Apple’s new EU terms: accept and lose money, or reject and stay within the walled garden

Apple’s ecosystem has always been known as a walled garden because of the restrictions it imposed on app developers and users. Developers had no choice but to list their apps on Apple’s App Store if they wanted an iOS user to install them. And if they wanted the user to buy something from them, they had to process payments through Apple’s own payment mechanism.

Such a closed system made life difficult not only for developers, who had to pay Apple’s 30% standard fee on in-app purchases (or 15% for small businesses), but also for users. The latter had less of a choice when it came to apps and download options than the users of the Android-based phones, since Google has always allowed sideloading.

This situation is about to change. The culprit is the EU’s upcoming antitrust law, known as the Digital Markets Act (DMA). In September 2023, App Store, iOS operating system, and Safari browser, all owned by Apple, received gatekeeper status under the DMA. This means that by March 6, 2024, Cupertino will have to open them up to competitors or face hefty fines of up to 10% of the company’s total global turnover.

As the deadline draws closer, Apple has come up with a plan for how it’s going to comply with the DMA. And after taking a look at this plan, it’s clear as day to us that Apple intends to comply with the legislation in letter, but definitely not in spirit. Essentially, Apple offers developers a false choice: either they agree to stay within the iOS ecosystem’s confines, or they can explore alternative payment methods and app stores — and risk going under in the process.

What’s wrong with Apple’s new business terms in Europe?

The dilemma that developers face right now is the following: they can either stay on the official App Store under the current terms, or accept the new terms and be subject to the new Core Technology Fee (CTF) that may cost them a fortune. Before we zoom in on the CTF and what it means for developers, especially those of free and freemium apps, we will briefly list the other parts of Apple’s DMA compliance plan.

Screenshot: Apple gives developers in the EU two options: stay on the current terms or accept the new news. Source: Apple

Under the plan, Apple says it will apply a “reduced commission” to in-app purchases. Developers in Apple’s small business program will pay a 10% fee instead of 15%, regardless of the payment method they choose. Others will pay a 17% fee instead of the standard 30% commission. If developers choose to continue using Apple as their payment processor, they’ll pay an additional 3% payment processing fee. But if they decide to ditch Apple and switch to an alternative payment system or redirect users to their own site for payment, they won’t have to pay Apple any additional fees.

So far so good, right?

It’s when we move to the third part of this masterplan, the Core Technology Fee, that things stop being pretty. In fact, they are starting to look pretty ugly.
The Core Technology Fee (CTF) is the fee that will apply only to the iOS apps whose developers accepted the new business terms. Importantly, it will apply both to iOS apps distributed on the App Store, as well as to the apps that are distributed through alternative app stores, or “marketplaces” as Apple calls them.

Subject to the fee are the developers whose apps will clock in over 1 million first annual installs in the past 12 months. They will have to pay a €0.50 fee to Apple for each user over 1 million who installed their app for the first time in a year. After these 12 months, developers will have to pay the fee again, and it does not have to be an install per se. The developer terms state that “app updates,” for instance, are also counted as new installs, “as long as they start a new 12-month period.”

Marketplace apps or alternative app stores will have it even worse under Apple’s new and supposedly more competition-friendly rules. The developers who will create and distribute their own app stores for iOS apps in the EU are due a €0.50 CTF to Apple for each user who installs their app store for the first time in a year even if it happens before the developer racks up one million installs in total.

Go DMA and go broke: what CTF means in practice

If any of the “big guns,” meaning apps that get more than 1 million downloads in a year, could afford such a fee, it would be the paid apps. However, when it comes to free apps that make money by showing ads, or to freemium apps that offer part of their functionality for free, the fee is insurmountable.

Needless to say, Apple’s masterplan did not strike a chord with developers. Spotify did not hold back, calling the CTF “extortion, plain and simple.”

A key issue raised by Spotify in its scathing response to Apple’s plan is the vulnerable position it puts free app developers in: “How will a developer pay Apple back if its free app goes viral — multiple millions of accounts install that free app, and then that developer owes Apple millions?” Indeed, if a developer of a free or freemium app makes the unfortunate decision to accept Apple’s new terms in the EU, and then has a breakthrough and sees the app gain popularity, the last thing on their mind would be celebrating their achievement, because the first thing they should be thinking about is how to pay Apple back the fees they would owe. And, as Spotify points out, there is nothing preventing Apple from raising the fees at any time they deem fit.

To be fair, Apple has made no big secret of how punitive the new terms could be for some developers. Anyone can estimate how much they’ll pay Apple under its DMA compliance plan using its fee calculator. So let’s take a game that hit the sweet spot and went moderately viral, reaching 2 million installs in the EU in 12 months. Under the new terms, it would have to pay Apple $45,290 per month, whereas under the old terms, it would have to pay nothing. The choice seems a no-brainer to us.

What Apple is effectively doing is trying to discourage developers from switching to the new terms, where they would have had more freedom to choose distribution and payment options. They are betting, and rightly so, that not so many would be willing to risk going into the red if their app takes off or experiences a sudden surge in popularity.

So, while Apple allows alternative stores de jure, de facto there is a prohibitive Core Technology Fee that blocks the way for free and freemium apps to enter alternative stores. In AdGuard’s case, we cannot take advantage of this offer either, simply because we do not have enough resources to pay the Core Technology Fee, and we are not alone in this. The only option left on the table is to make the app fully paid — which we have no intention of doing.

Will the EU regulators buy it?

It remains to be seen whether the DMA-focused changes that Apple plans to introduce will raise an issue with the EU regulators. As TechCrunch points out, the Article 6(12) of the DMA states that “the gatekeeper shall apply fair, reasonable, and non-discriminatory general conditions of access for business users to its software application stores, online search engines and online social networking services.” Is the Core Technology Fee fair? We don’t think so.

Apple’s plan to comply with the DMA is a clever attempt to spin the regulation to its own advantage, and to pressure developers into sticking with the old terms. By imposing the Core Technology Fee on apps that exceed a certain threshold of downloads, Apple is effectively penalizing developers who want to explore alternative distribution and payment options. This is a false choice and a mockery of real freedom and real competition in the digital sector. We hope that the EU regulators will not be fooled by Apple’s cosmetic changes and will insist that the DMA is enforced in a way that truly benefits consumers and developers.