Apple’s IAP deal with Amazon and the beginning of a new era

Last week, Amazon’s Prime Video app on iOS began offering users the ability to purchase and rent video content via Amazon’s payment system, bypassing the iTunes in-app purchase payments process on iOS. This is an enormously significant development: Apple has historically exerted tight control over payments on iOS by forcing developers to use the iTunes IAP payments process that levies a 30% platform fee on all transactions.

Developers have begrudgingly paid the 30% tax on IAP transactions on both iOS and Google Play for years, but as a number of high profile developers began moving their app transactions to the web in order to avoid these platform fees, a sea change seemed imminent. Netflix and Spotify encourage users to transact on the web so as to avoid using the iTunes payments system; YouTube last month went so far as to cancel all active iTunes subscriptions to force those users to subscribe via the web.

But a web-based payments flow isn’t ideal; it’s a bad user experience (a user has to leave an app, open a mobile website, log into the service, and enter their credit card information), and it’s also simply inconsistently implemented across the iOS ecosystem. Apple has been engaged in a sort of cold war with very large companies that operate across many platforms — Spotify, Netflix, YouTube were able to get away with bypassing iTunes payment processing on mobile because they could always claim that users may have discovered their services on any number of platforms (desktop, connected TVs, etc.). But by tacitly accepting the web payments workaround, Apple signaled to developers that allowing for non-iTunes payments on iOS was inevitable. With Amazon’s adoption of its own payments system for the Amazon Prime iOS app, that moment is upon us.

John Gruber has an excellent overview of how the new Amazon Prime payments process works on iOS, but as a succinct overview:

  • Existing Prime account holders can now purchase and rent videos in the Prime iOS app via the Amazon payments process with the credit card attached to their Amazon account;
  • Anyone who upgrades to a Prime account via the iOS app still has to do so via iTunes payment processing, which means Apple takes their 30% / 15% cut of that subscription;
  • Users who subscribed to Prime via the iOS app will pay for any movies rented or purchased via the iTunes purchasing system.

Apple provided a statement about the new arrangement with Amazon to The Verge:

Apple has an established program for premium subscription video entertainment providers to offer a variety of customer benefits — including integration with the Apple TV app, AirPlay 2 support, tvOS apps, universal search, Siri support and, where applicable, single or zero sign-on. On qualifying premium video entertainment apps such as Prime Video, Altice One and Canal+, customers have the option to buy or rent movies and TV shows using the payment method tied to their existing video subscription.

Parsing this passage reveals some vital information:

  • Amazon is taking part in an apparently pre-existing program that also includes Altice One and Canal+;
  • In order to qualify for the program, Amazon had to integrate the Prime Video app with a number of other Apple’s features and services.

Given that this is an explicitly designated developer program, it stands to reason that participation isn’t open to the development community at large: it’s very likely that preferential payment terms were negotiated between Amazon and Apple in order to entice Amazon to cooperate.

Given that, one might wonder if this development is actually meaningful. That two of the world’s largest companies negotiated a mutually-beneficial commercial partnership within the context of a narrowly-scoped, invite-only developer program doesn’t have broad implications for the developer ecosystem. But I think the deal struck between Amazon and Apple reveals something very significant that will eventually impact the degree to which the iOS platform remains rigidly controlled by Apple: that pricing power has shifted from Apple to developers, and Apple no longer gets to set commercial terms.

I’ve long maintained that Apple can’t be classified as a monopoly because of the 30% platform fee or because it doesn’t allow third-party app stores within the iOS ecosystem. Monopolistic power is fundamentally related to the ability to be a price setter: to dictate prices because, through lack of competition, consumers have no choice but to purchase from a single firm. But in the case of smartphone apps, Apple doesn’t actually transact with end users — it merely operates a marketplace that connects app developers (sellers) with the people that own Apple hardware (buyers). Apple’s relationship with developers is that of an agent, and developers certainly have more options than just iOS in terms of distribution platforms for their apps. Apple doesn’t even have a majority of smartphone sales market share; how could it be a monopoly?

This price setting property is important when considering a monopoly. If Apple increased its platform fee to 40%, or 50%, what would happen — would all developers simply accept that? And if so: why isn’t it happening? In fact, the opposite is happening: Apple reduced its platform fee for year-2 subscriptions in June 2016 and Google followed suit for Android shortly thereafter in October 2016 (monopoly accusations aren’t leveled at Google over platform fees because Android allows developers to transact directly with users outside of Google Play). If Apple enjoyed monopoly pricing power, it wouldn’t be engaged in a slow-motion race to the bottom with a competitor that owns more marketshare than it does.

Some proponents of the Apple as monopoly worldview argue here that within the iOS ecosystem, Apple exists as a monopoly because it doesn’t allow for competing stores. This re-scoping of the situation blurs some logical lines (both consumers and developers still have choice: Android is larger than iOS!), but even putting that aside, Apple doesn’t qualify as a monopoly within this perspective because Apple doesn’t sell anything — it connects buyers and sellers as a marketplace operator. If anything, Apple in this case might be considered a monopsony, or a firm that enjoys exclusive buyer status: a monopsony is the only party to whom goods or services can be sold and can thus set prices in a way that maximizes its profit regardless of market forces.

But there’s no marginal cost of production for software, and given that Apple takes a percentage of in-app purchase revenues and not a fixed fee per purchase, both Apple and developers are incentivized to maximize revenue through appropriate pricing. This is the whole reason the freemium model rose to prominence on mobile in the first place: developers, not Apple, began reducing app prices until most settled at $0 simply because the competition for attention in the ever-crowding App Store was so ferocious. In fact, Apple seems to host a non-trivial amount of antipathy for the freemium model, as is evidenced with its Arcade product.

Coming back to Amazon: it is clear with this deal that turning a blind eye to the web payments workaround on iOS is ultimately leading to adoption of third-party payments. Far from being a monopoly, Apple is competing for users in a very crowded platforms marketplace: a tightly integrated system in which almost all participants not only operate platforms but also publish content on other companies’ platforms — a matrix of content stores and content.

The calculus that Apple is dealing with is: at what point does the total surface area of this matrix begin to influence the way Apple polices its own slice of the matrix? As consumers are presented with ever-increasing opportunities to consume their favorite content, when, for example, does the incremental value from offering frictionless access to Prime Video content on iOS outweigh the incremental revenue from 30% of a poorly-integrated Amazon Prime on iOS?

Obviously that decision isn’t restricted exclusively to Amazon Prime: Apple will have to begin to decide how this matrix, which represents consumer choice and optionality, will influence the freedom to which it allows developers to operate on iOS. But a decision like the one that Apple made with Amazon seems unlikely to not cascade out to other developers into a more comprehensive platform policy.

Photo by Arnel Hasanovic on Unsplash