How will Apple's changes in the EU affect you?

Apple recently announced changes to the way iOS apps can be distributed and paid for in the EU. In this article, I'll dig in to what has changed, who is affected, and what action needs to be taken.

I wanted to write a longer form article about the recent changes from Apple in the EU, to give you a picture of who will be affected, and what, if anything, you need to do.

The first point I want to stress is that nobody, small or large, needs to make any decisions quickly. I’ve seen a couple of things saying things that say ‘here’s what you need to know, before it’s too late’. For me, that’s a little disingenuous because there really is no time pressure here. If you do nothing, everything will stay the same. Your apps will still be on sale in the EU, Apple will still take the same level of commission that they do now, and you’ll still get the same service from Apple in return. If you take no action, absolutely nothing will change for you. And for most people right now, taking no action will be the right course of action in the longer term.

What has changed

Before I get any further, let me go over the changes that Apple announced in January 2024 (a little under a week ago as I write this).

Historically, Apple has been unyielding in how it operates. If you want to distribute apps, you have to distribute them through their marketplace. If you want to take payments for digital products and services via apps, you have to do that through Apple’s own payment processing service. The main problems with this are that Apple controls what features apps can have, it has the power to reject apps or remove them from sale, and the commission it takes is high for apps that sell at scale, such as Netflix, Epic and Amazon Kindle. They have unilateral power over others’ ability to drive business value, and there is no competition in the iOS landscape to allow market forces to change things.

In the EU, Apple has been forced to make sweeping changes by legislation called the Digital Markets act (DMA). The main changes that will affect you as an app distributer are:

• Apps can be distributed via alternative marketplaces. For the first time, you won’t have to go though the Apple App Store to distribute iOS apps. 

• You can use alternative Payment Processing Providers to take payment for apps, and any digital goods or services that you sell inside them.

There are a couple of other changes that might affect you. Apple is opening up the ability for apps to implement their own contactless payments via NFC, whereas previously you were restricted to Apple Pay only. And finally, Apple is loosening the rules around 3rd party browsers. Initially that’s only interesting if you want to develop a browser, but longer term that might open up the viability for more organisations to use web apps rather than native apps in their mobile channel.

Alongside these changes, Apple is introducing new business terms. These are entirely optional, and the existing terms will still be the default. To reiterate, if you do nothing, you’ll stay on the existing terms, and everything will remain as it is. However the only way to take advantage of these changes is to adopt the new business terms. This is where things start to get a little less clear cut, and you’ll need to determine if you’ll be better off under the new terms or the old ones. I’ll get into the detail of this in a later section.

Who does this affect

When talking through the changes, it’s easy to get carried away and feel like this will affect all iOS apps. In reality, it will only affect:

• Apps distributed in EU stores.

To give you an idea of the size of the market affected, RevenueCat has shared that the EU represents 10–20% (currently ~12%) of revenue.

To spell it out, this won’t affect:

• Apps that aren’t available in EU stores.

• Apps that are downloaded in other regions (even if the same app is available in the EU).

How quickly will things change

Apple has strict rules both on who can offer Payment Processing services, and what alternative marketplaces can look like. These will require accreditation, so they won’t appear overnight.

But I expect that alternative Payment Processing services will appear soon. There are already big players in the web / online space, such as Stripe and Paypal, so it will be relatively straightforward for them to package a product for App payments.

Alternative marketplaces might take longer to develop, since these will be built from the ground up. However they already exist for Android, so it won’t be a huge leap for some of those providers to stand something up for iOS. Apple has launched a suite of technical frameworks and SDKs to support the development of alternative marketplaces, and has announced their first in-person workshops for those interested in developing marketplaces, so they won’t be too far over the horizon.

