There was a lot of talk when Phil Schiller became the App Store supervisor last December. Now, after only six months, we have been granted a glimpse to the new App Store strategy.
I like to think about this revamp as App Store 2.0, since it has changed more in the last half a year than in the previous eight years. After being introduced in 2008 alongside iPhone OS 2 and the iPhone 3G, there has been little change.
Up until now.
The App Store’s major problems
iOS developers have only had a handful of ways to get paid for their efforts. First and most obvious of all, is creating a paid app. Users that want to download it have to pay some small amount up front in exchange for unlimited use.
Free apps have also been around for some time. These have been supported with ads within the app, ensuring a constant stream of cash, although small and dependent on users’ actual use of the app.
A third and somewhat mix of the other two are the infamous in-app-purchases, where you have to pay a specific amount for unlocking new features of an app or getting some kind of advantage if it is a game.
Subscriptions have also been a part of the App Store strategy. But this has typically been reserved to bigger players and media content providers.
As some indie developers pointed me out privately several months back, these restrictions make it really hard for them to earn a living. They saw them as perfect for games and big companies but harmful for smaller developers.
The iOS App Store could benefit from the practices widely used in the PC software distribution. As Ben Thompson wrote on his blog:
- First, the lack of trials means that genuinely superior apps are unable to charge higher prices because there is no way to demonstrate to consumers prior to purchase why they should pay more. Some apps can hack around this with in-app purchases, but purposely ruining the user experience is an exceedingly difficult way to demonstrate that your experience is superior.
- Secondly, the lack of a simple upgrade path (and upgrade pricing) makes it difficult to extract additional revenue from your best customers; it is far easier to get your fans to pay more than it is to find completely new customers forever. Again, developers can hack around this by simply releasing completely new apps, but it’s a poor experience at best and there is no way to reward return customers with better pricing, or, more critically, to communicate to them why they should upgrade.
- That there is the third point: Apple has completely intermediated the relationship between developers and their customers. Not only can developers not communicate news about upgrades (or again, hack around it with inappropriate notifications), they also can’t gain qualitative feedback that could inspire the sort of improvements that would make an upgrade attractive in the first place.
In other words, the App Store strategy has worked well so long as developers kept their business focused on games and little else.
But this model is no longer suitable for devices different from the iPhone. The Apple Watch, Apple TV and iPad, especially the Pro models, need a different approach.
The need for a new approach to foster app sales
The App Store has been leveraging on the growth of the iPhone ever since its inception. But now, with that driver winding down amidst slowing iPhone sales, Apple developers are suffering.
Below is the evolution of the amount paid to developers at each time, in million dollars. Please note that the time scale is not linear since Apple only releases these figures on an irregular schedule:
Last time Apple updated this figure was in January 2016, where they reported 40 billion dollars paid to developers up until that date.
Except for a couple of hiccups, seems like the trend goes upwards. But if you take a closer look at the daily payments, the picture changes:
There has been a trend of slowing growth since the beginning. Something that is understandable as growing from a small number in absolute terms is easy and throws in huge growth numbers.
This figure really shows the need for a change in the App Store strategy. Slowing earnings for developers is a risk that Apple cannot leave unattended. Keeping their attention and their pockets full of dollars is paramount.
Meet the new App Store strategy
All these concerns, raised by several prominent app developers during the last months, are very real. And Apple listened to them.
The change in the App Store leadership is a sign as to how serious Apple is taking this matter. Today, we know that Phil Schiller’s appointment as head of the App Store has born fruit. Per Lauren Goode’s article on The Verge, we know now part of the story:
- Faster app reviews, with 90% done in 48 hours.
- Subscription model is now available to all app categories.
- With this model, the revenue split for the first year is the classic 70/30. From year two onwards it’s going to be 85/15, giving developers a bigger chunk of the pie.
- The App Store will filter out apps already installed, something borrowed from the Apple TV. Also, better app discovery will be introduced.
- Search ads integrated in the App Store, allowing for more chances of discovery for those developers willing to pay for them.
All of these improvements are long due and very welcome. But some more than others.
The subscription model addresses some of the developers’ concerns regarding paid app upgrades. In the past and as Thompson argues, they had to either give away big upgrades or create a separate app. The latter option had the added difficulty of not being able to communicate with users, letting them know a new app is available.
Again, per The Verge’s interview:
“It wasn’t done from a negative like that,” [Phil Schiller] says. When I asked about this, he stresses that it was “absolutely done because we recognize that developers do a lot of work to retain a customer over time in a subscription model, and we wanted to reward them for that by helping them to keep more of the revenue.” Apple can help drive customers to the original download, Schiller argues, but only the developer can keep the customer over time and “we want to incent them to do that
With the subscription model, developers only have to worry about keeping their apps attractive enough so that the user won’t cancel the subscription. Also and with this new App Store strategy, developers have the incentive to keep their users as long as they can in order to benefit from the new 85/15 revenue split.
It certainly is an approach that other big companies have been using for some time now. Microsoft is pivoting its business model towards subscriptions while Adobe has already transitioned completely.
It is still early to tell if rivals like Spotify and Amazon will welcome these changes in the App Store strategy. Jeff Bezos referred to the economic conditions a few days back to refuse to bring Amazon Prime Video to the Apple TV.
The financial side of the new App Store rules
Back in January, Apple executives tried to show a part of their business previously hidden within the company. During the Q1 FY 2016 conference call, Tim Cook released supplemental material to support his new thesis around the Apple Service’s story.
In FY 2015, Apple had almost 20 billion dollars of revenues coming through its different services: Apple Music, App Store, iCloud and Apple Pay are some of them.
Now look at the timing. Apple released this material a few weeks after appointing Phil Schiller as the new head of the App Store. It is very likely that right then the subscription model was being considered as part of the new App Store strategy.
Also, as part of this strategy, search ads are being introduced. This will effectively create a new way of earning revenues on Apple’s side.
To accommodate the new subscription model, there will be 200 new pricing tiers in different currencies and countries around the world. Will be interesting to watch how these are managed.
This new strategy is not enough
Although these changes are positive and much bigger than what the App Store has seen in eight years, I am still skeptical about its effectiveness.
Subscriptions are a good way to apease developer’s demands. But nothing was said about trials. For the App Store strategy to make a dent, trials are an essential part of the plan.
The iPad Pro’s biggest drawback for developers is being unable to offer a single app for free for a limited time, then unlock it forever with a payment (or a subscription). The user needs to understand the value of a full featured app before committing the money.
My other concern is that there is no mention to the other side of the coin. The user is the one that keeps the wheel spinning with his money. But, if the user doesn’t find these changes appealing, all falls apart.
It is obvious that subscription services are growing in developed countries. Everyone in the US is used to paying everything with a credit card and then with installment plans. But it also has some drawbacks.
Accumulating subscriptions at the end of the month can end up creating a backlash in the user, impacting developers revenues and their 85/15 split down the road. For sure, Apple could offer some sort of flat fee plan in the future, where the user pays a monthly fee that includes several app subscriptions.
We know the main points of the App Store strategy, but nothing about its details and implementation. In all fairness, the WWDC is only five days away and it is likely that some of these concerns could be addressed by then. But for now, I’m afraid the new App Store Strategy is not enough.