Apple’s App Store Changes in the EU

A look into Apple’s latest strategy and its implications for the tech industry

Last week, Apple announced a number of changes to their App Store policies as a result of the Digital Markets Act (DMA). Most notably:

1. The ability to sideload apps from third-party app stores.
2. The ability to process payments outside of the App Store within the EU.
3. A set of new commission structures available for app developers in the EU.

These changes, set to roll out in March 2024, are currently available for beta testing in iOS 17.4. Other than some additional renewal processes, all changes are optional for EU app developers. However, the complexity, and more importantly, the financial structure introduced mean only the largest (and most profitable) mobile app companies will stand to take advantage of these optional policy changes.

Deciphering Apple’s extensive updates in the EU market

The number of Apple’s announced changes is immense – only dwarfed by the 600 additional APIs introduced to control the enhancements. To summarize the rollout, we can break the notable changes down into five categories:

1. App Store Changes – Apple is introducing numerous APIs to support the creation and management of third-party app stores, which will enable app sideloading within the EU.
2. Browser Changes – Developers will have the freedom to use alternative browser engines, beyond Safari’s WebKit.
3. Payment Processing Changes – Apple is allowing developers the option to process in-app payments through third-party services from Apple’s App Store.
4. Commission Changes – The ability to opt into a new App Store commission structure:
   • Commissions will be reduced from 15% to 10% for mobile apps in the Small Business Program, and down to 17% from 30% for the larger apps.
   • Apps that opt to use the App Store for processing these payments will pay a 3% processing fee.
   • Additionally, apps that opt into the new commission structure will pay a €0.50 “Core Technology Fee” for every download, fees on the first 1MM downloads, reinstalls, and updates will be waived.
5. Review Changes – To manage (and police) these changes, Apple is requiring additional reviews and authorizations.

What Apple’s news means for app developers

Initially, these changes will likely have very little impact on the majority of app developers. This is largely because other than some additional review hoops to jump through, many app developers may choose to not opt into these changes. Apple opens their press release by saying, “The changes we’re announcing today comply with the Digital Markets Act’s requirements in the European Union, while helping to protect EU users from the unavoidable increased privacy and security threats this regulation brings.”

It’s no secret that Apple has been forced into these changes, but they’re not going down without a fight. The press release is littered with hints that there will be strong disclosures and warnings for users leaving Apple’s walled garden, underling their commitment to user safety in the face of new regulatory requirements.

“For apps that use alternative payment processing…. Users may have to share their payment information with additional parties, creating more opportunities for bad actors to steal sensitive financial information.” (source)

It’s clear that if developers choose to use alternative app stores and payment processors, they should be prepared to take additional steps, and perhaps add some friction—via in-app “disclosure sheets” to alert the user of leaving the platform. While these notifications add another step for developers, in the grand scheme of changes, adding disclosures is a small hurdle compared to the financial implications of these updates.

The optional 3% App Store payment processing fee is a key—and arguably easiest—aspect to evaluate. Developers that opt to use a third-party for processing payments will not only have to disclose warnings to end users, but will also be responsible for billing issues, taxes, and complying with local laws and regulations. Given the average credit card processing fee is 1.5%-3.5%, developers will need to justify an awful lot of accounting overhead for a best-case 1.5% increase in topline revenue.

At first, the new commission structure of the App Store seems compelling—a reduction of 5% and 15% for small and large businesses respectively—plus, no commission on third-party app stores. However, it’s important to note that while the fees have been reduced, there is a significant condition to consider: every app installation or update per year will incur a €0.50 Core Technology Fee. Although the first 1 million instances of this fee are waived, it still results in a 50% increase in cost for acquiring an average EMEA install.

Looking at the math, it’s easy to see how it would be difficult for this to make sense for most businesses. To offset a €0.50 fee with 5% savings, businesses would need to have every iOS download pay over €10. Alternatively, if 10% of downloads convert to purchase, businesses would need to have each payee clear over €100. And at 1% converting users, companies would need over €1,000 spent per purchaser.

Larger apps might find it more worthwhile to adopt these changes because they have the potential to save 10% compared to the previous 30% commission fee structure, which now consists of a 17% commission plus 3% processing fee. This 10% savings means they need to convert “only” 5% of their downloads to generate over €100.

Spotify, for example, has publicly noted that they have quickly adopted these changes, which is not surprising. Although they famously do not use the App Store to process fees, we can use their publicly available user information as an example to think about the impacts of the new cost structure. With 40% of their users paying €12 monthly, and assuming they update their app once per year to their 166MM EU users, with about 33% of users on iOS, they would face €82 million in Core Technology Fees. However, they would still stand to shave off an eye-watering €288MM yearly, compared to the standard commission structure.

If Spotify uses an alternative App Store, the commission drops to 0%, and the Core Technology Fee applies to all installs. However (not counting processing fees), this would hypothetically save €600MM over standard commissions.

So will this work? Perhaps. Will it be difficult? Yes. The up-front cost of user downloads shifts a burden of profitability to the app developer, and for apps with a large existing user base, this can be a very expensive upfront cost. This means that there won’t be a reduction in advertising expenses to help balance out the new costs, including the Core Technology Fee. Additionally, encouraging users to download apps from third-party app stores is expected to be more expensive for each download or user acquired. The additional disclaimers—likely containing strong language of Apple’s inability to control fraud and adding additional user acceptance and opt-ins—will increase friction, reducing conversion rates on installs.

It’s no surprise four days after Spotify embraced these changes they publicly admonished the Core Technology Fees. The new App Store commission structure will only benefit apps with high user lifetime values (LTV), high user conversation rates, require a small number of app updates, and generate low user churn.

Looking ahead

The long-term implications for the App Store are interesting to ponder.

In the advertising world, Apple will still be enforcing ATT on third-party App Stores. That, and increasing EU privacy regulations, mean it’s safe to assume we won’t see a return to deterministic tracking for advertising.

Amid the other changes announced, the ability for apps to use an alternative to WebKit is easy to overlook, but the implications could be outsized. Traditionally, all in-app web browsing (and indeed all web-browsing apps) were restricted to WebKit. Essentially, this meant all web-browsing experiences were fundamentally the same. Opening up new frameworks for iOS could introduce innovation—and complexity— to the browsing experience. For instance, non-WebKit browsers will have different rendering engines, which can introduce novel UI/UX innovations. As a parable, one can look at how fundamentally the user’s web browser experience shifted once Chrome was introduced as an alternative to Internet Explorer. Or, how Android and iOS UI and UX experiences draw heavily on each other for innovation. And while this innovation is great, it certainly will require additional testing and development, just like web development requires today to support multiple browsers.

Another overlooked addition that slipped into the documentation is a reference to what could signal a transformational shift of how mobile apps of the future operate. While Apple’s announcement was geared for mobile games—mostly additional analytics and sign-on options—the big change was in the policy for allowing an app to stream multiple games. Previously, Apple has restricted the concept of streaming apps, and in opening up this concept one can see a path forward for super apps to offer more holistic, dynamic experiences within their app.

One thing that’s certain is these changes will increase complexity for app developers. While the 600 additional APIs are infinitesimal when compared to the 250,000 that exist in the App Store, app developers will still need to determine how these changes affect their user’s experience. At Branch, we’re already hard at work to understand how deep linking and measurement will be impacted by these changes and how app developers can best prepare to take advantage of these opportunities. As always, we’ll keep our customers updated and informed as these changes become available.