Europe’s Digital Markets Act: But What About the Consumers?

Apple announced its plans to comply with the European Union’s DMA last week. This comes nearly two years after Apple changed its payment-processing rules in the Netherlands in order to comply with a Netherlands Authority for Consumers and Markets order, changed its same rules in South Korea in order to comply with the country’s Telecommunications Business Act, and implemented a worldwide change in how “reader” apps can link to external websites, thanks to a Japan Fair Trade Commission investigation.

These regulations achieve three goals: 1) provide developers additional choices for distributing their applications to iOS users, 2) provide developers choices with how they process payments for purchasing their apps and physical and digital goods within their apps, and 3) provide developers the ability to notify users of ways they can pay the developers, outside Apple’s (and Google’s) App Stores.1

All the regulations tinker around the margins of what developers really want: to pay Apple less money. That’s it. Sure, large developers would appreciate the opportunity to capture customer data through direct sales, and, yes, it might be nice to market existing apps2 in alternative app stores, which may provide better visibility to users who install these app stores. But developers only want to do these things if it allows them to receive more money in each transaction than they currently receive from Apple.3

At this point, it does not appear that these regulations from Europe and Asia force Apple to accept less profit from each digital transaction, even if regulators intended and developers hoped it would. For developers, sadly, it appears Apple has no interest in garnering good will or improving developer relations.4 And Apple has made clear it has no interest in reaping fewer profits from iOS developers.

Here’s the cynical take (at least from 2020): Apple’s App Store is highly profitable because 10% of iPhone users are spending so much money on in-app purchases in games, such that the profit Apple makes from these gaming purchases account for more than 10% of the company’s yearly profit.5 Gaming, in general, accounts for 70% of App Store revenue, and because only 20% of apps generate any revenue from the App Store (id.), the vast majority of revenue the App Store is generating comes from a small number of highly profitable games. It’s no wonder that the loudest voice against Apple so far (Epic) is a high-revenue gaming company.6

The CNBC article covering the Epic vs. Apple trial also revealed that 80% of apps on the App Store make zero revenue because they are free apps. But there’s a difference between truly free apps and apps that are free to download but require purchases or subscriptions at the developer’s website. For example, Netflix’s app is “free” to download, but it doesn’t do anything, unless a user signs up for a subscription on Netflix’s website. Netflix does not want to pay Apple for in-app subscriptions, so users cannot sign up for Netflix from within the Netflix app. I have no data for how many “free” apps fit into this category, but the category includes nearly every app that is a native front-end for a digital service accessible via the web.

But What About the Consumers?

Apple isn’t going to give up 15-20% of their yearly profit or even be willing to cut it in half. Can they afford to? They don’t need the cash in order run the company. But would the stock market accept permanently reducing profit by any amount to placate developers? Only if the alternative is that huge developers, en masse, leave the App Store. And while all developers would benefit by Apple taking less profit from them, most of the profit Apple already generates from the App Store comes from big gaming companies, and most of the money for digital transactions left out of the App Store come from huge companies like Meta, Google, and streaming services. All these regulations set the rules of engagement for the world’s largest companies, not small developers, and certainly not consumers.

There are three ways App Store deregulation could help consumers: 1) to lower prices of in-app purchases, 2) to simplify in-app purchases, and 3) to offer consumers the ability to install apps Apple doesn’t allow in the App Store.

First, I would note that I have never seen a consumer advocacy/watchdog group complain publicly that Apple’s App Store policies hurt consumers. Developer advocates, free capitalism advocates, anti big-business advocates, sure. But most consumers seem pretty happy, or at least not unhappy, with using the App Store. Consumers spend more and more money, every year, in the App Store. Apple and developers make more money, every year, in the App Store. From a consumer’s perspective, the App Store is working.

It’s theoretically true that, if an costs $10 in the App Store, and Apple takes $3 of that purchase (leaving the developer with $7), selling that app directly to the consumer could be done for less than $10, while still allowing the developer to keep $7. But would developers do that? They wouldn’t have to. And, if the developers want to be more profitable, that means they want to keep more than the $7 they earn from the sale with Apple. Does that mean they sell the app for $9 and keep $8? Maybe. Or, more likely, they continue to sell the app for $10 and keep $9. Why wouldn’t a developer want to have the same profit margin from an in-app purchase as it does from a web purchase? They would, and that’s fine. But that doesn’t help the consumer. It maintains the status quo.