What might take longer to determine is whether or not distributing in an alternative store will be worth it for your apps. If we take Android as an example, while alternative marketplaces exist, the Google Play Store is by far the largest. In my many years as a mobile practitioner, I’ve never released an organisation’s Android app to any store other than Google Play Store. You need your app to be where your customers are, and it remains to be seen if iOS users will be downloading apps in any great volumes from anywhere other than the Apple App Store.

Benefits of the existing business terms

As I said at the top of the article, if you want to take advantage of the changes, you’ll need to accept the new business terms. I’ll get to those in the next section, but first I’d like to take a look at the existing terms, and the benefits they bring.

The terms in the EU are simple. For all income you make selling digital products and services, including app purchases, in-app purchases (IAPs), and subscriptions, Apple takes a commission. The percentage of the commission is: 

• 30% for apps and in-app purchases.

• 30% for subscriptions in their first year, 15% in subsequent years.

• 15% across the board if your app revenue is <$1 million per year and you therefore qualify for Apple’s Small Business Program.

In exchange for the commission you pay to Apple, you get the following value in return:

• Search, discoverability and distribution to almost any iOS device on the planet via the App Store.

• Payment processing.

• A set of developer-friendly SDKs (Software Development Kits) that allow you to develop apps that support the very latest capabilities in mobile hardware.

When deciding whether or not to accept the new business terms, you should consider the benefits of staying on the existing business terms.

• They are simple. You don’t have to do anything except develop your app, and make paid services available.

• You don’t pay unless you earn. All commission is directly linked to payments from users. This isn’t the case with the new business terms.

• You don’t have the burden of accounting, reporting or making payments to Apple. Apple manages the whole payments system, and deducts its commission before it pays you.

• Because of the above, it’s predictable. You will never be hit by unexpected bills from Apple.

The real downside of the existing terms is that they break down at scale. Apps that make little or no revenue get an extremely good deal, because they get all the benefits of the platform whilst paying very little. As apps make more revenue, you can imagine there’s a ‘break even’ point where the value that the platform brings is exactly offset by the commission taken from Apple. But at scale, it’s difficult to argue that the incremental value provided by Apple equates to 30% of incremental revenue. At this point, the commission taken by Apple far outweighs the value provided by the platform. Unfortunately, as we’ll see in the next section, this is still a problem with the new terms.

Switching to the new terms

Switching to the new terms is entirely optional. There are three main reasons why you would switch. They are:

• To use alternative payment processing providers

• To distribute in alternative marketplaces

• To save money

If you want to take advantage of the changes, you have no choice but to switch to the new terms. If your motivation is simply to save money, make sure you take a good look at the new terms and how they apply to your context. When you look closely there aren’t many use cases where you actually would save money.

As for the terms themselves, they are structured in a different way. There are three primary elements.

1. Commission

The first is a commission on all income you make selling digital products and services, including app purchases, in-app purchases (IAPs), and subscriptions, structured in the same way as the existing terms. Note that you only pay this commission on apps distributed through the Apple App Store. The percentage of the commission is:

• 17% for apps and in-app purchases.

• 17% for subscriptions in their first year, 10% in subsequent years.

• 10% across the board if your app revenue is <$1 million per year, qualifying you for Apple’s Small Business Program.

2. Payment Processing Fee

The second is payment processing fee. If you distribute on the Apple App Store, you can optionally choose to use Apple’s payment processing, for a fee of:

• 3% on all revenue that qualifies for commission.

This doesn’t apply to apps distributed through alternative marketplaces, or to those distributed via the App Store but using alternative payment processing.

3. Core Technology Fee

The final element is the real sting in the tail. This is the Core Technology Fee (CTF). This is effectively a commission, but instead of being based on revenue, it’s based on usage. It is charged at a rate of €0.50 per ‘first annual install’ over a threshold of 1 million. After the first 1m, you will be charged each time a user downloads your app for the first time in a year. And yes, this does include app updates as well as new downloads. Importantly, this applies to all apps, not just those on the App Store. This increases the risk of distributing apps, because you will no longer only pay when you earn. You need to consider risks such as your app going viral and getting a spike in downloads (which would be considered a good thing under the current terms), or users having your app installed without using it, but still receiving automatic updates.

