Apple earns billions annually with its App Store. But this business model is faltering. A recent court ruling in the US declares some of the previous commission practices illegal. Developers are now allowed to use their own payment systems – without paying Apple a penalty. This puts the company under pressure. According to a report by Mark Gurman, Apple may soon have to act to remain competitive.
The App Store is one of Apple's largest sources of revenue. Apple currently collects between 15 and 30 percent commission for each in-app transaction. This generates enormous sums, especially in the US, by far the most important market for the App Store. But the business model is slipping. Since a court ruling at the end of last month, developers there are allowed to use their own payment providers without having to pay Apple the previous 27 percent commission. Many major providers have already taken this step. The question now is: How will Apple react?
The court ruling and its consequences
According to the ruling, the 27 percent commission on external payments in the App Store is illegal . Developers are allowed to implement their own payment processing systems. Until then, this was only theoretically possible – but unattractive in practice. Anyone who wanted to use an external system had to overcome several hurdles: First, they had to include a warning that warned users of the potential risks of leaving the App Store. Second, Apple demanded a 27 percent commission on every externally processed purchase. This meant that switching was not worthwhile. Most payment service providers only charge around three percent. Developers therefore had to pay Apple an additional fee – a loss-making deal. The ruling eliminates these conditions. Developers are free to decide how they want to process their payments. Many large providers reacted immediately and introduced their own systems. Smaller developers are also likely to follow suit. The loss for Apple could be substantial.
Apple loses control and revenue
According to Mark Gurman's report , Apple earns around $20 billion a year from App Store commissions. This amount is at risk. Developers are avoiding the issue, and the money is flowing to third-party providers. Apple intends to appeal the ruling, but the process will take time. In the meantime, the new rules will apply. This gives developers breathing room to become independent. The longer the process takes, the more developers could permanently switch to their own solutions. And even if Apple were successful in an appeal, many will not return. So the damage is not just short-term.
What Apple can do now
Mark Gurman identifies two concrete options available to Apple: First, Apple could try to retain developers within its own ecosystem by making a stronger case for data protection and security. Second, the company could adjust its commission structure. According to Gurman, Apple will sooner or later have to lower its commission. Without adjustment, Apple will not only lose revenue, but also control over payment processes and the relationship with users. A reduction in commission could deter developers from switching entirely to their own payment systems. Lower rates for external payments, closer to the 3 percent charged by other providers, are conceivable. A tiered rate based on company size is also possible – as already exists for smaller developers at 15 percent.
Apple's business model is faltering
The ruling represents a clear departure from Apple's previous App Store strategy. The 27 percent commission on external payments is history. Many developers already use their own payment systems – cheaper and more flexible. For Apple, this means a serious loss of revenue. Until the final decision in the appeals process, the company will continue to lose market share. Therefore, it's likely that Apple will take action beforehand. Reducing the commission seems like a logical step to retain developers in its own system. If you develop apps yourself or work in the App Store, you should closely monitor this development. The framework is changing – and with it, the rules of the game for everyone working in the Apple ecosystem. (Image: Shutterstock / Tada Images)
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