What you need to know:  

Consumers use app stores, officially known as Digital Application Distribution Platforms, to purchase and download apps for smartphones and other mobile devices. The main platforms are Google Play and Apple’s App Store, but Amazon, Samsung, Sony, Nintendo Switch and others operate app stores as well.

The convenience and security of app stores facilitated the transformation from cell phones to smartphones, providing easy access to the apps that make smartphones useful: email, social media, gaming, video and music streaming, online shopping and much more. App stores help keep users safe by screening out malicious software, and reduce the transaction costs for users. While they are far from perfect, these platform distribution models are more secure than a free-for-all system. App stores protect you, the consumer, by providing a centralized and trusted clearinghouse for mobile applications. If you’ve wondered why you’ve never downloaded a virus to your phone, this is a part of the answer.

Apple launched the first app distribution platform, the App Store, in 2008 with 500 apps. Today, there are more than 2 million apps in the App Store, with over 30 billion downloads in 2019. Google Play has almost 3 million apps, with over 108 billion downloads in 2020. The App Store was a revolutionary new approach to selling software that significantly reduced the transaction costs for users while providing a host of services for developers to make it easier to distribute and market their products to consumers. App stores provide an alternative marketing channel, avoiding a trip to a brick-and-mortar store or to various websites for downloads.

Here’s how app stores work

App stores scan for malware, provide secure transactions and payments systems, and have marketing tools, as well as the tools and infrastructure required for developers to reach their customers. These stores allow developers to reach a global marketplace with potentially billions of customers. App stores compete among themselves and across platforms, as well as with developer websites, and brick-and-mortar distribution models. Thanks to such competition, both consumers and developers benefit.

The benefits are made obvious by the rapid growth and size of the market for apps. With over 2 million apps available on each of the major app distribution platforms, a lucrative market has emerged for future sales. Globally, consumers spent $32 billion on in-app purchases in the first quarter of 2021 alone. Forecasts suggest continued growth, with the global market for app store purchases reaching $270 billion by the year 2025.

App Store Fee Structure

In exchange for providing a service to developers and a safe marketplace for users, app stores charge a commission of 30 percent for sales related to the app, including digital content and subscriptions. Both Google Play and the App Store reduce the commission fee to 15 percent each succeeding year of subscription. In 2020, Apple announced that it would lower the commission to 15 percent for developers earning less than $1 million in annual revenue. Google Play soon followed suit.

App stores provide malware scanning, secure payments, marketing, and more. Despite the price tag, developers still work with app stores because without them, developers would be required to invest in their own distribution and marketing systems––although they are free to offer their apps on their own websites. But app stores provide developers access to a global customer base who shop at app stores with greater confidence because they trust that their app store purchases will be safe and secure. Distribution platforms like Google Play and the App Store set guidelines with respect to safety, performance and design, and all apps are vetted prior to being added to the app store. The system works.

What Epic v. Apple is all about

In recent years, some companies have challenged the 30 percent commission. The effort is being led not by small developers, but by billion-dollar companies such as Epic Games, Spotify and the Match Group. These companies are using legal and political tactics to impose prices more to their liking. Epic Games, the creator of Fortnite and the Epic Games App Store, has filed a complaint against Apple in the European Union and against both Apple and Google in Australia. In 2019, Spotify lodged anticompetitive charges against Apple with the European Union, and antitrust regulators are now in the process of finalizing a charge sheet on the complaint. In the United States, Epic Games has filed separate lawsuits against both Google (Epic v. Google) and Apple (Epic v. Apple) after both companies removed Fortnite for violating their respective terms of service with regards to payments.

Problems with the Legislation

Several states have introduced legislation that would make significant changes to the current structure of digital application distribution platforms. The legislation targets two specific changes: the ability to use third-party payment systems to avoid fees charged by the App store; and the ability to “side-load” apps onto devices without going through the App store.

Third-party payment systems are prohibited by major app stores because developers could sidestep the 30 percent commission. Allowing these payment systems would grant companies access to app store benefits while skipping payment for those services. Similarly, side-loading refers to the practice of loading apps onto a mobile device from a source other than an app store. This is more common on Android devices; to do so on an iPhone typically requires “jailbreaking” the phone first. But again, the goal of sideloading is to avoid paying app store’s commission. Sideloading comes with the security risk of adding apps that have not been fully vetted by the app store.

The proposed state-level legislation would profoundly change the app store ecosystem. These changes increase security risks and exacerbate costs to both consumers and developers. As companies evade the commission and revenues are lost to alternative payment systems, app stores will either need to reduce the benefits they provide to the remaining developers or increase their commission. In either event, this may lead to consumers facing higher prices when making purchases in the app store.

Additionally, state-level mandates on an inherently global market are not practical. App stores cater to billions of consumers in 175 countries. Creating a patchwork of state regulations will do more harm than good, given the nature and scope of the app store ecosystem. There are, in fact, serious constitutional concerns with such state mandates, particularly with respect to their impact on interstate commerce: state-level regulations may run afoul of the dormant commerce clause by unduly burdening interstate commerce.

Finally, there is a fundamental concern with the states interfering in private contracts between app developers and the application distribution platforms. Having states put their thumb on the scale for the benefit of one party raises serious questions about the freedom of contract, imposing new conditions on the voluntary arrangements between app stores and developers. These private parties have agreed on the terms and conditions and the resulting contract governs the outcomes. Any changes should be left to negotiations between the contracting parties.

Image credit: Aleksei

Featured Publications