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What's Really Behind Apple's App Store Revamp

Photo of Karol Severin
by Karol Severin

This week Apple announced that major changes are coming to the App Store. Firstly, it will allow all app categories to deploy subscription offerings as a part of their revenue models. Furthermore, if publishers can keep subscription customers engaged for more than one year (with less than 60 day lapse breaks), then the traditional 30% app revenue commission Apple currently takes will drop to 15%. The third major change is the introduction of Search Ads in the App Store.

All these changes are geared to ramp up Apple’s services. In light of the iPhone sales slowing down, services are becoming increasingly important to Apple for two reasons:

The ability to keep improving user experience in its ecosystem to drive Apple's brand loyalty, which drives hardware salesGrowing Apple services to a robust revenue channel itself as a hedge to the slowing hardware strategy

Apple aims to achieve this by tackling two major issues in the app economy, which are user retention and app discovery.

The new revenue share model motivates developers to consider implementing subscription models more often and to go more aggressively after long-term retention. Apple wants this for the following reasons:

Incentivizing more predictable revenues such as subscriptions enables Apple’s service revenue to become more predictable.Developers will now have a larger incentive to continuously upgrade and improve their services in order to reach the one year engagement threshold. This will lead to better user experience with apps as well as an increase in total App Store revenues.Aligning itself better with the ongoing shift in media consumption from ownership to access.

Buying Time Before Current App Distribution Is Disrupted

In addition to the reasons discussed above, Messaging platforms are potential disruptors to the current distributors of mobile experiences (i.e. App Store and Google Play). The better add-on services and bots get in replicating full app experiences, the larger grows the risk of decreasing motivation for developers to build apps and to choose to distribute via app stores rather than Facebook, Wechat and the other messaging platforms. That's because apps can be more expensive to build than bots, but most importantly they have to compete for the scarce user time with incumbent apps like Facebook, Instagram, WhatsApp etc. Messaging apps now provide a way for developers to build experiences where the consumers already are, allowing them to avoid competing against the app behemoths. Apple’s decision to give better conditions to app developers will help them stick around with apps for longer, buying some more time as it moves forward with its own messaging services and Siri.

Search Ads

App discovery is one of the largest issues for developers and distributors. And the constantly growing number of available apps is making discovery increasingly more difficult. The most common way of discovering apps is still by word of mouth, then followed by browsing the app stores (including the top charts, features etc.). App ads are naturally very effective if shown to users, when they are currently looking for apps. We have seen time and again the tremendous promotional power of an app getting featured in an App Store (which is essentially a form of an App Store ad - though not monetised). Thus it makes sense that Apple takes this 'proof of concept’ and deploys a fully-fledged business model around it. It’s a win-win for developers, consumers, as well as Apple itself.

One balancing counter argument to this is that even though Apple says that ''only relevant ads will be shown - no matter how much you are willing to pay'' this still promotes the problem of the superstar app economy, where the app store rankings are often competitions between marketing budgets rather than the quality of apps. Sure, you will not be shown a navigation app if you are looking for a gambling game, but even within those more nuanced categories there will be clear budget champions who will most often win the ad bidding wars. This means, that indie developers with smaller marketing budgets might keep struggling with discovery despite the recent changes.

Apple hopes for a better app discovery experience, leading to a better user experience within the Apple ecosystem. In turn this, would keep developers as well as consumers happier and more loyal to the Apple brand, which is what Apple needs to keep selling hardware. Furthermore, the new ad revenue will help grow Apple’s service revenue stream.

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