Saturday, February 26, 2011

The App Store Margin

Recently there has been a lot of discussion about the Apple announcement that they are taking a 30% margin for selling subscriptions through their App store, and that Apple will also take a 30% margin for Apps that sell virtual products and subscriptions through the App. Unfortunately most of the discussion has been heat without light. That is there have been no facts to back up the arguments on either side. I had been curious about the margin in selling goods anyway, so as I had the data, I computed gross margin for publicly traded US companies in the various different retail categories.

As you can see the margin varies between 20% and 40%. The overall average is about 25%, dominated by the Grocery and Department & Discount categories. For retailers working in the real world, after paying for their goods, they have to pay for their properties, staff and marketing so their net margin is considerably less. On the other hand Apple is just processing payments and delivering virtual goods over the internet. On this basis, a 30% margin seems to be on the high side, although not completely out of line.

Galen Gruman at Infoworld points out that a higher margin tends to favor small app and content providers because they would have high distribution costs anyway. On the other hand, a large content provider resents having to hand over 30% of their revenue to Apple for not doing a lot of work. For this reason, I expect that large content providers campaign for a bulk discount on the cost of distributing their content. Thus a good and hopefully likely outcome is a sliding scale. For example, a 30% margin on the first $20,000 per month, 20% on the next $20,000, 10% on the next $20,000 and so on (I have no insight on the business so these numbers are invented as an illustration rather than a suggestion as to what the numbers should be).

Part of the resentment with Apple is that they have a captive market and their behavior in stating terms appears dictatorial. They would have been much better to follow the standard politically correct procedure. That is, to put out a discussion document and then after some to and fro, imposed their terms as they always intended. It has the same end result while creating good will through a patina of choice and consultation.

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