Photo of Phil Schiller by Kevork Djansezian/Getty Images
APP STORE 2.0
The App Store changed the way we buy software. Can Apple do it again?
By Lauren Goode
Apple’s annual conference for developers, which kicks off next Monday, is normally when the company previews its newest software for iOS and Mac OS X. But this year’s WWDC isn’t just about new operating systems: starting next week and continuing throughout the fall, Apple will begin rolling out new incentives for developers in its App Store, including a new revenue-share model and the introduction of search ads in its iOS App Store.
In a rare pre-WWDC sit-down interview with The Verge, Phil Schiller, Apple’s senior vice president of worldwide marketing, said that Apple would soon alter its revenue-sharing model for apps. While the well-known 70 / 30 split will remain, developers who are able to maintain a subscription with a customer longer than a year will see Apple’s cut drop down to 15 percent. The option to sell subscriptions will also be available to all developers instead of just a few kinds of apps. "Now we’re going to open up to all categories," Schiller says, "and that includes games, which is a huge category."
If the new subscription model becomes widely adopted, it will represent a fundamental shift in the economics of the App Store. Developers will be incentivized to sell their apps for a recurring fee instead of a one-time cost. It could change the way consumers pay for certain apps, but it also presents a massive opportunity for developers, many of whom feel the app economy has become moribund in recent years. And as iPhone sales growth slows, a move to app subscriptions is another way for Apple to wring more profits from its existing user base.
Apple is also going to start showing search ads for apps in its iOS App Store search results for the first time, something the company had previously resisted. "We’ve thought about how to carefully do it in a way that, first and foremost, customers will be happy with," Schiller says, adding that he believes the ad auction system in App Store search will be "fair to developers, and fair for indie developers, too." (Bloomberg News recently reported that Apple was exploring paid search results in the App Store.)
Finally, Schiller says that the App Store has been speeding up app review times — to the point where 50 percent of submitted apps are now reviewed in 24 hours, and 90 percent are reviewed within 48 hours.
The new emphasis on subscriptions and the more favorable revenue split could be an inflection point in the history of the App Store. The changes are coming at a time when App Store revenue is in the billions, but also at a time when some app makers — especially small or indie app developers — have become increasingly vocal about their inability to run sustainable businesses making apps.
In January of this year, Apple says that developers around the world have earned $40 billion since the App Store launched in 2008 — with over a third being generated last year alone. For those counting, there are four "app stores" now, five if you separate iPhone from iPad: iOS, Mac, TV, and Watch.
But on iOS, specifically, the overwhelming majority of revenue comes from one app category: games. According to App Annie, an independent app data and insights firm, games made up 75 percent of total revenue worldwide in the iOS App Store as of April 2016. Almost all of the top-grossing apps are free-to-play, offering some type of in-app purchase once you’re in the app.
For most other mobile app makers, revenue generation is more challenging, or at the very least more complex. As The Verge’s Casey Newton wrote in his profile of the makers of photo-editing app Pixite, the middle class for apps is shrinking. There are the whales, the game makers; there are the well-known social networking, cloud service, and entertainment apps; and then there’s everybody else, left to figure out whether a one-time download fee, in-app purchases, or a subscription model could possibly work for them. (It often doesn’t.) One respected app maker I spoke to last fall downright refused to port his app to the iPad Pro when it launched because, he says, his company had "no reasonable expectation of earning back on our investment."
Developers have been asking Apple for lifelines; features like free app trials — so customers can try before they buy— and paid updates, which means software developers can actually charge customers when they issue significant updates, not unlike the old shrinkwrap software model.
But these are feature requests that Schiller won’t comment on, at least for now. It’s doubtful that they’ll be rolled out this fall along with the other App Store changes. All he will say about free trials and paid updates is that Apple "looks at everything. We evaluate what will be a better experience for the user, and we make choices based on that."
What Phil Schiller does want to talk about, while tapping intermittently on a giant, 12.9-inch iPad Pro in a stark white conference room in Cupertino, are subscription models and search ads.
