A Farmer Without The Agri Bills May Still Be Paying Less In ‘Cuts’ Than An App Developer In India; Here’s Why

There are more than 2.7 billion (270 crore) smartphone users in the world, with 500 million of them (50 crore) from India, which is expected to add another 300 million (30 crore) in the next couple of years.

The Covid-19 pandemic has further triggered adoption of an app-based digital economy with 100 million (10 crore) digital transactions happening per day in the country.

Various studies reveal that Indians seem to be gorging on apps with an average usage of 24 apps/day against a global average of nine apps.

The number of apps in a phone downloaded through an app marketplace in India ranges from around 50 to 200. This number itself is indicative of user behaviour, availability of apps and an aggressive marketing push.

What Is An App Marketplace?

An app marketplace is like a real-world store in a digital form that behaves like a distribution platform for any mobile/computer software called applications or apps.

It is a common presumption amongst many that an app, once created by a developer/startup, is easily uploaded on an app marketplace and the rest of the process is smooth, with people downloading them crazily for accessing products and services.

Obviously, it is not that straightforward and like any real-world product, the app undergoes the grind of supply chain, logistics, marketing and toll nakas (booths) before reaching its destination to be adopted by the consumer.

An app is similar to a product/service in the real world and needs to be marketed through distribution channels like a kirana shop, supermarket, store etc, which in the virtual world are the app marketplaces.

How Many App Marketplaces Are There?

The Apple App Store for iOS and the Google Play Store for Android dominate the space as the two largest distribution channels for mobile apps.

In addition to these, there are an estimated 300+ app stores operating globally today. There are also specific app stores catering to certain app genres like Kongregate that focuses on the gaming market while Opera offers cross-platform apps that also work in its web browser.

Each app store may have its own charge rates for showcasing a product which many call as a revenue sharing or commission or tax.

In case of Android, the marketplaces include the Google Play Store, the Amazon App Store, GetJar, Aptoide, Opera Mobile Store, AppBrain, F-Droid, ACMarket, SlideMe, UpToDownMarket, 1mobile etc.

In the case of iOS, there is the Apple App Store, Cydia, GetJar, Appland, TutuApp, AppValley etc.

Apart from these there are handset manufacturer-specific app stores like the Samsung Galaxy App store, LG Smartworld, Huawei App World, Sony Apps, Lenovo, apart from app stores that cater to Windows, Symbian and other platforms.

India’s native app store, the Indus App Bazaar has around 400,000 apps and has tie-ups with multiple handset manufacturers, while the government of India’s digital store hosts government apps like Umang, Aarogya Setu, DigiLocker, Bhim and various state government apps.

Android users today have access to more than 3.4 million (34 lakh) apps, while iOS ones to 2 million plus (20 lakh). Naturally, any new app created daily gets buried amongst this massive pile unless it does something spectacular to be visible.

The Google Play Store continues to dominate the market with close to 3,700 new apps added daily while the Apple App Store has an average of close to 1,000. In 2019 alone, there were more than 205 billion (20,500 crore) app downloads globally with India leading the show.

From Creation To Revenue, The Journey Of An App

Let us now look at the journey of an app from its creation to its revenue-earning status.

The app pays for its existence, from birth to becoming revenue-generating, including at all stages of its continuum of commercial growth. Such payments may range from development, listing, functionality dependencies, distribution, to marketing, payment gateways, commission cuts and government taxes.

Once any app is created, getting listed on the Apple or Google stores is generally not easy.

An app usually undergoes various screenings and checks to be eligible to be uploaded. There are certain prerequisites to be met, such as multiple rounds of testing, fixing of code, bugs, emulator testing, size limit of base app, security certifications, private keys etc.

Then comes the step of packaging the app, such as providing a title, description, screenshots, category, reviews, contact and associated policy guidelines with the mandatory adherence to store policies. If the policies are violated at any point of time, it gives the concerned store the right to remove the app.

Google Play Store charges a one-time fee of $25 (approximately Rs 1,875) to open an account on its store, while Apple charges $99 (approximately Rs 7,425) per year.