In-app purchasing with the App Store is pretty darn easy. But it’s possible third-party developers could build even easier and more secure payment methods than Apple. Having competition in this area could benefit consumers. Or not. Forcing a consumer to enter billing information into a web page within an app is not as easy or as nice as Apple’s in-app purchasing system, and it may be less secure. It also forces the consumer to deal directly with the developer, and/or the payment processor, for refunds or resolving issues. For the consumer, that is not better or easier than dealing with Apple, which, much to developers’ chagrin, has been incredibly generous in refunding purchases.

Apple’s customers, however, are at a disadvantage with developers who refuse to use Apple’s in-app purchasing system. Netflix won’t let Apple customers sign up for a subscription directly in the Netflix app because Netflix doesn’t want to give Apple a percentage of the revenue. For an iPhone user who wants to download the Netflix app and sign up for Netflix, this makes the experience worse. Whether you want to view this as Apple’s fault for being greedy, or Netflix’s fault for being greedy, the consumer suffers. I assume nearly all developers would include a way to purchase a subscription/digital good within their app if Apple didn’t demand a cut of the revenue. For consumers looking to in-app purchases in apps that currently offer no in-app purchasing, regulation here could help the consumer.7

Finally, there’s the reality that Apple rejects some apps and categories of apps that consumers want. I don’t consider it anti-consumer for Apple to exclude these kinds of apps from the App Store. Best Buy and Gamestop aren’t required to sell any app or game that wants to be there. But it is anti-consumer to not let developers give or sell these apps directly to customers. Gruber has a good analysis of Apple’s position regarding third-party distribution, namely that Apple decided the DMA’s use of “or” is exclusive when it says gatekeepers must allow installations from third-party developers “or” third-party marketplaces. Apple decided this meant it could limit sideloading to third-party marketplaces, i.e. alternative app stores and not have to allow developers to directly sell or give away apps to consumers. Apple requires anyone who wants to create a third-party marketplace to 1) be a company and 2) post a letter of credit for €1M. Even for free apps, you’d have to pay Apple for installs over 1 million per year. It’s hard to imagine a marketplace of free emulators existing if it has to fulfill those requirements. This is Apple saying it is not giving consumers the ability to add any apps they want, but Apple will give developers the opportunity to sell apps differently, if there’s money in it for Apple.

Governments around the world can craft regulations that give consumers more choice, but they haven’t done that here. While I have sympathy for a small business developer who needs another 20% in revenue and has no other way to get it than from Apple’s 30% cut, I’m not sympathetic to Spotify, Meta, or any of the big gaming companies. I’m not especially sympathetic to Apple, and if Apple wanted to help its customers, it would start taking steps to curb how financially addictive its platforms’ games are.

All I want is for Apple to offer a developer account to anyone who wanted to distribute free, non-revenue-generating apps outside the App Store and a way for Apple’s customers to download those apps directly from developers.

  1. It’s noteworthy that none of these regulations is designed to primarily benefit phone owners, the consumers of these digital purchases. ↩︎

  2. and the sort of apps Apple prohibits from being in the App Store, such as pornography, emulators and virtualizers, crypto mining apps, etc. ↩︎

  3. Depending on the kind of app or digital good a developer is selling, whether it is in the Small Business Program, or whether the transaction is recurring subscription revenue, Apple is charging developers 3% in payment processing fees, as well as 12-27% in platform fees, which is essentially Apple’s profit margin from the transaction. ↩︎

  4. See e.g. Six Colors 2023 Report Card ↩︎

  5. Apple purported made $64B in revenue from the App Store in 2020. The company made $104B in profit in 2020. Assuming Apple keeps roughly 27% of App Store revenue as profit, that means Apple made $17.28B in profit from the App Store in 2020 and $12B of that profit is from games on the App Store. App Store profit counted for 16.6% of Apple’s 2020 profits, and gaming purchases alone counted for 11.5% of Apple’s 2020 profits. ↩︎

  6. There is a valid argument to be making regarding subscription and digital services purchases from companies like Spotify and Meta, but I am not discussing it here because Apple is not currently capturing significant revenue from those companies. ↩︎

  7. Sadly, between the ways these regulations have been written, and the way Apple is choosing to implement required changes, there will likely be no change in this area that benefits consumers. ↩︎