This past December, Schiller took on an expanded role as overseer of the App Store, though he stressed that Apple senior vice president and iTunes lead Eddy Cue is still very much involved (Cue oversees engineering and international App Stores, while App Store marketing now officially falls under Schiller). Schiller is still the company’s senior vice president of worldwide marketing, reporting directly to CEO Tim Cook. But his day-to-day now includes more meetings specific to the App Store, he says, "more me getting involved with the engineering team, the search team, things that I just didn’t spend a lot of time on in the past because I didn’t need to with the things I was doing."
"Somehow that one moment of someone saying, ‘You’re taking more responsibility’ did cause me and others to take a step back, take stock of where we are, and think about how much more can we do to make it better, faster," Schiller says, adding that there’s a "renewed focus and energy" around the App Store now.
Part of that energy has been channeled into figuring out how to sell developers on subscription services, and not only that, but how to keep them keeping on with those subscriptions. Previously, only apps classified as news, cloud services, dating apps, or audio / video streaming apps could sell subscription content. Now it’s open to all product categories.
For the first year of a subscription Apple will maintain its 70 / 30 revenue share; after one year, the new 85 percent / 15 percent revenue share will kick in (applied per subscriber). The new app subscription model will roll out to developers this fall, though if app makers have subscribers they’ve already retained for a year, the new revenue split starts June 13th.
All of these changes underscore Apple’s intent on getting developers to sell subscriptions — so much so that the company is willing to reduce its revenue share. Internally, Apple has even been referring to the rollout as "Subscriptions 2.0." In a way, Apple is treating subscriptions as a proxy for paid upgrades; rather than doing a big update, and charging customers for it once a year, developers are now supposed to do this on a rolling basis.
For Schiller, subscriptions are a proven model. And it doesn’t hurt that they’re much easier to implement than free trials or paid upgrades. "The developers who do have access to the subscriptions have been very happy with them," he says. "The system works really cleanly and nicely."
There will also be new tiered pricing options for app subscriptions, up to 200 of them across different currencies and territories. This is something that could impact companies like Netflix, which offers one rate for streaming services in the US, but might want to lower the subscription price when launching in an emerging market.
Apps like Spotify might also come to mind, which normally charges $9.99 for a monthly premium subscription but charges $12.99 for its monthly subscription through the App Store (to compensate for Apple’s 30 percent takeaway). Last year, Spotify very publicly urged would-be subscribers to go through Spotify’s own website rather than the App Store because of what it called the "Apple Tax." It’s tough to say whether a reduced, 15 percent "tax" would appease companies like Spotify; or like Amazon, which doesn’t let Prime Video subscribers stream stuff on Apple TV.
But Schiller insisted that it wasn’t any kind of "Apple tax" backlash or companies encouraging users to go to their own websites that drove Apple’s new subscription model: "It wasn’t done from a negative like that," he says. When I asked about this, he stresses that it was "absolutely done because we recognize that developers do a lot of work to retain a customer over time in a subscription model, and we wanted to reward them for that by helping them to keep more of the revenue." Apple can help drive customers to the original download, Schiller argues, but only the developer can keep the customer over time and "we want to incent them to do that."
Schiller imagines scenarios where many kinds of apps that were previously single-time purchases could move to the model. Games that have an ongoing subscription-like program, ones that have a massive online playing world that require upgrades of game worlds, might make sense. He suggests many enterprise apps could move to subscription, and that professional apps that require "a lot of maintenance of new features and versions" would be a good fit.
One popular app developer, who had been clued in to Apple’s App Store changes, says the new subscription offerings are "an earthquake in my world, in a good way."
"It’s hard to emphasize how significantly this can change the viability of companies like mine and their growth trajectory," says Itai Tsiddon, the co-founder of Lightricks, which makes top-selling apps like Facetune and Enlight.
Tsiddon says his company makes around $10 million a year from its premium apps, which are sold for a one-time purchase fee of $3.99 or $4.99. Lightricks has sold 8 million app downloads to date. Tsiddon hasn’t fully committed to a subscription model yet, only saying that he’s "excited to experiment with the business model," but based on back-of-the-envelope math he believes if his company saw 4 million downloads while charging a $4 monthly subscription fee, he could make 10 times his current annual revenue.
