Back in 2020, Epic Games sued Apple in a blockbuster lawsuit.
Epic’s gripe was with the 30% commission fee that Apple charges for any transaction made through apps downloaded via the App Store. Apple calls it a service fee, but app creators are more likely to call it the Apple Tax.
In protest of a fee that they believed was unfairly high, Epic launched an alternate payment system within Fortnite that enabled users to buy in-game currency directly for a 20% discount — a breach of Apple’s terms. Apple promptly removed Fortnite from the App Store, kicking off a long legal battle.
Epic Games wasn’t the first company to try and bypass the Apple Tax, and they won’t be the last. But their very public battle with the colossus from Cupertino has a lot of execs wondering: Is it even worth it to try?
What is the Apple Tax?
“Apple Tax” is a slang term for the commission fee Apple charges for the use of its App Store and in-app payment system.
Many purchases made through iOS apps — including in-app purchases like gaming microtransactions and monthly subscription payments — are subject to a 30% surcharge.
30% is obviously very high, but it’s actually comparable to the fees charged by similar platforms like the Google Play store.
What makes the Apple Tax unique is the strict control Apple maintains over its App Store. iOS devices prohibit users from loading apps via other means, so there’s no way around Apple’s fees. Or is there?
Does everyone have to pay?
The Apple Tax applies to most — but not all — transactions made on iOS apps.
Some app categories are exempt. Payments for food, physical products, and tangible services bypass the 30% commission. That means Apple doesn’t get a cut of consumer’s money for Starbucks mobile orders, Etsy products, or Uber rides. Apple does sometimes miscategorize businesses, so make sure your app is getting the treatment it deserves under Apple’s current terms.
There are discounts, too. For example, subscription payments are charged 30% fees for the first year, but only 15% after that. In addition, small businesses (up to $1 million USD in annual app revenue) that participate in Apple’s App Store Small Business Program get a discounted 15% fee.
What about not-so-small businesses? Apple has shown some willingness to negotiate its rates with major players. Amazon managed to get them down to 15% in a rare behind-the-scenes deal.
What can my company do to avoid it?
If none of the above exemptions apply to you, your only remaining option for avoiding Apple’s commission structure is to get creative.
One option is to offer differential pricing. That is, pass the fee through to iOS customers and charge a lower rate on your owned platform, in order to incentivize users to sign up through that channel. YouTube Music, Tinder, and Tidal have all tried this strategy.
The trick is that most Apps are not allowed to promote this differential pricing in-app under Apple’s terms. That means your brand has to pay to continuously advertise the fact that lower rates are available elsewhere, or else risk negative backlash from customers who feel they’ve been ripped off.
A few apps have tried turning off in-app payments altogether, including Netflix, Zoom, and Financial Times. In this scenario, users are required to subscribe via the company’s website before logging in on-device (they can subscribe via Safari on their iPhone, just not in the app).
Again, there’s a catch. Most apps aren’t allowed to link to their alternative payment portals, so customers need to already have enough interest to find the website signup on their own.
Even if you don’t accept any in-app payments, you’re not out of the woods. Apple still reviews all apps and has been known to reject apps that it feels should allow in-app payment. We highly advise companies attempting this strategy to review this section of Apple’s App Store Guidelines and specifically include in their app submission notes which exception applies to their business. (Google’s policy on this is more lenient)
Should I even bother trying to avoid the Apple Tax?
Paying 30% of all your in-app revenue to Apple obviously isn’t great. But there are drawbacks to trying to avoid it that you should consider before making a move.
Apple claims their fees go toward making the App Store safe, easy, and streamlined. There’s a lot of truth in this. The App Store experience makes it really easy for iOS users to find, download, and pay for goods and services in your app (especially if you follow guidelines for App Store optimization).
There’s also a cost to interrupting that carefully engineered user experience. Big brands with must-have content like Netflix might be able to get away with adding some extra hassle to their sign-up flow, but they’re the exception, not the rule.
For most, taking away the option to pay in-app will have consequences. Metrics from Insight portfolio companies indicate conversion rates as much as 2x higher for brands who do offer in-app payments. Are you prepared to accept lower revenue and fewer users to avoid the transaction fees?
Apple’s 30% fee also covers payment processing. If you choose to go the owned-platform route, that will become your responsibility. Credit card fees are much lower, but you’ll also be responsible for processing refunds and dealing with chargebacks. This can be significant if customers tend to forget about your subscription until it’s already been charged for the year. You’ll have to determine what all that’s worth in dollars and cents.
For now, Apple’s commission structure is a reality for many “app-first” companies. But the future is uncertain. Lawsuits, regulations, and industry trends seem to be nudging Apple in the direction of lower fees with more exemptions.
The Epic Games lawsuit ended (in the U.S. at least) with a ruling mostly in Apple’s favor, with one important exception — the judge ordered Apple to change its rules to allow in-app links to alternate payment options. This order is currently on hold pending appeal.
Regulators are taking action too. There are rumors of a possible DOJ antitrust investigation. In the Netherlands, regulators have cracked down on the Apple Tax as it relates specifically to dating apps. South Korea actually passed a law banning the practice of forcing apps to use one payment system.
Meanwhile, Apple’s biggest competitor has lowered its fees. Google now charges 15% commission for all subscriptions, regardless of how long they’ve been active, and offers lower commission fees for certain other categories. Google has also been sued by Match Group (maker of dating apps like Tinder and Hinge) and other app creators for this very same issue in their marketplace.
We’ll be keeping a close eye on all these developments. In the meantime, whether you want to try to avoid the Apple Tax or not, your Insight Onsite representative is always available to help you talk through the options and make the best move.