But now some of those app developers and their parent companies are starting to push back against the so-called app-store tax, which is often up to 30% of the amount consumers pay.
Epic Games, developer of the overwhelmingly successful “Fortnite”, has cut Google’s Play Store out of the app equation entirely by having Android users download the game to their phones from its own website. More recently, Netflix (NFLX) began testing a way to get around paying Apple a cut of its customer subscription fees by having users sign up for the service outside of the App Store in 33 countries, not including the U.S.
The move follows a similar decision by Netflix to move its subscription sign-up process off of Google’s Play Store. Even Spotify (SPOT) has moved the subscription process away from Apple’s Store. However, these measures could backfire on app developers for one reason — Consumers are lazy.
“Whenever you add a step, conversion declines,” explained Gene Munster of Loup Ventures, referring to a customer who’s being “converted” to a regular subscriber. “It could be one, or two, or three steps to leave the platform, get redirected and sign up. And that’s the experiment that these companies are doing. You are going to lose some conversion.”
Why leave app stores
According to a study by SensorTower, Apple earned $38.5 billion in revenue through the App Store in 2017, while Google pulled in $20.1 billion. Those would be enormous sums for standalone companies. But for Apple, this is just a portion of its total services revenue, which made up $9.5 billion of the company’s $53.3 billion in total revenue in Q3 2018.
For every app purchase made through Apple’s App Store or Google’s Play Store, the companies take a 30% cut, leaving developers with 70% of the revenue from their own apps. For subscription services like Netflix, Apple and Google start off by taking 30% of the purchase for the first year, but cut that back to 15% after 12 months.
For a company like Epic Games, which offers “Fortnite” for free but earns money on in-app purchases, each 30% taken by Apple or Google hits its bottom line. Apple makes it difficult for developers to offer their apps outside of the App Store, so Epic had to stay with Apple when it launched “Fortnite” for iOS. But Google’s Android lets users download and install apps from outside of the Play Store, which is why Epic can skirt that company’s storefront.
Importantly, for companies like Netflix and, especially, Spotify, Apple and Google have become both distributors and direct competitors for their products. With Apple and Google poised to release even more of their own original content, the tech giants are homing in on Netflix’s business. Spotify has already had to deal with Google’s Play Music on Android phones, and now with Apple Music pre-installed on every iPhone sold the Swedish streaming service has even more competition in its space.
So not only do such companies have to pay Apple and Google to host their apps, they also have to compete with them.
The problem with leaving
To be clear, Netflix and Spotify aren’t taking their apps off of Apple’s or Google’s app stores. Instead, they are making customers who want to sign up for subscriptions, called conversions, move over to the services’ own websites. But consumers are fickle, and they’re less likely to sign up for a service if you throw more roadblocks in their path.
According to Munster, consumers would rather simply sign up for and pay for their subscriptions through Apple and Google’s app stores, because it’s a faster, more seamless process.
“My guess is that, they’d be giving up more than they’d be gaining, because of the increased hassle,” Munster said.
“Some players, like Netflix, … may be a different animal, where they are so good people are willing to say, ‘That’s fine, I’m okay with jumping over this very low hurdle,’ but most people are lazy,” Munster explained.
Apple and Google will be fine either way
While Netflix and Spotify could muscle consumers into signing up for their services because they are already so ubiquitous, other app developers and service providers are likely to have a much more difficult time.
“I think the bottom line is that for most companies, it’s not worth giving up the incremental user to give up 15% [of app revenue],” Munster said. “It’s kind of like someone selling on Amazon. Amazon’s average take-rate is 12%, and as a seller you put up with it because you generate a lot of users from it.”
Netflix says its move to test moving user subscriptions off the Apple App Store is one of many it does to improve the user experience for consumers, meaning it may never be fully implemented as a permanent solution.
That’s not true for the Google Play Store, for which Netflix stopped supporting subscription sign ups back in May. If you already signed up, you’ll still be billed through Google. But if you’re a new user or try to re-subscribe, you’ll be directed offsite. Similarly, Spotify doesn’t allow for new subscribers to sign up through the Apple App Store.
Despite that, the moves are unlikely to impact either tech company in such a way that they would eliminate such fees or reduce them by a significant amount. Both Apple and Google previously cut their fees for subscription services from the standard 30% to the current 15% after one year in 2016 and 2017, respectively. But that 30% still stands for one-time purchases.
Munster says the chances of Apple and Google being impacted by a handful of app developers moving away from the App Store is low. In fact, he believes that over time, they will move back to the App Stores.
“If I’m wrong and there ends up being a sea change where people just get comfortable to redirect to mobile [websites] to sign up … this is going to be a real stinger for Apple’s services growth. If I was going to put a probability on it, I would say a 5% chance, it’s a low probability,” Munster said.
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