"With this change they’re incentivizing the right kind of company," he says, "companies with actual long-term value propositions to the users."
It’s easy to see why some developers might think that the new subscription model is the good kind of earthquake (if there is such a thing). For consumers it could be a different story. Some apps that were previously a one-time purchase could become a new recurring cost for iOS users. Schiller says that the new subscription features will be consumer-friendly. If, for example, an app decides to raise its subscription price, consumers will be given an option to opt-out. If no action is taken, the subscription will be terminated, rather than opting a user into another week or month of payment.
"We’re trying to protect the customer from surprises in pricing," Schiller says. The App Store will also have a revamped interface to make it "even easier for [users] to manage subscriptions," he adds.
Even with a new interface, whether or not people will want to cough up monthly fees for apps or manage more subscription services is to be seen. In short, a subscription-based model might be Apple’s best solution for making the entire app ecosystem more sustainable, but as with almost all changes to purchasing models, the buyer has to want to opt-in, too.
As the App Store has swelled to more than 1.5 million apps over the past eight years, both users and developers have complained that another core function of the store hasn’t advanced along with it: search. Schiller says he’s aware of the complaints, and that App Store search is improving, though he wouldn’t qualify that with data from search test results. The Categories tab will be coming back to the App store on iOS this fall. Under the Featured tab, apps you’ve already downloaded will be filtered out. And, almost as a reminder that 3D Touch is a thing, users will soon be able to hard-press on an app and share an app recommendation with friends.
These are comparatively small tweaks around the whole area of app discovery. The biggest change being made is that Apple is turning to a not-so-new and sometimes controversial method of promoting apps: paid search advertising. As Schiller’s team looked closely at the App Store, "We found just one place that for us makes a lot of sense given what we’re all used to in the world, and that is on search." Two-thirds of all downloads in the App Store are generated from searches within the store’s search tab.
Schiller explains that Apple landed on search ads as the most consumer-friendly option of everything developers have been asking for. "They’ve asked us, ‘Can we pay for editorials? Can we somehow invest in charts, in chart placement, can we invest in being in certain collections?’ And in all of those things we’ve said ‘No,’" he says, out of an interest in keeping the App Store clean and not a mess of money-for-placement ads.
Basically, Apple figured search ads are something that consumers are already used to from internet searches and social media, and the company wants in on the marketing dollars from mobile app developers. According to IAB, paid search on both desktop and mobile for the US market totaled more than $29 billion last year, with mobile alone comprising about $9 billion.
So how will the search ads work in the App Store when they launch in beta next Monday? For one, the ads are only for other apps. An ad will appear at the top of iOS App Store search results, and will be identified as a search ad, showing a light blue background with a blue ad button on it. Only one ad will appear at a time (or none at all).
For marketers, Apple will provide a second-price auction system, borrowing technology from Apple’s soon-to-be-shuttered iAd network, and developers don’t pay unless users click. All of this, Apple says, is a fair system for developers.
On the user side, Apple is promising that the ad shown will be something "relevant to what the user searched for." And, not surprisingly, Apple is beating its privacy drum: it says it isn’t going to create search profiles of users, and that no user data is shared with developers. The ads won’t be shown to minors, anyone 13 or younger. And users have the ability to opt-out of search ad data tracking and location tracking, built in to iOS settings.
With all of these changes happening to the App Store, it’s worth asking: why now? Or rather, why not sooner? Schiller’s newly expanded role and the recent focus on the App Store might easily suggest that it wasn’t being paid enough attention before, but Schiller denied that was the case. Instead, he says, the changes are a sign of the times and the success of the store, which he calls "the best place ever created for distributing software."
When the App Store launched eight years ago, not even Apple could have known how big it would become, nor could it predict the challenges developers would face in 2016. Many of those developers have been clamoring for changes, and Apple is finally delivering some with these expanded subscription options — a way that few expected.
It may sound like a hyperbolic statement, but it is true: Apple’s App Store changed the way people get and pay for their software, creating a new app economy at the same time, and it did so in a relatively short amount of time.
The question now is whether Apple can do it again.
Design by James Bareham
Edited by Dieter Bohn
Produced by Frank Bi