Rebooting the App Store

In a somewhat surprising move, Apple announced yesterday a set of changes to the App Store just days before its developer conference next week. In some ways though, it’s not a complete surprise – as I wrote in my Insiders piece on Tuesday, WWDC keynotes have become densely-packed affairs, with so much material to cover and a fairly fixed two hour slot to cover it all. As such, getting some of the more complex announcements out ahead of time should help streamline things without getting bogged down in the details during the keynote. It also gives us time to review these announcements separately, without the crush of other news to drown them out.

Schiller’s First Six Months Have Been Productive

Phil Schiller took over most of the responsibility for the App Store from Eddy Cue six months ago, shortly before Christmas. The scale of these changes is impressive but it’s a surprise we didn’t see some of them sooner. Developers have been clamoring for fixes to several of the problems these changes address for years and Apple should have dealt with them earlier. However, the pace Schiller has moved since he took over this responsibility reinforces the sense it was the right move and he’ll address pain points with more alacrity than Cue did.

Fixing Productivity Business Models

Many of the press reports on the news, including those that involved an interview with Schiller himself, have discussed the change to subscriptions in a way that’s been, at best, an oversimplification and, at worst, misleading. I’ve seen very frequent references to the fact productivity apps couldn’t make use of the subscription model until now. However, the App Store developer guidelines explicitly include productivity apps in those categories allowed to make use of them (emphasis added):

Apps may only use auto-renewing subscriptions for periodicals (newspapers, magazines), business Apps (enterprise, productivity, professional creative, cloud storage), and media Apps (video, audio, voice), or the App will be rejected

Why this disconnect between what the policy says and the reporting? Well, it appears that, in practical terms, it’s been hard to qualify under the heading of business apps despite the apparent broad scope. Microsoft Office, Evernote, Dropbox, and others have all made use of this function (indeed, Microsoft’s use of subscriptions led several of the Office apps to the top of the top grossing charts when they first launched on iOS), so it’s simply not true to say the subscription option hasn’t been available to productivity apps. It does appear, though, the policies have been applied in ways that have been opaque and frustrating to smaller productivity app developers, to the extent many of them felt as if productivity apps were indeed excluded altogether (hence the reporting this week). What’s really changed this week isn’t that productivity apps were out and are now in, but that all apps in all categories are eligible to use this model (though there’s still some slightly opaque language from Apple about whether the model is appropriate for all apps).

Regardless of the confusion about what’s changed, the reality is that opening up subscriptions to (essentially) all apps means smaller productivity apps can now take advantage of new business models familiar from other platforms. Interestingly, Apple still doesn’t offer paid upgrades but that’s actually a complicated thing to do on a platform that assumes continuous updates to apps. Would those who forgo a paid upgrade be stuck without updates on the previous version of an app, or would they be forked off into a parallel set of updates? The former is anti-user, while the latter is anti-developer. Neither is satisfying.

Though subscriptions don’t exactly replicate the upgrade model, they meet, to some extent, the same need, which is to pay developers not just once but on an ongoing basis for the work they do to continually improve their apps. As such, I suspect, for many developers, this solves the upgrade problem.

Finding a Path Beyond IAP in Games

I’ve written previously about the unpleasant economics of “free-to-play” games. Gaming dominates the App Store and free-to-download apps with in-app purchases dominate revenues from games. Apple has benefited enormously from the rise of the IAP model, as have many game developers. But the reality is the IAP model tends to foster and encourage addictive behavior and the spending of irresponsible amounts of money on things that have little real value (see the piece I linked at the beginning of this paragraph for the gory details). I would guess that at least some people at Apple feel uneasy about the massive revenues that flow from this fairly unhealthy business model, but no one would be willing to kill the goose that lays the golden eggs without some alternative in place. Though productivity apps may well benefit greatly from the new subscription model, I suspect it may also be a way to wean at least some developers off the IAP model and onto something that’s both more sustainable and more user-friendly.

Today, one-off in-app purchases are really the only way for game developers who don’t charge for downloads to make money from games, but it’s very hard to build a sustainable business off one-off purchases. Game developers have therefore worked hard to craft experiences that require not just a single upgrade but repeated purchases of in-game currency in order to continue playing without interruption or loss of functionality. The subscription model suddenly gives developers a more sustainable way to generate ongoing revenue while giving users a way to pay for experiences they value yet capping their spending at a predictable and consistent level. Together with free trials, the expansion of the subscription model should allow game companies to create better business models that treat their users better while still making money.

Aligning Apple’s Cut with its Contribution

Another big change is the drop from 30% to 15% of Apple’s cut once a subscription hits a year. This strikes a good balance between Apple’s need to fund its investments in the App Store and the recognition its main contribution is in user acquisition, not retention. Though app developers benefit enormously from the store front, the search function (more on that in a minute), and other up-front assistance in acquiring customers, from that point on it’s largely over to developers to keep users happy and engaged. After the initial sale, Apple’s main contribution is in billing, hosting, and the update model, so it makes sense its cut of revenue would drop once its help in acquiring users is recognized and compensated. The new model should incentivize developers all the more to retain their subscription customers, while allowing them to capture more of the value of the subscription, both significant benefits. The next thing Apple needs to do is better support developers with analytics around subscriptions, so app owners can better measure user behavior, likelihood to renew, and so on.

Search Ads Bring Pros and Cons

As was reported a while back by Bloomberg, Apple is introducing paid ads in search results. The introduction of this ad unit is being handled very carefully, with strict limits on the number of ads (one per search), their identification (blue background, with a tag), their relevance (a high payment alone isn’t enough), and protecting users (users under age 13 won’t see them at all). For most users, these ads will either be useful or unintrusive, while they should help developers with new ways to get discovered. And, of course, all this should also help Apple make more money. With 65% of apps apparently discovered through search and billions of downloads per year, search advertising could be lucrative for Apple, as it already has been for both Facebook and Google, though in the grand scheme of things it’ll be far less significant for Apple.

The downside is more accusations from smaller developers that Apple favors the behemoths, who are most likely to be able to pay for such ads. However, the reality is smaller companies face greater obstacles than larger companies in every business in a modern economy and the App Store has never promised to be different. the Editors’ Choice area and other curated elements of the App Store highlight the best apps regardless of size and provide opportunities for smaller developers to get in front of users but the long tail can’t expect preferential treatment in the App Store any more than in the economy as a whole. I expect we’ll continue to see gripes about small developers being squeezed out but this is a transparent move which should have mostly neutral effects.

No Panacea, but Good Progress

There’s no panacea for all that ails the App Store here but there’s definitely progress in addressing some of the most common developer complaints about the App Store. I’ve talked specifically about gaming and productivity apps but the subscription model and other changes should benefit additional categories as well and lead to the creation of new apps and categories that weren’t possible under the more restrictive old model. There will still be complaints and problems and Apple has more work to do to convince at least certain developers that the App Store is right for them and has their best interests at heart, especially on the Mac, but there are signs it understands this and will work to fix things.

Published by

Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw Research, a technology research and consulting firm focused on consumer technology. During his sixteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.

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