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Wednesday, November 18, 2020

Apple Halves App Store Fees for Tiny Developers... Introduces Economic Disincentives

By LUDWIG VON KOOPA - There's a parallel lesson here...

I hope you remember this summer (good times) when Epic Games sued Apple and Google over their anti-competitive application markets on smartphones, started by Fortnite's reduced prices if people paid Epic Games via a direct payment. We focused on Apple because that was the blatantly more nefarious monopoly, and I made it clear in my summer article that Apple has no real justification for their actions. Apple rejected Epic's payment method and Fortnite has been off the App Store ever since. You can only use Apple's App Store on an iPhone, and you can only use Apple's payment method (which Apple takes a 30% cut on every in-app purchase) for any application on an iPhone.

However, Apple has now made an announcement: They will only take a 15% cut—half of their normal 30%—from app developers that have under $1 million in revenue (aggregating all of the apps they have) per year. They call it the App Store Small Business Program. Under one million describes almost 98% of developers, according to media outlets citing app analyst Sensor Tower. According to that same analysis, the 2% or so of developers with over $1 million in app revenue provide 95% of the revenues from the App Store that Apple gets, which is even more lopsided than the generic Pareto principle, otherwise known as the 80/20 rule. In other words, Apple's move is more for public relations (publicly the reason was because “hey, 2020 was a rough year, our small businesses need some help”) to try to influence the lawsuits against them than anything else.

Epic Games, or at least their CEO, Tim Sweeney, is less than impressed with Apple's symbolic gesture, since for the majority of business that's going on (including Epic's), nothing is impacted. I'm much less impressed with the economic implications.

While Apple promises full details come December, here's what they're willing to share about the App Store Small Business Program:
•Existing developers who made up to $1 million in 2020 for all of their apps, as well as developers new to the App Store, can qualify for the program and the reduced commission.
•If a participating developer surpasses the $1 million threshold, the standard commission rate will apply for the remainder of the year.
•If a developer’s business falls below the $1 million threshold in a future calendar year, they can requalify for the 15 percent commission the year after.
To understand why this is problematic, let's put some real numbers to this. Note that the $1,000,000 cut-off is “post-commission earnings”, meaning you get that much revenue AFTER Apple takes the money.

Say my business makes one million in pre-commission earnings in 2020. Apple takes 15% of that, leaving me with $850,000, and putting me in the 15% tax bracket in 2021. Alright. Let's say my business grows, and I make $1,176,471 in pre-commission earnings in 2021, Apple takes 15% of that, leaving me with $1,000,000.35 in post-commission earnings. That will bump me up to a 30% bracket for 2022. If I had just made one dollar less ($1,176,470), I would make $999,999.50 in post-commission earnings, keeping me in the 15% tax bracket in 2022.

At that point, if I make the same amount of money again in 2022 ($1,176,470), I would, in the 30% scenario, only get $823,529 for 2022 revenue. I'd requalify for 15% in 2023, but that's $176,470.50 less revenue in a year just because of a one dollar difference the year before. That'd money I could use for all sorts of things, like retain my software engineers (or anyone else) as opposed to laying them off. (Anyone making over $1,428,571 will always be in the 30% bracket, by the way.)

Apple App Store Small Business Program Fees Structure marginal taxes
I thought a picture might be useful, but this probably isn't because of how the post-tax column works.
(And how it's titled as fees, but it's depicting revenues.)

This creates an enormous disincentive worth several hundreds of thousands of dollars for small businesses to stay small and never try to scale up, because they will be able to keep more of their money by making less sales taxed at a smaller rate, than making more sales taxed at double the rate. This is why actual progressive income tax systems have graduated income brackets taxing higher rates at the marginal dollar, not all of the dollars. In other words, you'll only pay a higher tax amount on any income you make AFTER a certain point. (Of course, the United States tax code still has enormous disincentives to earn more money, because it's not that simple when you factor in how certain welfare benefits and deductions and penalties work.)

Now, if Apple will come out and say the 15% rate applies to your first million, and then the 30% applies to your income after that, then the disincentive mostly goes away, because you'd still rather get the extra sales than stop growing. It doesn't remove the problem that, while most businesses will be paying 15%, most TRANSACTIONS on the App Store will be at 30%, which are costs bigger businesses are still passing on. It's exactly like how politicians lie about how the “rich aren't paying their fair share” and win elections based on claiming they'll lower taxes for the middle class but raise them for the rich. Most people aren't rich, but most people aren't paying most taxes already, and in a system where rich people don't get more votes, they lose every time. (Eventually, rich people stop having taxable resources, or politicians promise more social services than what can be paid for by taxing rich people. Then they have stealth taxes on non-rich people, similar to how bigger app developers need to pass on their extra expenses in the form of higher consumer prices.)

It's a sham, folks.

By the way, Ludwig supports a national consumption tax paid on all new purchases, at the same rate by everyone, regardless of what their income is. It's still “progressive” in that richer people will pay a higher percentage of their income in taxes, thanks to there being a prebate system. It's called the FAIRtax. Also, Ludwig isn't even involved in the smartphone purchasing ecosystems anyway. ...Still, he calls it as he sees it.

Ludwig once wrote an article with the opposite headline, The Incentive To Migrate To Apple.
Apple has revealed some more details that make Ludwig's numbers a slight fantasy (but still directionally correct), and you can now apply to the program.

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