Apple’s 15% cut for non-millionaires: PR move or sound investment?

Apple just announced their “App Store Small Business Program”, wherein companies making less than $1 million/year can keep 85% instead of 70% of revenue (the system is a bit less straightforward than that, but that’s the gist).

That announcement has created a lot of buzz, and a lot of questions. One big one is whether or not this is “just a PR stunt” to help Apple’s side of its various anti-monopoly suits (most notably brought by Epic Games).

I’m not going to speculate on why Apple made this move, but instead on the business outcome (ignoring the question of lawsuits). In particular, what does this cost Apple, and what does Apple gain, in the long term?

The thing that caught my eye was a couple data points in the GamesIndustry.biz article on this topic (data from Sensor Tower):

• 97.5% of companies on the App Store meet this criteria.
• They represent only 5% of App Store revenue.

If those numbers are correct, the implication is that Apple is cutting roughly 2.5% of its revenue. Likely much less than that, since it’s an opt-in program with caveats.

While Apple loses up to a few percent of its revenue, the developers in the program stand to increase their own revenues by 21%. That’s an important asymmetry: developers stand to gain far more than Apple stands to lose.

In the long term, though, I suspect that Apple doesn’t lose anything at all here.

Running a successful company that makes games or apps is extremely difficult. We’ve been doing it for seven years, and there were many points where our journey nearly ended. Our future is still uncertain. Small companies like ours are always at risk: we launch one game/app at a time, each representing an enormous relative investment over months or years, and if that app alone flops we’re toast. We don’t have a portfolio to average over.

The thing we’re always watching is our runway: how long do we have until we’re out of money?

Runway dictates everything. Each day we aren’t launching new apps or finding new business deals is one day closer to the end of our run, and so we have to spend each day carefully. Do we invest in trying to make existing apps more successful? Or in making entirely new apps? Or in engaging with other businesses? Or shoring up our skills and technology foundations to make development faster and easier? Do we dump money into the black hole of advertising?

With the extreme time limitations that small businesses face, we always have to put all our eggs in one basket.

An extra 21% of revenue is synonymous with an extra 21% of runway. That’s an extra 2.5 months on top of a 12 month runway!

What can small businesses to with that extra money/time? If we make small apps, we might be able to squeeze out one more and roll the dice again. If we make larger apps, we can squeeze in a few features that might make all the difference between a flop and a blockbuster. Or have more money for advertising.

Or maybe we instead invest that time and money into making our companies more resilient. Perhaps pay our employees better to make them more likely to stay (the cost to a small business of employee turnover is enormous). Maybe invest time into training or building improved development pipelines. Or perhaps hire a new person who turns out to be the catalyst for our future success.

The point is that an extra 21% of revenue is enormously significant for a small studio.

By giving small, constantly-on-the-edge-of-collapse companies some extra breathing room, in the long term this means more apps of higher quality. Not only because companies get to invest more time and money, but also because experienced companies stick around longer. Newer companies, on average, make less valuable stuff. By reducing the risk that existing companies go under, Apple will find itself with an even more valuable portfolio in the long-run.

Now, you could make these same arguments for large companies. After all, if a large company has more money to spend on their products, won’t they also make more and better products? On average, probably. But at what cost to Apple? Reducing the churn of small companies is cheap for Apple, and has the chance of creating more of those few companies that generate all the App Store revenue. Cutting Apple’s revenue in half from the major players seems extremely unlikely to be cost-effective for Apple.

A more interesting argument would be: why stop there? Why not remove the cut entirely for small companies? After all, the small companies today that manage to survive are the source of tomorrow’s large companies.

The 30% cuts required by nearly all app stores *never* made sense for those of us barely scraping by, as the cut is more likely to speed up our demise than to generate significant revenue for the stores. I hope everyone else follows suit (looking at you, Google Play and Steam!). It’s a good PR move and, more importantly (for profit-motivated institutions) it’s a sound investment.