Day: 15 March 2019

There’s a lot going on in Spotify’s complaint to the European Commission alleging anticompetitive behaviour by Apple. Their supporting evidence is plentiful — there’s a blog post by Spotify’s CEO Daniel Ek and a new Time to Play Fair website, though the complaint itself has no accessible documentation — but it is not always precise or particular.

Their complaint seemed, to me at least, to be completely valid on its face: Spotify is required to process new subscriptions in its app through Apple’s in-app purchase mechanism, from which Apple takes a 30% cut, which is reduced to 15% after the first year of a recurring subscription. Spotify also cannot mention other avenues by which a user may purchase a subscription, until recently could not create an app for the Apple Watch because the right public APIs weren’t available, and still is not available on HomePods. An Apple Music subscription, meanwhile, incurs no 30% “tax”, is available on all of Apple’s platforms, and gets priority treatment at every turn.

On further reflection, though, I’ve changed my mind. Mostly. To be clear, I completely understand Spotify’s frustration and I think there are changes that Apple can make to their App Store policies. But I also think that Spotify’s complaints prioritize sensationalism over facts.

Furthermore, I have no intention of defending either company, per se. I am not a lawyer; I cannot assess Spotify’s accusations from a legal level. Even if I were a lawyer, I wouldn’t do this work pro bono. Both companies are valued at billions of dollars and employ legal teams to serve their needs. This post serves as a way for me to sort out my own head on this and to try to understand, mostly for myself, why neither company’s stance seems comfortable, logical, or sane; but, also, why I have a hard time supporting Spotify’s arguments. Mostly.

To illustrate why I’ve largely changed my mind on this, I’d like to break down Ek’s argument as laid out in his blog post. First, in full:

Apple operates a platform that, for over a billion people around the world, is the gateway to the internet. Apple is both the owner of the iOS platform and the App Store — and a competitor to services like Spotify. In theory, this is fine. But in Apple’s case, they continue to give themselves an unfair advantage at every turn.

To illustrate what I mean, let me share a few examples. Apple requires that Spotify and other digital services pay a 30% tax on purchases made through Apple’s payment system, including upgrading from our Free to our Premium service. If we pay this tax, it would force us to artificially inflate the price of our Premium membership well above the price of Apple Music. And to keep our price competitive for our customers, that isn’t something we can do.

As an alternative, if we choose not to use Apple’s payment system, forgoing the charge, Apple then applies a series of technical and experience-limiting restrictions on Spotify. For example, they limit our communication with our customers — including our outreach beyond the app. In some cases, we aren’t even allowed to send emails to our customers who use Apple. Apple also routinely blocks our experience-enhancing upgrades. Over time, this has included locking Spotify and other competitors out of Apple services such as Siri, HomePod, and Apple Watch.

And, now, in pieces:

Apple requires that Spotify and other digital services pay a 30% tax on purchases made through Apple’s payment system, including upgrading from our Free to our Premium service. If we pay this tax, it would force us to artificially inflate the price of our Premium membership well above the price of Apple Music. And to keep our price competitive for our customers, that isn’t something we can do.

A critical thing to remember is that Spotify isn’t required to sell subscriptions through in-app purchases. Any Spotify Premium subscription sold on any device — including on the web — will work in the Spotify iOS app. It is unquestionably more convenient and more obvious to offer a premium subscription from within the app, but it is not necessary.

With that in mind, Spotify has three options:

1. Make the price of subscriptions uniform no matter where the user purchases it and absorb Apple’s commission.

2. Charge about 43% more for subscriptions paid through in-app purchases, which gets users to cover the 30% fee charged by Apple — and Google; more on that later.

3. Don’t allow subscriptions to be purchased within the app; assume users will figure out how to subscribe.

Spotify has experimented with all three of these options and found them lacking. It’s understandable why they would — a 30% commission could easily be their entire profit margin, or nearly so;¹ charging iOS users more to cover Apple’s commission doesn’t look good from a PR perspective. Right now, they’re on the third option, and it seems they’re not big fans of that, either, because it’s clunky and non-obvious.

