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Tutorials, musings on programming and ePublishing

The Real Outcome of the New In-App Purchase Rules

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The root cause for so much of the subscription ruckus, I think, isn’t that 30% number — it’s that Apple pulled the rug out from under some major apps after the fact. … [T]heir months or years of hard work, and in many cases, their entire businesses — can be yanked by Apple’s whim at any time for reasons that they couldn’t have anticipated or avoided. … [I]f Apple breaks that expectation by changing an important rule in a way that we think isn’t justifiable, it’s perfectly reasonable for us to complain about it as loudly as possible in order to effect change.

I’ve been saying these same things all along and have primarily been getting shit for it. Now that more admired people are saying the same thing, will something good come of the argument? I’ve been talking to (and convincing, I think) some more well-known pundits in the last few days, so I certainly hope so; it’s clear that my own writing isn’t good enough to generate the same sort of publicity as folks like Marco, so I’ve long since aimed to just pass on my arguments to them for dissemination through more artful prose than I can provide.

That said, there’s something else worth pointing out, just to see if Mr. Gruber still thinks it’s unacceptable for me to feel it’s unjustified for Apple to change the rules like they are.

It goes like this:

I have a company which produces digital content. For whatever reason (buying from others, low perception of value in the market, etc.) I sell this content at approximately 10% more than it costs me to make. I tried selling it at a higher price, but the market apparently wouldn’t bear that, because I only got enough sales to break even after I dropped the price to cost + 10%.

For the sake of argument: let’s say it costs 90% of retail to produce what I sell.

I disseminate this stuff through an iOS application. I have a team of programmers working on the app, and I have some server-side people, and I have some QA people. All in all, I pay out about $400’000/yr in salaries to all these people. I also pay about $20’000/yr for hosting, bandwidth and the like. There are other costs associated with running the business, but these are the costs directly related to having my content available through an iOS app.

Initially, Apple advised me to send the user to a webpage in Safari (I wasn’t allowed to just show the page in-app) to sell my products.

A couple of years later, Apple told me that I couldn’t have my app or sell my stuff to any of my existing customer base unless I used IAP. No, they wouldn’t change the commission from 30%.

Now, suddenly and with no advance warning, my business is unable to operate. My outgoings were covered before, and the business made maybe $90’000/yr in profit, which is nice. Under the new rules, however, I actually have to pay Apple out of my pocket for every single transaction I make. I could raise prices, but the problem with that is that Apple is offering competing items at what would now be a lower price, and that I’ve already seen that the market isn’t willing to pay that great a markup over the base cost— it just doesn’t perceive these items as being worth that much money.

So, my income & outgoing has changed a fair bit: but by how much exactly? Let’s round up the figures to include all operating expenses, so we can see:

Yearly Accounts Before IAP Mandate

  • Payments for all staff, services, non-content-creation expenses: $550’000
  • Total revenue from all sales: $8 million
  • Total profit from all sales: $800’000
  • Cost for handling all transactions ($8’000’000 * 2%): $160’000
  • Net Profit ($800’000 - $550’000 - $160’000): $90’000

Yearly Accounts After IAP Mandate

  • Payments for all staff, services, non-content-creation expenses: $550’000
  • Total revenue from all sales: $8 million
  • Total profit from all sales: $800’000
  • Cost for handling all transactions ($8’000’000 * 30%): $2.4 million
  • Net Profit ($800’000 - $550’000 - $2’400’000): -$2.15million

Yearly Accounts After IAP Mandate If Sales Increased By 50%

  • Payments for all staff, services, non-content-creation expenses: $550’000
  • Total revenue from all sales: $12 million
  • Total profit from all sales: $1.2 million
  • Cost for handling all transactions ($12’000’000 * 30%): $3.6 million
  • Net Profit ($1’200’000 - $550’000 - $3’600’000): -$2.95million

The Difference?

Switching from what I had before to Apple’s 30% fee has taken me from a $90’000 profit to a loss of over $2 million. And if I make more sales, it doesn’t help— each additional sale increases my net loss.

Let’s add one more thing to the equation: Apple is in competition for selling the same goods (or the same class of goods). How does it stack up then, assuming no change in Apple's own sales volume?

Before IAP

  • My profit: $90’000
  • Apple’s profit: $200’000 (they have a lot more volume than I do)

After IAP, No Change In My Sales Volume

  • My Profit: -$2.15 million
  • Apple’s Profit: 2.6 million

After IAP, My Sales Volume Increases By 50%

  • My Profit: -$2.95 million
  • Apple’s Profit: $3.15 million

Other Sales Channels

So I open up the app on Android, on the Mac, on Windows/Linux/YourMom, etc. Sales made through those platforms eventually allow me to break even. However, any increase in sales on iOS will put me back at a loss, since every sale on iOS means I’m paying Apple 20% of the retail price out of my own pocket— for every $1 in sales through iOS, I lose $1.20.

At the end of the day, it becomes in my own best interest to try to sell less content to iOS users, so that it doesn’t eat up all of my profit from the other platforms.

How is that good for anyone?

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