The app economy’s Perestroika

As is becoming the norm in the frenetic, post-ATT mobile ecosystem, in the last two weeks, three important developments related to mobile platform payments policies were announced. In chronological order:

Spotify revealed that it has entered into a partnership with Google in which it will be allowed to provide alternative, off-platform payments options within its Android App, globally. Note that Google allows this in its South Korean Google Play storefront following the passage of a bill nicknamed the Google power-abuse-prevention law in that country, although Google merely reduces its platform commission by 4% in those circumstances. Note that no commercial terms of the partnership program in which Spotify is participating — and which will presumably initiate other participants at some point — have been revealed (March 23rd, 2022).

The European Parliament voted to approve the final text of the Digital Markets Act (DMA) upon the conclusion of tri-party negotiations between the European Commission, European Parliament, and EU Member States. The DMA comprises a series of reforms targeted at “gatekeepers,” or very large tech platforms like Apple, Meta, Google, and Amazon, as identified by the qualitative and quantitative standards outlined here. Among other things, the DMA mandates that gatekeepers must not require the exclusive use of platform-specific services like payments systems, and that gatekeepers must also allow for the existence of alternative app stores (and the sideloading of apps) on their platforms. With the final text of the DMA agreed upon, the legislation is expected to pass when it goes to a final, perfunctory vote in European Parliament. The DMA is will likely to be followed by sister legislation, the Digital Services Act (DSA), which is focused primarily on content moderation and digital advertising targeting (March 24th, 2022).

Apple softened its requirements for the use of off-platform payments providers for dating apps in the Netherlands. I detail the prior requirements here, which include the use of a separate, Netherlands-specific app binary and the exposure of an unmodifiable Apple-defined pop-up consent modal that includes (in my view, prejudiced) language around the safety of App Store payments related to off-platform payments. All of which provide the benefit of just a 3% reduction in Apple’s platform commission. Apple’s updated requirements do away with the separate binary demand, allow alternative payments to be offered alongside native iTunes payments (previously, Apple only allowed an either / or model for native vs. off-platform payments), and modify the text of the consent modal (March 30th, 2022).

Apple introduced the “external link account entitlement” that was announced last year and allows “reader apps” to link to their websites for the purposes of account creation and management. Apple originally announced its intention to allow for this last year after it reached a settlement with the Japanese Fair Trade Commission.

These regulatory initiatives and platform policy changes, when combined with the slew of piecemeal developments introduced last year, suggest that an app economy Perestroika is nigh. I see no durable path forward for the current status quo on mobile, wherein platform operators are able to restrict or moderate the use of off-platform payments, retain total control over app distribution, or both. Either through regulation or simply attrition, the commercial and operational norms that have characterized the app economy since the App Store was launched in 2008 are being reformulated.

I resisted writing about Spotify’s deal with Google previously given the paucity of detail made public around commercial terms. Given that Google reduced its year-one subscription fee to 15% this year (remember that year-two subscriptions for both Google Play and the App Store have been 15% since 2016), and that both Apple and Google maintain small business programs that reduce their respective platform commissions to 15% for developers with modest on-platform revenues, the relevant platform commission for most developers is 15%, not 30%.

But the dominant platform commission paid on most revenue is not: the App Store is the Games Store, and Apple and Google have both resisted capitulating with lower commissions on in-app purchases for that reason. Games generate the majority of mobile platform revenue, and the largest subscription services sidestep the platform stores anyway, so the platforms offering lower fees on subscriptions gives nothing away. To borrow a colorful phrase I learned during diligence work for a private equity transaction, it is like cutting sleeves off a vest.

The DMA offers the first credible threat to total platform control of distribution and payments. Yes, the drumbeat of concessions made by the platforms around payments in various countries was steady, but as I’ve written before, the country-specific, limited scope (eg. Dating Apps in the Netherlands) restrictions slowly bleeding into platform policy through an ever-growing string of asterisks benefits the platforms more than developers. The more complex platform policy becomes, the higher the overhead required by developers to implement off-platform solutions. EU-wide or US regulation (and a bill similar to the DMA has been proposed) is the most realistic catalyst of change.

Photo by Alex Knight on Unsplash