What’s at Stake in Senator Amy Klobuchar’s App Store Fight for Startups?

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Smaller firms can benefit when Congress scrutinises Apple and Google’s policies against third-party software developers.

Spotify, Tile, and Match Group are no longer considered startups. Neither is Epic Games, the maker of Fortnite, which was estimated at $17.3 billion last year. However, these firms, who both rely on Apple and Google to host their applications, are embroiled in a struggle with the tech behemoths that may have ramifications for smaller businesses and individual software creators.

Several of these firms appeared before a Senate Judiciary Committee subcommittee led by Senator Amy Klobuchar (D-Minn.) on Wednesday about how Apple and Google’s app-store practises have harmed their businesses. It’s the last in a series of hearings on major tech and antitrust questions that Klobuchar has presided over.

“When you first hear about this, I know my first reaction was, ‘Why wouldn’t everyone want to be on the App Store?'” In an interview previous to the hearing, Klobuchar told Inc.

App developers have a host of reasons as to why they don’t want to partner with the world’s two largest mobile operating systems. One major point of contention is the so-called “app-store tax” of anywhere between 15 to 30 percent that Apple and Google charge companies for most paid transactions made through their platforms. For example, if Spotify users subscribe to the service through their iPhones, Apple will receive a cut of sales.

As businesses grow more profitable, the 30 or 15 percent cut for every paid transaction starts to add up. Jared Sine, chief legal officer of Match Group, the company that owns popular dating apps like Tinder and Hinge, revealed that app-store commission fees are the company’s single largest expense at more than $500 million annually.

Both Apple and Google take the position that Spotify, Tile, and other companies are still successful despite the app-store commissions. They also argue that the labor of curating and vetting each app for safety justifies the commission. Apple’s legal chief, Kyle Andeer, noted that each week, Apple reviews about 100,000 submissions and rejects 40 percent of them. Critics say that the tech giants are still missing scam apps, and are rejecting new features that legitimate app makers roll out to keep users safe.

Here are the three biggest issues at stake for startups and third-party developers as Congress scrutinizes Apple’s and Google’s app-store policies:

1. Even reduced app-store “taxes” are hurting smaller developers.

While years of pushback prompted Apple and Google to reduce the cut they take from the smallest app developers from 30 percent to 15 percent, Klobuchar and other critics of the move say this doesn’t inoculate the tech giants from anticompetitive conduct.

“They changed their policies for some of the smallest fish, but it seems like whenever someone’s to the point where they can compete with the yacht, they might start to say, ‘OK, I’m going to start charging a lot of you,” said Klobuchar.

Apple and Google respectively charge a discounted commision rate of 15% until an app maker generates more than $1 million in sales. After $1 million, the fee increases to the 30% that most (but not all) bigger businesses must pay for app store revenue purchases. Every year, the $1 million threshold on Google Play is reset. A enterprise that receives more than $1 million in 2020 will be ineligible for the small-business discount in 2021, but will reapply the next year, according to Apple.
But most app developers won’t hit anywhere near the $1 million mark. As a March 2021 App Annie study notes, the vast majority of app developers on both iOS and Android generate less than $100,000 in consumer spend per year. So even with the reduced rate of 15 percent, a company that earns $100,000 in sales one year on either platform will end up losing $15,000 to commission rates.

One way businesses can circumvent the 30 percent app-store tax is to ask customers to pay for services directly on their website. But companies like Spotify say Apple has blocked them from advertising lower-priced options on the apps themselves.

During the hearing, Spotify’s chief legal officer, Horacio Gutierrez, said, “We couldn’t even email our users to tell them about a way to upgrade that didn’t involve paying through Apple,”

Such action, according to Klobuchar, is unjustifiable. “I don’t know how [Apple and Google] can justify telling companies that are on their app store that they are banned from telling customers that they can get a better deal on their website,” Klobuchar told Inc.

3. Beware if Apple or Google decides to build something to compete with your app.

When applications or utilities mimic existing or upcoming offerings from Apple or Google, the situation becomes complicated. Tile, a lost-item finder, has accused Apple of anticompetitive conduct in response to the newly introduced Apple AirTag. The AirTag product, which is also a lost-item finder, will compete directly with Tile.

“We welcome competition, but it has to be fair competition, and Apple’s idea of competing is patently unfair,” said Kirsten Daru, Tile’s general counsel. Tile, for example, claims that iPhone users must go deep into their phone’s settings to allow tracking, while AirTag’s tracking functionality is activated automatically.

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Apple has also been accused of favouring its own applications over those of competitors in search results. Competitors have responded in some cases by buying paying advertisements that appear first in search results. A quest for “Maps” on the iOS app store, for example, yields a paying ad for Google Maps, followed by Waze, Apple Maps, and then Google Maps again.

However, there could be a silver lining. Apple has made its “Find My” network and even more precise Ultra Wideband technologies available to users, which means that even third-party applications will also make devices based on the network. Tile is now developing its own Ultra Wideband tech tracker that will use virtual reality, putting it one step ahead of AirTags.

Apple’s decision to open up its Ultra Wideband technology will make it possible for those businesses who can’t afford to have location-tracking on their own to do so. Manufacturers of bikes or other easily misplaced products, for example, will now allow them to be monitored via Apple’s “Find My” network. In principle, these businesses may benefit from having connections to a more precise network. However, with Apple’s track record of third-party brands, it’s too early to predict how many businesses can pay for the privilege.

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