So why is Apple taking a 30% haircut off developers’ earnings? Their justification for taking a cut before subscriptions were available was, as first said by Steve Jobs, to keep the store running. But there were some other reasons, too:

When we sell the app through the App Store, the developer gets 70% of the revenues right off the top. We keep 30% to pay for running the App Store. There are no credit card fees for the developer — we take care of all of that. There are no hosting fees for us hosting the app — we take care of all that. There’s no marketing fees. The developer gets 70% of the revenues, and it’s paid monthly.

Even in an era of subscription-supported apps, it would be silly to entirely disregard how many costs Apple absorbs. Spotify’s app is over 90 MB and is one of the most popular apps on the store; as I write this, it’s sixth on the list of top free apps, just above Facebook. It’s updated every week, too. If they had to pay for the hosting and bandwidth just for the app, it would be like if every user streamed one or two more albums every week. Credit card fees can also add up, especially for smaller developers, and Apple does a lot of promotional work for developers big and indie.

But is 30% the right cut to be taking, or is it too much? I’m not sure. My gut instinct is that it’s higher than it should be — especially for subscriptions, where it seems more like rent seeking. And what would be the right amount, anyhow? Would lowering it to 25% be enough; should it be a flat 15%? What if it were more like a credit card interchange fee of 1-3%? What about zero?

An analogy I’ve seen used before is that this situation is like a supermarket that sells a mix of national and store brands. The store brands are almost always less expensive than an equivalent product from a national brand, and the store will take a cut of all national brand sales for marketing, keeping the store running, and for store profit. Therefore, national brands must justify their cost. For example, many national brands are positioned as being of a higher quality, or having a better reputation.

Apple Music is the store brand; other streaming services like Tidal, YouTube Music, and Spotify are national brands. Tidal and YouTube Music both sell premium subscriptions through in-app purchases, while Spotify has elected not to do so. Tidal’s differentiator is that it has the option to stream lossless audio, and it carries some exclusive releases. YouTube has live performances, covers, and an enormous library of music videos, in addition to the usual collection of studio recordings.

Spotify should be able to position itself as a place where users curate tens of thousands of unique playlists that you simply can’t find anywhere else. Or it could brag about the app’s remarkably precise recommendations. Recalling both of those features as I write this has made me want to resubscribe.

As with any analogy, there are some holes in thinking of the App Store as a supermarket. For one, while there are probably several supermarkets near where you live, there’s only one App Store on iOS. But that doesn’t mean there’s only one place to buy stuff; you can buy subscriptions to any of the services I’ve mentioned in Safari, too. This isn’t a perfect solution, of course, as it’s a bit like trying to order a national brand’s products directly from them as opposed to going through common channels: you have to know where to look, but you’ll probably get a better price.

Indeed, to that last point: users must know where to look. Apple doesn’t let developers indicate where users may purchase subscriptions outside of their app, and they are absurdly strict about this. Not only must developers not use any kind of button or link to an out-of-app subscription option, they’re not allowed to so much as mention it anywhere in the app — including in any documentation embedded or linked to from the app — or in its App Store description. In Spotify’s case, the best they’re allowed to do is allude to Spotify Premium in certain circumstances, and say that “Spotify Premium can’t be purchased in this app”. Those explanations are cryptic and unhelpful, but that’s all any developer is allowed to say.

However, I can think of one possible justification for Apple requiring the use of in-app purchases for subscriptions, other than services revenue: it’s consistent. Users may build familiarity and trust with in-app subscription confirmations, and subscription options are centrally available in iOS. Apple undermines that argument, however, due to unnecessarily complicated subscription management and a lack of policing subscription abuse. Klaxons and giant red lights should go off inside Cupertino when a colouring book app is charging users over $700 per year through a weekly subscription.

