Apple’s platform fee reduction is strategically genius

This morning, Apple announced that it would roll out a new platform fee scheme beginning on January 1st called the App Store Small Business Program. In this new framework, developers that earn less than $1MM per year through IAPs — across all of their apps — are eligible to join the program, which entitles them to a 50% reduction in platform fees applied to their on-platform generated revenue. In other words, program participants will only pay a 15% platform fee to Apple.

This is a strategic masterstroke by Apple — and to understand why, the mechanics of the program as well as the underlying dynamics of the app economy to which it applies must be examined:

  • This new program requires an explicit application, which implies that Apple will judge whether a developer qualifies based on historical revenue. Which is to say: this is not a $150k tax cut for developers that earn more than $1MM per year, it is only a cut for developers making less than that. Companies that earn more than $1MM per year now will likely not be eligible and thus will not benefit from this program;
  • According to SensorTower data, the Top 1000 Grossing iPhone app in the US yesterday made roughly $4,000. The daily revenue required to reach a $1MM / year run rate is $2,740. Given the negative exponential shape of the revenue distribution of apps in the App Store, one might estimate that an app that makes $2,740 sits at roughly around rank 5,000. According to 42Matters, the App Store hosts 1.76MM apps. So 0.28% of all apps in the App Store earn $1MM per year. The program applies to developers, though, not apps, and 42Matters estimates that 1.38MM developers publish to the App Store for 1.28 apps per developer on average. So it seems fair to assume the ratio is higher in terms of developers that make $1MM per year given that publishing multiple apps gives a developer multiple opportunities to make money. But even if the ratio is almost 4x — to 1% — that still means that this program applies to .99 * 1.38MM = 1,366,200 developers. These are very crude calculations, but I think they stress the scale of applicability for the platform.

Through this scheme, Apple has created powerful optics of benevolence through a tax cut to more than 1.3MM developers, while retaining its standard 30% cut for the 13,800 developers it really cares about — those generating more than $1MM per year (and in some cases, much more than that).

What Apple is doing here is disarming the arguments against it as an overbearing, exploitative platform without jeopardizing its critically-important services revenue. Apple gets to celebrate its commitment to small developers through this program, which neutralizes criticism that it prevents small developers from gaining traction through the 30% fee. Meanwhile, larger developers look greedy if they complain that the fee reduction doesn’t apply to them: why should a developer making millions per month pay the same tax rate as a small, indie developer making hundreds per month?

Apple’s decision to reduce its platform fee for small developers is strategically and optically genius: this decision provides a veneer of magnanimity (and, to be fair, it is generous and helpful to small developers) while protecting its core App Store revenues stream by undermining the arguments against it from the Coalition for App Fairness.