Future of In-App Payments: Duopoly vs Choice

Two Party Rule or Democracy?

by: - Last updated on: September 1st, 2021
Key Takeaways
  • Google’s Play Store and Apple’s App Store dominate the app distribution market with over 4.8 billion apps combined.
  • In addition to app distribution, the two companies control the in-app payments too which has led to a stranglehold on revenue.
  • South Korean parliament has passed legislation to address this duopoly in in-app payments. Will other countries follow suit?

The popularity of smartphone applications has increased rapidly over the past decade due to technological improvements and lower prices. This has led to app stores becoming major distribution platforms, with Google Play Store and Apple App Store ruling the roost. At the time of writing, over 4.8 million apps are available on the two stores. This duopoly has had a significant impact on app developers, as the dominance of the Apple App Store and Google Play Store has led to a stranglehold on revenue. This primarily affects in-app payments.

in app payments

All About the Choice

In an ideal world, developers should be able to decide which platform to use to distribute the app, which payment gateway to use, and what percentage of revenue to share with the distributor and payment processor. In addition to these three points, a developer could innovate the way they interact with their customers and offer discounts based on preferences. These in-app payment options would allow the app developer to secure a more stable revenue stream.

Does that sound too idealistic? Well, with the new in-app payments legislation passed on South Korea, this could soon become a reality.

But how did we get to this stage? Primarily, what kicked the hornet’s nest was Epic Games’ Fortnite, which was initially released for Android and could not support in-app purchases. This was due to Google’s payment policy, and Epic duly announced that it had no plans to support this feature on Android. Last December, Epic Games filed two separate lawsuits against Google and Apple for predatory practices in handling in-app payments. The verdict in the lawsuit against Apple is expected later this year.

Although the symptoms of this problem have been known for some time, it has now gained prominence and both consumers and developers are starting to take notice. This lawsuit led to an unprecedented event when Google Play Store disclosed its revenue for the first time. According to a report from Paresh Dave of Reuters, Google Play generated $11.2 billion in Play Store revenue in 2019. Apple’s App Store generated $20 billion in gross app revenue in the first quarter of 2021. This includes consumer spending on in-app purchases, subscriptions, and premium apps in the most recently measured quarter.

While South Korea is becoming a utopia for app distribution, governments in other parts of the world are taking up the issue as well. But before that, context both Apple and Google prohibit developers from using their own or third-party payment systems for in-app purchases and subscriptions.

google apple app stores

Here’s how much each of the two charges:

How much does Apple charge developers for distributing via App Store?

– 30 percent standard commission on apps and in-app purchases of digital goods and services. Subscription commission falls to 15 percent after one year.
– Developers who generate less than $1 million in annual revenue from the App Store receive 15 percent commission on those sales.

How much does Alphabet charge developers for distributing via Play Store?

– 30 percent standard commission on apps and in-app purchases of digital goods and services. Subscription commission falls to 15 percent after one year.
– Google charges developers 15 percent every year on the first $1 million in Play Store revenue, and the rate goes back to 30 percent after that.

Governments and Regulators are now actively involved

Since this issue started gathering moss, several governments across the world have started taking notice of this duopoly:

– South Korea, through their new legislation.
– The United States of America, through a federal case brought in by 36 states.
– European Union through Digital Markets Act.
– The United Kingdom, through multiple anti-monopoly probes.
– Indian Ecosystem through an anti-monopoly probe and questioning the system as a united front.

Apple and Google would argue that they have put in a lot of effort (and money) to make the whole process of in-app payments easy and secure for their customers. They would also point out the significant amount of money they pay to developers in the form of revenue share.

But for developers who have to work within the rules of this system, it does seem like a raw deal. A platform can be open yet also be closed at the same time. As per a BBC report, “Apple’s estimates of its costs for running the App Store were “just $100mn” (£71mn) – but it had made $15bn (£10.6bn) last year.” While we don’t have the exact numbers from Google’s side, we can expect it to be on similar lines.

Conclusion

It’s not just the developers who feel stifled; even the indigenous payment players feel they are losing out on business to the duopoly. They feel that the claims of security by Apple and Google remain meritless because that would mean these two companies are doing something extraordinary that others are not.

It’s about the choice of distribution, we all know that Google Play Store and App Store will continue to exist. We believe that choice is central to competition and hence when developers choose to distribute via our infrastructure, we allow the choice of payment gateway. This choice we believe would allow developers leverage to negotiate a reasonable fee with the two companies and payment gateway providers,” says Rakesh Deshmukh, CEO, and co-founder of Indus App Bazaar which is one of the most popular “alternative app stores” for Android devices.

Competition breeds innovation. And that extends to the choice of app platforms as well. “For our IoT product, Vookmark, launching on Indus App bazaar has boosted our growth with a new set of engaged users and more ways… We are exploring the ability to distribute and collect payments through alternative channels for our browser extensions, Android, and iOS packages. Alternative distribution & lower commissions will certainly help to redirect funds for R&D and grow faster,” says Rajesh Padmanabhan, co-founder, NFN Labs.

The amendments to the South Korean Telecommunications Business Act that were approved yesterday intend to promote fair competition in the app market industry. The bill prohibits app market business operators from taking advantage of their dominant status to force developers to use a specific payment system. The move would also enable app developers to avoid the hefty commissions, and thus reduce costs both for developers and end-consumers.

However, this is just a start. Developers and payment gateways will be hoping more countries including the US and India follow suit. Democratization is the need of the hour, not just for in-app payments but for app distribution as well.

Disclosure: This article was written in partnership with Indus App Bazaar.

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