App stores, including Google Play Store and Apple App Store, charge fees for in-app purchases. They take a significant percentage of developer revenue from subscriptions and one-time charges in the app - that's how they make money.
In the past couple of years, subscription billing has grown in popularity, and Apple has tried to entice developers with revenue structures that reduce commission charges over time. For one-time purchases, Apple charges 30 percent in fees. Since 2016, Apple has reduced the fee on subscriptions but only after a year of service. In the first year, they take the usual 30 percent from merchant revenues, after which it drops to 15 percent.
This revenue structure is still too expensive for many merchants, and they'd love the freedom to redirect consumers to external payment options that charge less fees. According to a recent court ruling, Apple will have to permit merchants to inform users of external payment options. Unfortunately, linking to these external payment service providers isn't allowed yet, but it might be soon.
Epic vs. Apple legal battle
This breakthrough came from the Epic and Apple trial held in May 2021. During the trial, Epic tried to convince the judge that Apple needs to change how it runs the App Store or allow merchants on their platform to sidestep their payment process entirely.
Epic pushed for several aims, which affected Apple's app revenue. Primarily, Epic wanted to add alternative payment methods for in-app purchases as they had done with 'Fortnite' before Apple removed it from the App Store. They also wanted to change an Apple policy that prevented developers from telling consumers alternative payment systems existed within the apps.
Finally, and probably the largest aim for Epic was to force Apple to allow merchants to sideload apps on iPads and iPhones, which would allow the existence of alternative app marketplaces on Apple devices. Allowing Epic's Games Store on Apple devices would translate into more gaming revenue for Epic, while cutting Apple from app sales.
According to Apple, the current system allows them to make a return on their investment for creating and maintaining numerous APIs and developer tools. Also, opening up app distribution in iOS would lead to a loss of security since it opens doors to downloading software from untrusted sources that could have malware.
The court ruled that Apple should allow developers to include links or buttons to other alternative payments by December 9, 2021. However, Apple won a last-minute stay after appealing to the 9th Circuit Court of Appeals. So Apple can retain its status quo until the appeal is finalized, a process that could take several months.
The delay doesn't mean Apple won't have to make the changes, only that the debate continues for a while longer. Also, developers can still communicate the existence of alternative payment systems using contact information acquired from Apple Apps.
Although Apple enjoys a 55 percent market share and high-profit margins, the courts didn't deem it a monopoly which means Apple isn't violating antitrust laws. Consequently, Apple doesn't have to allow side loading or third-party app stores on their devices, a move that could have disrupted long term Apple's App Store business.
Apple and Google Pay chargebacks
Aside from high app store fees, most developers have trouble challenging Apple Pay and Google Pay chargebacks from app users. In fact, only 5 percent of merchants claim to have successfully challenged Apple Pay and Google Pay chargebacks compared to 48 percent that claim success with credit card chargebacks, despite Google claiming their chargeback process is similar to credit card chargebacks. This also occurs in spite of the inherent biometric authentication Google Pay uses, which should lead banks to side with merchants instead of customers during chargebacks.
On average, merchants fight only 37 percent of chargebacks, meaning the vast majority of this money is lost. Moreover, there's an increasing trend of friendly fraud where customers pay and then file disputes with the bank instead of requesting a refund from the merchant. The growth of this phenomenon will cost developers an increasing share of their profits in the future.
What does the ruling mean in practice?
The judgment passed in the Epic vs. Apple case has potentially opened the door to new competition for processing payments in the Apple App Store. While Apple will probably react in a way that seeks to preserve its App Store profits, the likelihood is that the case will lead to lower costs for iOS app developers in the future.