Microsoft might upend the app economy

Last week, Microsoft published a set of “Open App Store Principles” to its blog. The principles fall across four broad categories — Quality, Safety, Security & Privacy; Accountability; Fairness and Transparency; and Developer Choice — and they hew quite closely to the text of the Open App Markets Act, which I’ve covered here and here.

The principles are worth reading in their entirety. But to my mind, the three most consequential developer guarantees to which Microsoft affirms in its Open App Store Principles are:

  • Microsoft won’t unfairly privilege its own titles in its app store relative to those of other developers, including through the use of proprietary data gleaned through operating the store (this is an important consideration for the XBox store if the Activision Blizzard acquisition closes);
  • Microsoft will allow for off-platform payments to be used in processing transactions in its app store;
  • Microsoft will not require that developers offer favorable terms for transactions processed through the native mechanisms of its own store (versus those processed with off-platform payments systems).

These principles exists in stark contrast to the operating model of the App Store on iOS, and, to a lesser extent, Google Play on Android. With these principles, Microsoft is essentially opting into the conditions of the Open App Markets Act without that bill having been passed.

Microsoft’s declaration of principles deftly accomplishes two very important app economy landscape adjustments.

First, the principles challenge, if not eradicate, the arbitrary distinction between mobile and other hardware form factors in terms of app store policy (as does the Open App Markets Act). Why should the consumer and developer protections and benefits spelled out in Microsoft’s principles not apply to any content distribution portal, on any hardware form factor? This fits into my thesis around the future of mobile content platforms, which I express in this three-part series: consumers expect to engage with their favorite content seamlessly and across a range of devices, so why should the legacy mobile platforms be allowed to claim exclusive rights and privileges?

Second, the principles break the gridlock of the de facto policy coordination between the largest mobile platform operators. This is potentially less potent of a near-term benefit to developers, but nonetheless: Apple and Google have operated in lockstep around payments policies since the dawn of mobile app distribution. Both Apple and Google both reduced second-year subscription fees to 15% in their mobile app stores at roughly the same time, they both instituted small business programs at roughly the same time, and they have both dug their heels in against the current wave of by-country regulation of alternative payments in roughly the same way. There is some app store policy differentiation between Apple and Google, of course — for instance, Google recently reduced its platform fee on all subscriptions to 15%, which Apple didn’t match — but for the most part, the two companies present outwardly as a united front.

It’s important to remember that the App Store is the Games store: gaming contributes the vast majority of mobile app store revenues. Acknowledging gaming as the primary scope of these principles, Microsoft is ostensibly trying to accomplish the following, in decreasing order of priority:

  • Win favor with the FTC, which is investigating Microsoft’s proposed acquisition of Activision Blizzard on the basis of competitive harm;
  • Rally legislative support in the direction of the Open App Markets Act, which very clearly influenced Microsoft’s principles. If this legislation is passed, it would clear a path for a Microsoft app store on mobile platforms;
  • Win favor with game developers, which might preference development for the XBox platform as a result of these app store principles.

While Microsoft’s app store principles don’t create a viable third choice for mobile developers, they at least create a spiritual alternative that interrogates the necessity of operating the way the mobile platforms do. “If Microsoft can offer alternative payments, why can’t you?” becomes a salient question to pose to Apple or Google, and “Because we operate a mobile app store and Microsoft operates a console app store” becomes an insufficient response.

Microsoft appears to be assembling a content fortress within its gaming business. At the very end of last year, in a deal that garnered very little attention outside of the ad tech space, Microsoft acquired Xandr, AT&T’s advertising platform. Xandr was primarily built atop the AppNexus DSP, which was acquired through AT&T’s purchase of AppNexus in 2018 and subsequently integrated into WarnerMedia’s content portfolio. With the acquisition of Xandr, Microsoft now operates a scaled video DSP capable of bolstering its advertising business, which reached $10BN in trailing-twelve-months revenue per Microsoft’s latest earnings call. Microsoft has articulated an ambition to continue to scale that business. From the call:

More broadly, we are expanding our opportunity in advertising. Over the past 12 months, our total advertising revenue, inclusive of LinkedIn, surpassed $10 billion ex-TAC. And with our acquisition of Xandr, we will bring to market new advertising solutions that combine our deep audience understanding and customer base with Xandr’s large-scale, data-driven platforms…In search and news advertising ex-TAC, we expect revenue growth in the mid- to high-teens against a strong prior-year comparable that was driven by a recovery in the advertising market. And in gaming, on a prior-year comparable that included significant strength in hardware from our new consoles, as well as across Xbox content and services, we expect revenue growth in the mid-single digits. Console sales will continue to be impacted by supply chain uncertainty. And in Xbox content and services, we expect revenue growth in the mid- to high-single digits with strong engagement and continued momentum across the platform.

Microsoft’s combined ownership of a hardware form factor and content store (XBox), an ad platform (Xandr), and, potentially soon, a massive and culturally significant content portfolio (Activision Blizzard) represents possibly the most significant content fortress in gaming. If its acquisition of Activision Blizzard is approved by the FTC, Microsoft could have enough engagement surface area through the XBox, the massive mobile reach of King at 250MM mobile MAUs, and the Activision catalog to operate an enormous — possibly the largest? — gaming ad network.

And ad networks are attractive businesses. It’s possible that Microsoft doesn’t genuinely want to build an ad network with placements within the XBox store and across its content portfolio, using the tech it has already acquired. But it could — and that’s a good reason to care more about bringing third-party content to its platform via attractive publishing terms than in extracting rents via payments lock-in.