In The Biggest App Store Overhaul Since 2008, Apple Cuts Fees For Most Developers By 15%

In the biggest change to the Apple store’s revenue structure since the iPhone maker launched the service in 2008, and one which could have an adverse impact on its Services revenue at least over the short-term, Apple announced it would cut by half the fees charged to most developers who sell software and services on the App Store. Apple’s standard 30% fee will remain for developers that generate more than $1 million in a calendar year.

Since the beginning of the App Store, Apple generally has charged developers a 30% slice of revenue generated by their apps. In 2016, Apple lowered to 15% the cut it takes from subscriptions purchased through the apps for more than a year. Earlier this year, Apple also loosened restrictions on some cloud-gaming apps and email services, charging a fee to fewer developers.

The company is lowering the App Store fee to 15% from 30% for developers who produce as much as $1 million in annual revenue from their apps and those who are new to the store. The changes kick in Jan. 1 as part of an App Store Small Business Program, the world’s largest company said Wednesday in a statement. The company said the new structure will apply to the “vast majority” of developers who charge for apps and in-app purchases on Apple’s devices. The program won’t affect some major apps such as those from Netflix and Spotify Technology.

Apple said it’s making the change to help small developers financially and to provide a way for them to invest in their businesses amid the economic struggles caused by the Covid-19 pandemic.

“We’re launching this program to help small business owners write the next chapter of creativity and prosperity on the App Store, and to build the kind of quality apps our customers love,” Cook said in a statement. “The App Store has been an engine of economic growth like none other, creating millions of new jobs and a pathway to entrepreneurship accessible to anyone with a great idea.”

The company said that if a developer made $1 million or less in 2020, the fee will drop to 15% in 2021 until they reach the $1 million mark. If a developer doesn’t reach $1 million in revenue in 2021, they will retain that discount in 2022. If a developer tops $1 million in revenue in a calendar year, they won’t be eligible again for the 15% split until their revenue falls to less than $1 million for a full calendar year.

The change will take place across App Stores on the iPhone, iPad, Mac, Apple TV and Apple Watch. The company has said that 85% of apps found on the App Store are free and aren’t part of the revenue fee system.

The change comes as a result of ongoing scrutiny from government regulators and criticism from developers about the percentage of revenue Apple takes for App Store purchases. The company has also been engaged in a lawsuit with Epic Games, the maker of the video game Fortnite, over its App Store fees and payment rules. Alphabet’s Google also charges similar fees to developers on its Android app store. U.S. Justice Department lawyers have probed the rules that govern Apple’s App Store, and at least one developer was asked about the 30% fee. Spotify also has complained about the fees to the European Union’s antitrust agency.

With iPhone sales having peaked in 2016/2017…

… income from app developers has been key to Apple’s growing services business, which reached almost $54 billion in revenue in fiscal 2020.

Quoted by Bloomberg, Toni Sacconaghi, an analyst at Sanford C Bernstein, said that the App Store is one of several products and offerings that make up the services unit, but is the biggest revenue driver. He estimates the App Store alone will bring in $18.7 billion in 2021, about a third of Apple’s total services revenue next year.

According to Apple, there are 1.8 million apps in the App Store across all of the company’s platforms and more than 28 million registered developers. The company said earlier this year the store has generated $155 billion for developers since it started.

Chief Executive Officer Tim Cook testified about the company’s App Store practices at a July hearing before U.S. lawmakers. In advance of Cook’s appearance, Apple published a study that claimed its 30% cut is normal for the industry or lower than some app stores.

Small developers make up the majority of App Store sellers. Some major apps, such as those offered by Netflix and Spotify, don’t let subscribers sign up through the App Store, avoiding the 30% charge. Apple’s new fee program reductions won’t lure those subscriptions back because the popular apps generate far more than $1 million annually.

While the price cut will have an adverse near-term impact on Service revenue, Apple is betting that the fee change will result in developers creating more apps and sticking with the App Store, which will create enough new revenue to offset any potential financial negatives from the fee reductions. AAPL stock remains unsure what the outcome is, and after an initial kneejerk move lower, it has stabilized near Tuesday’s closing price.