Part of the problem is simply the scale at which the App Store operates. I wish App Review acted more like a quality barrier and less like it was actively seeking incredibly stupid reasons to reject apps.

So, to summarize:

1. Apple’s cut is neither unprecedented nor extraordinary.

2. Other developers are happy to sell subscriptions using in-app purchases.

3. Apple’s cut may be excessive, especially for subscriptions, but it is not unique.

4. Apple has severely restricted the ability for developers to tell users how to buy subscriptions if they don’t use in-app purchases, producing cryptic and byzantine explanations.

Fortunately for you — and me — the next paragraphs in Ek’s argument require far less explanation. To continue:

As an alternative, if we choose not to use Apple’s payment system, forgoing the charge, Apple then applies a series of technical and experience-limiting restrictions on Spotify. For example, they limit our communication with our customers — including our outreach beyond the app. In some cases, we aren’t even allowed to send emails to our customers who use Apple.

For what it’s worth, I cannot find anything in the App Review Guidelines that would support a reading of the rules that would prohibit Spotify from emailing Spotify users using the email attached to their Spotify account regardless of the device they’re on, so long as they have opted into receiving emails from the company. Strava emails me all the time; so does Delectable. I’m not sure what circumstances Ek could possibly be referring to here that would prohibit customer communications; he does not elaborate.

Apple also routinely blocks our experience-enhancing upgrades. Over time, this has included locking Spotify and other competitors out of Apple services such as Siri, HomePod, and Apple Watch.

Apple issued a response to Spotify’s case. They state that Spotify is available through CarPlay and on the Apple Watch, and that they issued app updates just as quickly as they normally would have. They also say that they’ve asked Spotify about Siri support — which, as far as I can tell, would be limited to Siri Shortcuts, which is kind of a cop-out — and Spotify has not made a solid commitment.

Spotify makes a big deal in Ek’s post and on their timeline about how Apple Music has been available on the Apple Watch and HomePod since those products were released — and how Siri is able to control Apple Music directly — but no third-party music streaming services have been able to take advantage of those products directly. It may be frustrating for users and developers of those services, but I’m not convinced this is for sinister reasons. I think it’s totally plausible that trying to get third-party services to work well with Siri and the HomePod just isn’t working in a way that’s satisfactory so far. Siri is generally inadequate from even a first-party perspective, let alone in its developer capabilities; there’s no reason to suspect malice when any user of Siri can tell you that it’s just not a terrific voice assistant for being the oldest one around.

By the way, Apple’s response to Spotify’s accusations has the conviction of damp newspaper. Their press release drags in some nonsense about Spotify’s disagreement with new royalty rates determined by the Copyright Royalty Board, and claims that there’s a level playing field for developers when everyone knows that the biggest developers often get special treatment. They didn’t even bother to sign the damn thing.

One of the reasons this dispute has been rattling around in my head and why I’ve been having a hard time figuring it out is because both companies are acting like jackasses. Apple should have no problem allowing developers to direct users to purchase subscriptions outside of their app. Perhaps there should be restrictions on the subscription page — for example, mandating a minimum level of security, or maybe requiring that the checkout form supports Apple Pay. The rest of Spotify’s complaints are distracting, with some bordering on asinine.

Perhaps most of all, Spotify ought to encourage users to pick up a premium subscription. If it’s worth it, I’m sure users will jump at the chance to pay. If the rapid rise of Apple Music has taught us anything, it’s that people don’t have a problem with paying for a music streaming service, even if it lacks standout features. Spotify has a compelling product, and they should do a better job of selling it.

Update: A previous version of this piece stated incorrectly that Google has a similar payment structure to Apple’s for in-app purchases. While it is true that Google generally mandates that developers use their payment gateway for subscriptions — and that those payments are subject to a similar commission scheme as Apple’s — Google has afforded an exception to services that offer subscriptions that may be used across multiple platforms.