Downsides of the new terms

There are some other downsides, that aren’t immediately obvious, that you need to be aware of:

1. You can’t go back to the original terms, it’s a one way street. If it turns out you were better off under the original terms, you can’t go back. 

2. The Core Technology Fee brings a significant risk. With the existing terms you don’t pay anything for downloads and installs that don’t bring you any revenue. Under the new terms you pay by volume, not income, so you will pay for downloads that don’t lead to any revenue for you.

3. You will have an additional burden of accounting, reporting and making payments to Apple. Under the current terms, this is all handled by them.

4. There will still be rules on what you can release, even on alternative marketplaces. These rules are likely to be more relaxed, but there will still be constraints.

5. You might pay less to Apple, but you’ll have to pay someone else instead. Currently the commission is all-in, but under the new terms you’ll have to cover commission to Apple (if you’re in the App Store), payment processing fees, the Core Technology Fee, alternative marketplace fees (which will be structured to cover their component of the Core Technology Fee), and the increased costs for accounting, reporting and making payments.

Who will the new terms be good for

If you’ve read this far, you are probably wondering if the new terms and structure will actually be beneficial to anyone. And you’d be wondering correctly. Apple appears to have complied with the letter of the Digital Marketing Act whilst making sure the terms will be unfavourable for most of their customers. However there are a couple of use cases where the business model could work. Thanks to the panellists on RevenueCat’s recent webinar about the changes for raising these.

The first is AAA games. These command a high price relative to other mobile app genres, and have a business model where customers expect to pay up front before downloading. This means the Core Technology Fee will only be incurred for paying users, and it will be small compared to revenue received. They are sold at scale, giving them leverage to negotiate a competitive deal from alternative payment providers. And you can imagine the benefits of having an alternative store in this space. It could provide value that the App Store can’t, such as making it easier for customers to find the content they want, and by having a curated selection of only very high quality games.

The second is selling B2B (business to business) apps. The App Store only supports selling B2C (business to consumer), i.e., directly to end users. There’s no way for a business to buy licenses for apps that employees will use for work. You’d need to use an MDM (Mobile Device Management) solution for that, and that’s a whole other can of worms. It’s not hard to imagine an alternative marketplace that could register individuals to a business account, and allow the business to purchase apps on their behalf. Software used in business can command a higher price, so the Core Technology Fee would again be relatively small compared to revenue.

Another segment that is being touted as likely to benefit from the new terms are small developers, whose ‘first annual download’ volume is less than 1 million, which means they could pay nothing to Apple under the new terms if they use alternative marketplaces and alternative payment processing. However, I doubt that they would gain overall, as they’ll still have to pay fees for both the marketplace and the payment processing. And it’s hard to imagine a world where the App Store won’t still be the largest iOS app marketplace. There would be an opportunity cost of lost users to developers choosing not to distribute at all via the App Store.

Summary

So, let’s summarise if you’ll be affected, and if so what you should do:

• You are only affected if you have apps distributed via the App Store in the EU.

• There’s no rush to do anything. There are no deadlines, and if you do nothing at all, everything will stay as it is.

• For the vast majority of apps, staying on the current business terms will be the best option.

• If you are considering the new terms, look at them very carefully, as it’s unlikely you’ll be better off. And be aware that once you’ve changed, you can’t switch back.

• Alternative marketplaces will be a good option for some specific use cases. If you’re not sure if this applies to you, it probably doesn’t.

Even though it makes sense for most apps to remain on the existing terms and not take advantage of alternative marketplaces or payment processing at the moment, these are still exciting times in the land of iOS. Hopefully it will bring innovation in the alternative marketplace space, opening up competition to improve what’s on offer for app providers, and in turn to end users. Watch this space, as I’m sure this is only the beginning!