If the app has a provision for in-app purchases then it becomes compulsory to link the developer account with the store’s merchant account. Rating of content, listing countries where the app will be available, decisions such as whether the app will be free or paid, have to be taken upfront as a free app cannot be changed later to pay-to-use.

Due to the large number of affordable smartphones in India hosting Android, the market share for Android is currently around 95 per cent, which makes it the most preferred choice for developers and startups.

Also, developing apps on Android is presumed to be cheaper and easier due to the options available for seamless integration with others through authentication using Gmail/social media platforms. Most developers in India are comfortable on Java which creates a natural affinity with Android.

What Is Google’s Revenue Model In This Space?

Before understanding Google’s revenue model in this space, it is important to understand Android.

Android was acquired in 2005 by Google for $50 million and is a free and open-source software based on a modified version of the Linux kernel and other open-source softwares developed by the Open Handset Alliance.

However, the version that the world is used to patronising is the one bundled with Google’s proprietary software that include Google Mobile Services, Google Chrome, Google Play and the associated development platform.

These are partly free-to-use, provided one complies with all of Google’s terms and conditions that mandates that the device manufacturer needs to compulsorily include apps such as YouTube, Gmail, Maps, Photo, Search and Chrome with Google Search being default and apps being visible prominently on the home screen, etc.

If you thought the price for a handset paid by you was the only revenue for a handset manufacturer, then it is important to understand that they make decent revenues from app developers/startups for bundling apps as part of the initial pre-install offering.

Even Google pays billions of dollars each year to Apple and other major mobile handset manufacturers to ensure Google remains the default pre-installed search engine. Google also shares revenue emanating from the use of Google Search on their devices with mobile handset manufacturers.

In recent times, certain handset manufacturers have been reaching out to many app developers/startups and have sought significant fees for ensuring that performance of their apps does not get affected when their hardware system software upgrades are undertaken. This is usually code for not meddling with the app’s ‘user notifications’.

It is a common understanding across the developer community that there exists no transparent protocol around managing 'notifications' for an app as handset manufacturers, operating systems and even telcos can interfere with a user’s device and play around with the performance and notifications feature of an app.

Apple and Google's gross revenues from App Store and Play Store stood at $54 billion and $29 billion in 2019 and in the first half of 2020 they have already recorded revenues of $32.8 billion and $17.3 billion respectively.

In the case of Google, while its Play Store revenues may be comparatively lower to Apple due to a more stricter enforcement by Apple in addition to a third of its revenues coming from China which Google does not get, it may be earning revenues separately from its other products/services that may have been signed for outside the Play Store separately.

What Does An App Have To Do To Be Visible Amongst Millions Of Others?

For an app to rise from the pile and be visible, it requires significant marketing else it runs the risk of being used only by family and friends of the app developer.

Marketing is usually expensive and is undertaken through paid print, television, social media platforms, affiliate partners and Google’s Universal App Campaigns (UAC), Mobile App Install campaigns etc.

Mobile App Install campaigns facilitate promotion of apps across the Display Network, Search Network, YouTube etc. Google generates ads based on the text and content from the app store.

Apps could also be paying anywhere between Rs 40 and Rs 150 per successful app download triggered through this campaign to Google, in addition to the advertising pay per click models.

Once the app reaches monetisation stage, the next cost exposures come in the form of payment gateways which charge right from set up costs, AMC, and two-four per cent of transaction costs.

Taxation then kicks in that could range from 18 to 28 per cent depending on the category of product offered.

For an app offering real world goods, the margins are usually very low and for virtual products, if one adds cost of operations including innovation, development, upgrades, hosting, marketing, payment to content creators, user incentives, taxes etc, there isn’t much room for any earnings left that can accommodate an additional 30 per cent or 15 per cent commission payout.

A startup/developer here also runs a business that needs content, innovation, R&D, operations and an app marketplace is a mere window to be visible to the end user.

The app universe in the Android space was jolted recently when Google announced to effectively enforce rules that require certain categories of apps to use its in-app payment system with an initial year cut of 30 per cent and 15 per cent thereafter. Google and Apple have been charging this mostly on products/services that are virtual in nature and have kept real world goods/services out of the same.

