Apple & Google – Increase the squeeze

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App store price cuts will hurt the little guys more.

• The fact that both Apple and Google are moving to make the economics more favourable for developers is likely to hurt the smaller players and potentially squeeze them out of contention. .
• Both Apple and Google have announced that they will reduce the cut that they take on subscription based revenues from 30% to 15%.
• Google will reduce its cut from day 1 of the subscription whereas Apple will reduce its cut when the subscription passes 1 year in longevity.
• This is good news for developers but particularly for Spotify, Netflix, HBO and Pandora who are subscription based and regularly grace the “top grossing” charts for the Apple App Store.
• This also speaks volumes about the power of default as Spotify has been urging its subscribers to buy their subscriptions from outside the Apple App Store where they will pay 30% less but with very little success.
• With the cut being reduced to 15%, I suspect that the media subscription companies will pass the cost saving directly to the consumer which will therefore have almost no impact upon their revenues at all.
• I think that these moves say different things about each company.
  • Apple. I have long believed that most of what makes Apple so strong is the fact that it is by far the best distributor of third parties apps and services.
  • This means that when things slow down, Apple needs to do what it can to keep them happy so that they will continue to prefer developing for iOS.
  • Currently, RFM research indicates that the economics for developers are very much skewed in favour of iOS.
  • This means that even being forced to share 30% with Apple and use its payment gateway, it is still by far the best platform for a developer to make a good return.
  • Hence, I see this as a move to cement its grip on this position and to keep developers as happy as possible as after all, this lies at the heart of why users pay a huge premium for its devices.
  • Google. When it comes to developers, RFM research has indicated time and again that Google is on the back foot.
  • Developers now make less money on Google Play than they did before and this has incentivised them to develop for iOS first and then worry about Google Play later.
  • Furthermore, Google Play has the Amazon App Store snapping at its heels and hence Google is under pressure to keep developers as happy as possible.
  • Google uses Google Play to control Android and to ensure that its services are both on the home screen of the device and also set as default.
  • If Google Play deteriorates, then Google’s ability to control the devices that run its ecosystem will also deteriorate, weakening its ability to earn revenues from Android.
  • This is why Google has to keep developers as happy as possible as they are the key to keeping its services squarely under the user’s nose.
• The 30% share was started as a way to compensate the app stores for the cost of providing the infrastructure that would allow a developer to sell his apps and were initially not intended to make money.
• However, both Google and Apple have become so large that the revenues have long since outstripped the rising costs of supporting the developers and I see pressure to improve the economics for the developer only increasing with time
• The net result is likely to be further cuts over time to the fees that the app stores charge to developers which will hurt the competing app stores much more than Apple or Google.
• This is because these two are used as the industry benchmark and if developers pay less to publish their apps there, they will demand lower fees to also publish elsewhere.
• The smaller app stores don’t have the scale to allow them to make a decent return by charging 30%, and being forced to cut their fees could make life very hard for them indeed.
• Hence, although Apple and Google will have slower profits from putting through extensive cuts, it will also have the effect of squeezing out those that would see to challenge them.
• It will make like harder for Amazon but I think there is plenty of cash available to absorb this.
• It is also likely to have a knock on effect in China where Tencent is No 1, Qihoo is No. 2, Xiaomi is No. 3 and Baidu is No. 4.
• I still prefer Apple over Google which I think is more than fairly valued.