
- Take the amount that consumers are spending on apps, in-app purchases, and the like.
- Multiple that by 24%. This is based on an assumed percentage going to the app stores once you account for some discounts (~26%), minus the spurious 3% that the CAF thinks would be paid in a “competitive” market.
- Multiply again by about 71%. This in theory allows for not all of the savings being passed-through to consumers. It is probably very optimistic. Analysis Group found that, after a similar change in the EU because of the Digital Markets Act, “developers kept the prices of what they sold through the App Store the same or increased them more than 90% of the time.”
That yields about £13 a year, which doesn’t sound juicy enough for a newspaper headline so they multiply that by four as if that were the average number of smartphones per household. It’s not, to be clear, the real number is probably under two. It’s also not a typical family because spending on apps is not evenly-distributed across the population, a small percentage of users drive the majority of spend and a typical family spends far less. They then assume an around 13% growth rate to forecast a claimed cost over 5 years, which is where you get the headline number in the Daily Mail.
They repeated the same exercise a day later with dating apps specifically but seem to have skipped most of the steps and just reported that they believe £300m in in-app purchases would mean £90m in fees.
There are a few issues here and you could debate almost all of the numbers used in this study.
There is just no way that any fair-minded assessment of the value or costs of an app store is effectively zero, nothing but passing on the fees from banks and credit card companies. Indeed, when the Competition Appeals Tribunal looked at this issue it found that “competitive” app stores charged between 15% and 20%, choosing 17.5% as a midpoint – many times the 3% cited by the CAF. This still does not account for the significant investments that leading providers like Apple and Google have made into their app stores and brands, to the benefit of consumers and app developers alike. It does not take account of the fee structures that major app stores have to enable lower or zero rates for new entrants, or the fact that consumers can still go directly to a developer website to pay for a subscription or service.
These overcooked numbers are a terrible starting point for understanding how and why app stores are priced, and the implications if the CMA intervenes.
