Why In-App Payments Make Sense, and the Open App Markets Act Does Not
The proposed Open App Markets Act (OAMA) voted out of the Senate Judiciary Committee in February threatens the vibrancy of the app ecosystem. The OAMA has a number of troubling provisions, one of which is prohibiting an app store from requiring the use of its own in-app payment system. This provision is problematic as it will reduce app innovation and harm both consumers and app developers. The Senate should not take up this proposed legislation intended to harm America’s leaders in app innovation.
The app economy is highly competitive. App development is risky and success is not guaranteed. Neither the operating system owner (e.g., Apple, Google, Microsoft, etc.) nor an app developer knows in advance whether an app is going to be successful. The success rate for mobile apps is astonishingly low—less than one percent for consumer-oriented apps and only 13 percent for business-oriented apps. Suppose Apple, for example, in lieu of in-app payments, charges all developers a high fixed fee upfront to access the development tools necessary to create apps or to access the Apple App Store. In that case, many developers will choose not to create apps for iOS. When the success of an app is highly uncertain, the expected revenue will not be sufficient to cover these development costs. Therefore, only app developers with deep pockets will create iOS apps and there will be fewer apps available in the Apple App Store. In-app payments are a way for Apple, and other app store owners, to earn revenue from the tools and other services it provides to developers while maintaining incentives to innovate for smaller developers.
In-app payments operate by applying a constant percentage fee to all revenue earned by a developer within the app. When Apple uses in-app payments instead of uniform fixed fees, successful, high-revenue apps pay more in total fees than do less successful, low-revenue apps. This discriminatory payment scheme encourages more risky app development by smaller developers who might otherwise not find it profitable to create apps for iOS. In this way, in-app payments encourage innovation in app development.
Incentivizing the development of apps is important because app stores are two-sided platforms. This means consumers get more value from an app store when there are more apps in the store and app developers get more value from an app store when there are more consumers using the store. This means that app stores compete for both consumers and developers. If an app store offers app developers terms that are less attractive than those offered by other app stores, they may attract fewer app developers and the quantity of apps available in their store may suffer. Because an app store with fewer apps is less attractive to consumers, competition among app stores constrains the terms any single app store offers developers.
In addition to the quantity of apps, consumers also have preferences over the quality of app stores leading app stores to differentiate themselves on the basis of quality. For example, while both Epic Games and Steam operate app stores for PC games, Steam differentiates itself by offering a personalized recommendation algorithm and the ability to live-stream gameplay. These app store innovations, which are funded by a revenue-sharing arrangement that operates similarly to in-app payments, attract consumers to the app store which in turn attracts game developers. If Steam required game developers to pay high fixed fees instead, fewer games would be developed and there would be less app store innovation.
The most vocal critics of revenue-sharing with app stores are Epic Games, Match Group, and Spotify—owners of some of the most successful mobile apps—who have sued Apple and Google directly or have made complaints to competition authorities. Fortnite, by Epic Games, was the third most downloaded mobile game when it was released in 2018. Spotify earned over $10 billion in revenue last year due in large part to streaming on mobile devices. These critics do not appear to object to revenue sharing in principle but to the revenue-sharing rate. For example, Epic Games uses a revenue-sharing arrangement in its own app store but only charges a 12 percent commission instead of the 30 percent rate charged by Apple and Google. Now that these innovative app developers have achieved success, they are reluctant to pay for the intellectual property and innovation that made that success possible.
Prohibiting app stores from requiring the use of their own in-app payment systems, as proposed by the OAMA, will by definition force app stores to seek revenue in alternative ways such as through high fixed fees to access development tools or the app store itself. These alternative payment systems are likely to make app development more costly for smaller developers. This will limit entry by new app developers and entrench app incumbents to the detriment of innovation and consumers. The OAMA threatens the vibrancy of the app ecosystem. The Senate should not attempt to fix an app ecosystem that is not broken.