Apple (AAPL) Slashes Commissions for Small App Developers

Apple, Inc. (AAPL) has announced that, starting Jan. 1, 2021, small app developers will see the standard commission that they pay to Apple cut in half, from 30% to 15%. Apple promises to release further details in early December 2020, but the basic qualification is that a developer's total proceeds from the App Store in calendar year 2020 must be less than $1 million.

This includes all paid apps and in-app purchases but excludes commissions paid to Apple. Additionally, developers that are new to the App Store in 2021 also may be eligible for the reduced commission rate. Apple is calling this initiative the App Store Small Business Program.

Significance for Investors

Small Short-Term Percentage Hit to Revenue: The initial short-term impact of the App Store Small Business Program is likely to be a small decline in App Store commission revenues for Apple. Independent research indicates that perhaps 98% of Apple's 28 million registered app makers may qualify for the commission cut, but they collectively contribute a mere 5% of the estimated $50 billion in annual revenues that the App Store generates.

That adds up to a potential revenue drop of up to $1.25 billion ($50 billion x 5% x 50%). Meanwhile, Apple's total net sales for the fiscal year that ended on Sept. 28, 2020, were $274.515 billion, making that potential initial revenue hit less than half of one percent of Apple's total net sales.

Potential Long-Term Revenue Boost: However, in the longer term, Apple probably is betting that this program will stimulate the creation of more apps, which ultimately will generate yet more commission revenue, both from paid apps and from in-app purchases.

Indeed, Apple highlights the growing importance of e-commerce portals for businesses amid the COVID-19 pandemic. "Apps have taken on new importance as businesses adapt to a virtual world during the pandemic, and many small businesses have launched or dramatically grown their digital presence in order to continue to reach their customers and communities," the press release states.

Public Relations Aspect: Apple probably is using this program as a public relations counter-offensive, aimed at lawmakers and regulators, in the wake of growing attacks on its business practices, size, and market power. Just regarding the App Store, its 30% standard commission has been attacked as excessive in various quarters, including a report issued by the U.S. House Judiciary Subcommittee on Antitrust in October 2020 that called its profits "supra-normal." Meanwhile, the European Union is conducting an antitrust investigation into both the App Store and Apple Pay. Also, the rules that Apple imposes on app developers have been criticized as anti-competitive. 

Against this background, acting as a friend to small business is a way to burnish Apple's image as a good corporate citizen. "Small businesses are the backbone of our global economy and the beating heart of innovation and opportunity in communities around the world. We're launching this program to help small business owners write the next chapter of creativity and prosperity on the App Store, and to build the kind of quality apps our customers love," as Apple CEO Tim Cook stated in the press release.

Initial Program Details

Among the initial details that Apple offered about the App Store Small Business Program, commissions paid to Apple will be deducted from the gross revenues earned through the App Store by a given developer for purposes of determining whether the $1 million threshold has been reached.

If a participating developer goes above the $1 million threshold during a calendar year, the standard commission rate will charged for the rest of the year and for the next year. A developer who was above the $1 million threshold in one calendar year but who fell below it in a subsequent calendar year can re-enter the program during the next year.