A Direct And Symbiotic Relationship: Stores And Dominance

Companies like Apple, Google and Microsoft seem to be strongly adopting a 30 per cent cut model on subscription-based services along with gaming marketplaces like Sony’s PlayStation Store, Microsoft’s Xbox Games Store, Nintendo’s Game Store, Steam Store.

This has led to Apps from Spotify, Netflix, Epic Games (Fortnite), Match (Tinder) creating alternative ecosystems to let users sign up directly to their service through a mobile webpage that would let them bypass 30 per cent store cut.

The policies of both question these models and has led to turbulence in the app world. Even in South Korea the app ecosystem is of the opinion that if app creators that use other payment methods are either booted out or forced to comply, then they have no choice but to agree and pass the cost onto consumers that may harm the broader industry.

It is surprising that such policies may not be evenly applied on everyone and it can depend on who bargains what. Amazon’s video platform has a deal with Apple to use its own payment gateway to fulfill Prime Video purchases and pays 15 per cent for the same.

Since 2019, some of Google’s terms and conditions do not apply in the European Union due to the antitrust case in which the EU fined Google 4.3 billion Euros for abusing the market dominance.

There are an increasing number of voices emanating from various countries like South Korea, US, Europe, Russia and India wherein developers are beginning to question this gradual erosion of their revenue by app marketplaces.

The China market has an insignificant presence of Apple and Google due to its usual ring fenced approach and is dominated fully by China-only app stores.

In the software space a ‘one price fits all approach’ has never worked geographically. Pricing has always differed from country to country and margins have differed depending on culture, competition, and price points in each country.

The Indian app ecosystem is still at an emerging state and most apps which are still at various stages of their journey, run on negative margins as they continue to be in the early market acquisition mode.

Added to this, most products may be attracting high goods and services tax (GST) rates of 28 per cent, which when added with payment gateway, marketing and 30 per cent cut would easily cross a 70 per cent ‘tax rate’, beating tobacco, liquor and other sin/luxury goods.

This can have a devastating effect on the emergence of the startup and app ecosystem, especially for those belonging to the types that are currently covered under the policy by Google that covers virtual goods, subscription and other content services including education, gaming, entertainment, video, music, fitness, paid app functionality or contents, education, cloud software and services, data storage services, business productivity software, and financial management software etc.

Today, it is important to understand that both Apple and Google are app store runners as well as app developers that compete with others.

If app marketplaces continue in the current trajectory, they run the risk of becoming a monopoly in their respective technologies and the world of apps will have no choice but to die or live rebelling with. The boon of technology that was beginning to give its dividends to all its participants should not become a case of killing the golden goose.

While Google has deferred the implementation of its ‘30 per cent rule’ to 31 March 2022, for India, it has stated that if an app developer does not like the terms of engagement of Play Store, they are free to list on any other available app store or set up their own app store.

However, the “how” part of this and financial dependencies, if any, has not been elaborated upon.

The challenge emanating from such captive app marketplaces today is being felt by the startup ecosystem which complains of a lack of algorithmic transparency and an increasing stranglehold through bundled services.

There are many things that are not transparent today due to certain lock-in business models. App developers and users still depend on multiple offerings from such players that can be withdrawn, interpreted or charged arbitrarily any time.

A free and open model that allows competition and empowers consumers and developers to decide where they wish to operate should be the ideal way forward.

While app marketplaces are certainly a necessity and need to earn revenues for their existence as well, without a thriving app market there will be no marketplace.

Hence, it is critical for marketplaces who have avenues for revenues at each level of an app evolution, to rethink and apply a better yardstick of collaboration than prescribing any hard commission or cut models that would not work commercially. Expecting startups to turn profitable in such a scenario will continue to be a distant dream as such models will bleed growth.

It is also critical for governments and regulators to understand that startups in the open Internet world are in different stages of evolution in different parts of the world, and such moves can finish off an emerging ecosystem, especially in countries like India.

The Indian farmer may certainly think that he is in a better place with or without the farm bills when compared to an app developer.

Rameesh Kailasam is a public policy expert and CEO at IndiaTech.org.