Apple: How Apple’s proposed changes could crumble the freemium model

Last month, Apple announced changes to its app store and iOS operating system in Europe in compliance with the European Union’s Digital Markets Act (DMA).

The company will now allow developers to opt for the ‘new regime’ which lets users within the EU download apps and make purchases outside the Apple app store. It will also permit developers to distribute their apps via alternate stores, thereby also opting out of Apple’s in-app payment system.

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Apple has also introduced a new fee for developers, called the ‘core technology fee’. Developers will now pay 0.50 euros for each first annual install over one million in the past 12 months.

These changes are significant because they open up the ‘walled garden’ that Apple has prided itself on, but they also come with a caveat that could effectively kill the ‘freemium’ model that most of these apps are based on.

But many are unhappy with the changes. Be it Meta CEO Mark Zuckerberg who called it “onerous”, or Epic Games founder Tim Sweeney who termed it “malicious”, Apple has found itself under fire. Even Thierry Breton, commissioner for internal markets at the EU, said that if Apple’s proposed solutions weren’t good enough, the commission won’t hesitate to take “strong action”.

“Very few developers see this as a realistic option,” said Eric Seufert, general partner at Heracles Capital.

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Death of freemium

Most experts believe the new changes could kill off the freemium model that the industry thrives on. “The freemium business model, which dominates the app economy, is predicated on zero marginal distribution costs,” Seufert explained.

“In order for it to work, I need to incur no cost to distribute my product, which the app store facilitates. But if you introduce friction to that, if you introduce a cost of distribution, the model breaks.”

Tom Smith, partner at Geradin Partners, also agreed that the core technology fee may jeopardise the model. “There’s no reason why Apple needs to raise all these barriers and scare screens and nudges away from using the new freedoms that the DMA is intended to put in place,” he said.

“It could allow alternate app stores, it could allow direct downloading from websites like it does on Macs. There’s no reason why it couldn’t do that. It doesn’t need to charge the core technology fee. All this friction is unnecessary.”

The commission debate

Charging a 30 per cent commission too was the company’s way of monopolising their position, Smith felt, especially because Apple benefits from developers just as much as they benefit from its app store ecosystem.

Seufert, however, defended Apple’s right to charge the commission because the app store generated 650 million weekly active users, as it revealed in 2023.

“That’s a very large market that Apple is giving developers access to,” he said. “A lot of developers would prefer that they charge zero commission because they would just get to pocket that money. But one thing you have to keep in mind is when you price an IAP, the calculus that goes into that pricing decision is optimising for gross revenue.

The commission is not a fixed euro or dollar amount. If Apple reduced the commission, it’s not like there’d be savings passed on to consumers.” Ultimately, the implications that would concern Apple involve whether regulators are taking note of what’s happening with the DMA.

Experts said that the nature of competition law is such that regulators frequently mirror one another. Apple is being investigated by India’s competition watchdog, the Competition Commission of India (CCI), over similar charges.

The CCI had launched its probe into Apple’s policies in 2021 following allegations levelled by the non-profit Together We Fight Society— about allegedly high commissions being charged by the company and the lack of third-party payment options on the app store.

The industry grouping Alliance of Digital India Foundation and US-based tech company Match Group also filed similar cases, which were all clubbed together for the investigation.

“It’s quite clear where the direction of travel is in every country, including India,” Smith said. “In fact, the CCI has been very active in tech cases. It’s really quite remarkable that all these different agencies have different viewpoints on other things but are coming to very similar conclusions on this stuff.”