Original URL: http://www.theregister.co.uk/2011/02/18/the_payment_problem/

Death by 30% cut: Apple app tax must change

Pole dancers need not apply

By Matt Asay

Posted in Developer, 18th February 2011 23:54 GMT

Open...and Shut Mobile is no longer about selling devices, but rather about selling ecosystems, and payment services are a critical component of those ecosystems. It's too bad, therefore, that Apple, GroupOn and others may be wrong in their various approaches to getting paid.

The ecosystem vendors have been in a mad rush to add payment systems, with most claiming 30 per cent of a developer's fee for the privilege of running on their platforms. There are a few problems with this.

The first is viability. A friend who runs a small store recently told me that there was no way his store could afford to run a GroupOn promotion:

The problem is that they take too much margin for a product store to use them. For example at my store we could never afford the discounts given our margins.

GroupOn doesn't seem to care. And why should it? It has enough spa services and pole-dancing companies signing up to sell services through its programs that it needn't worry about some clothing store and its silly need for "margin."

This concern, however, isn't just about selling high-margin services versus low-margin products. It's also a question of the value provided by an ecosystem for different kinds of vendors. Think Vitamin''s Ryan Carson writes:

The power of the App Store is in two things: Reaching the mass market….[and] one-click buying….

All of us folks who have built up a following in a small niche market (web design and development, for us) don’t need the mass-market distribution channel that the App Store provides. We’re not going to put up with Apple demanding we fork over 30% of our revenue just so our customers can have an iOS experience.

Does Apple deserve a large cut for the massive audience they bring to mass-market apps? You bet.

Do they deserve the same cut from companies who are simply augmenting their offering with iOS apps. Definitely not.

But Apple (and other ecosystem vendors) don't discriminate between different kinds of vendors. To them, everyone looks like a fat, 30-per-cent commission charge.

It's possible that the Apple's of the world are engaging in such behavior simply because they don't know how to do any differently. For example, Apple isn't a payments company. It's really a hardware company.

So maybe we should it cut it some slack. It turns out that processing payments is a hard problem to solve, and simply offering a new method of in-game/in-app credits or payments may not be enough.

That certainly seems to be what PayPal is thinking. In response to Facebook's new Credits system, asked if Facebook Credits foretells doom for eBay's PayPal, PayPal president Scott Thompson argues that "payments is really, really hard to do," making it unlikely that a generalist like Facebook will be able to displace a payments specialist like PayPal.

Perhaps.

It's clear why this is good for the ecosystem vendors. They make a lot of money from their commission. This isn't "money for nothing and chicks for free," however. At least, not as the ecosystem vendors tell it. They're working hard for the money! Facebook, for its part, argues that providing a platform-wide payments system will make it more likely that consumers will pay games developers for their virtual goods.

But in return, it makes as much as $30m per month from game developers like Zynga, according to TechCrunch. At what point does 30 per cent seem too expensive?

Probably pretty soon.

After all, even the rapacious credit card companies don't take anything approaching 30 per cent. The industry standard ranges from one to five percent, with American Express claiming the highest percentage, on average. How long can Facebook and Apple claim a 30 per cent share when credit card companies, PayPal, and now Google demand far less?

I suspect that we're going to see specialist payment vendors, not broad ecosystem players, eventually win out. Why? Because that's their job, and it's going to seem pretty silly to have to buy into a particular payments system for one ecosystem and then buy a completely different one when you move to the next platform.

As a consumer, I want to buy one subscription across all my devices. Time's new Sports Illustrated app gets this, making my subscription follow me across print and my digital devices. This is enabled, in part, by building in HTML5, so my app experience isn't fully tethered to any particular reader machine.

Right now, the ecosystem vendors are tailoring payment systems to their needs, not really to the needs of developers and certainly not to consumers. That will change. It must. ®

Matt Asay is senior vice president of business development at Strobe, a startup that offers an open source framework for building mobile apps. He was formerly chief operating officer of Ubuntu commercial operation Canonical. With more than a decade spent in open source, Asay served as Alfreso's general manager for the Americas and vice president of business development, and he helped put Novell on its open-source track. Asay is an emeritus board member of the Open Source Initiative (OSI). His column, Open...and Shut, appears twice a week on The Register.