By: Eric Le
App stores have become a robust place of commerce. In 2021, consumers spent $133 billion dollars on in-app purchases. Apple and Google launched the iOS App Store and the Google Play Store in 2008, respectively. Since then, many coding wizards have become millionaires before they hit the legal drinking age.
Samantha John is a classic example of an entrepreneur who created a successful career through app development. In 2012, she launched HopScotch, an educational app that teaches children to develop games, stories, and art. Initially, John did not monetize the app in order to build a customer base. The strategy worked. Hopscotch gained 20,000 downloads within the first week. In 2015, John monetized the app by introducing a subscription for $7.99 per month, or $79.99 per year.
The subscription model turned an app into an investable business. And it wasn’t just any investable business; it was a business that drew Shark Tank’s Mark Cuban in as an investor. Cuban and John agreed on a deal of $550,000 for 11% equity, putting the valuation of the company at $5,000,000.
App developers who want to list their app on the iOS App Store must sign a Developer Product Licensing Agreement (“DPLA”) with Apple. Pursuant to the DPLA, app developers (1) must pay a commission on in-app purchases; (2) are prohibited from putting a store within the App Store; (3) are prohibited from sideloading apps onto iOS devices; and (4) are required to use Apple’s commerce technology for any payments.
Apple takes a 30% commission fee out of every transaction made through the App Store. There are over 30 million registered iOS developers, all of whom, with very few exceptions, must agree to the contractual terms. Consequently, the 30% commission fee that Apple takes from its developers can quickly add up. In 2020, Apple collected an enormous $64 billion dollars from its 30% commission fee.
Small developers benefit from the DPLA and working with Apple, too. They enjoy the developer tools provided by Apple, such as promotional support and a massive customer base of iOS users. These perks draw smaller developers to Apple and Apple’s in-app purchasing system, but not the bigger players like Google or Facebook.
In 2020, Epic Games, a multi-million-dollar game developer took Apple to court to challenge, among other things, Apple’s 30% mandatory commission fee. Epic largely lost at the District Court level because the court rejected most of its antitrust claims, including technological tying or willful maintenance of monopoly. Epic and Apple are appealing different parts of the decision to the Ninth Circuit Court of Appeals and arguments are scheduled for Oct. 21. (see below)
Epic’s one victory came in the form of an injunction against the anti-steering provision within the DPLA. The provision read, in pertinent part, “Apps and their metadata may not include buttons, external links, or other calls to action that direct customers to purchasing mechanisms other than in-app purchase.” Simply put, the court held that Apple’s anti-steering provision that prohibited developers from directing customers to a website to make payments or completing the transaction outside of the in-app purchasing system, was anticompetitive.
This major win for Epic will also affect smaller developers, as it applies to all iOS app developers. 30% of revenue for a small business trying to get off the ground is a large chunk. Take, for example, HopScotch. If the app gained 20,000 downloads in one week and converted a quarter of downloads into subscribers. Let’s say the subscribers pay $7.99 per month. That would compute to a gross revenue of $31,960 (4,000 x $7.99) per month. Of that $31,960 monthly revenue, Apple would take 30%—roughly $10,000 every month. For a small business, $10,000 is a significant sum. Epic’s victory here should be a huge boon to all entrepreneurial app developers on the iOS App Store.
Smaller app developers certainly have a stake in the fight between the two tech giants. These developers banded together and created the Coalition for App Fairness (CAF). The group celebrated the injunction for lifting Apple’s “stranglehold on the app market as a whole.” In its amicus brief, CAF gave the example of an app called Knitrino, “a Washington state-based company that hosts online interactive knitting communities.” Developers of Knitrino “had to scratch its plans to offer both digital and physical goods through its app after being told by Apple that digital goods had to be purchased through Apple’s own payment systems while physical goods could only be bought through an external system.”
Apple, in response, cited security concerns and asked the Ninth Circuit to stay the injunction. The app store operator asserted that external payment systems “do not necessarily include the anti-fraud, parental control and other protections provided by Apple’s in-app system.” In a last-minute decision, the Ninth Circuit stayed the injunction pending the outcome of the Court of Appeals ruling. At least for now, Apple can delay “making major changes to the App Store to allow developers to include links or advertisements directing users to outside websites where they can make purchases.” But the issue will certainly be litigated extensively before the Ninth Circuit.
As of September 2022, the U.S. Department of Justice and the state of California have joined the fray. Both the DOJ and California received approval from the Ninth Circuit to participate in oral argument. The DOJ plans to use the opportunity to “address the proper legal framework governing [antitrust] claims under . . . the Sherman Act.” California plans to address the District Court’s application of California’s Unfair Competition Law (“UCL”). Neither the DOJ nor California will be advocating for Epic or Apple.
The stakes are high. Oral argument is scheduled for October 21, 2022. App developers, big or small, will have to wait with bated breath to find out if the world’s most valuable company will, pun intended, continue to get a bite of the apples.
This post has been reproduced and updated with the author’s permission. It was originally authored on February 10, 2022 and can be found here.
Sources:
Taylor Locke, ‘Shark Tank’: Mark Cuban ‘Looks Up To’ the Founder of Hopscotch–So He Invested $550,000 in Her App That Teaches Kids to Code, CNBC (Mar. 1, 2021, 10:44 AM), https://www.cnbc.com/2021/03/01/shark-tank-why-mark-cuban-did-6-figure-deal-with-hopscotch-app.html.
Shadab Rabbani, Users Spend $133 Billion on Apps as Apple’s App Store Continues to Lead Revenue Shares, BUSINESS INSIDER (Dec. 8, 2021, 10:33 AM), https://www.businessinsider.in/tech/apps/news/users-spend-133-billion-on-apps-as-apples-app-store-continues-to-lead-revenue-shares/articleshow/88157952.cms.
Sarah Perez, App Stores to See Record Consumer Spend of $133 Billion in 2021, 143.6 Billion New App Installs, TECHCRUNCH, (Dec. 7, 2021, 2:48 PM), https://tcrn.ch/3B1U3tD.
Bryan Koenig, App Makers Backing Epic ‘Controlled By Epic,’ Apple Says, LAW360 (Dec. 1, 2021, 8:19 PM), https://www.law360.com/articles/1444721.
Matthew Perlman, Apple Asks 9th Circ. To Pause Epic App Store Order, LAW360 (Nov. 17, 2021, 6:44 PM), https://www.law360.com/articles/1441407/apple-asks-9th-circ-to-pause-epic-app-store-order.
Hailey Konnath, Apple Gets Epic App Store Order Paused Pending Appeal, LAW360 (Dec. 8, 2021, 10:46 PM), https://www.law360.com/articles/1447084/apple-gets-epic-app-store-order-paused-pending-appeal.
Hailey Konnath, DOJ, Calif. Get OK to Join Arguments in Apple, Epic Appeals, LAW360 (Sept. 16, 2022, 9:37 PM), https://www.law360.com/articles/1531427/doj-calif-get-ok-to-join-arguments-in-apple-epic-appeals.