Phil Schiller Testifies on App Store Commissions - Web Sales Concerns

Phil Schiller’s Testimony Reveals Early Concerns Over App Store Commission

Apple Fellow Phil Schiller testified in court on Monday regarding the 27% commission charged to app developers for purchases made outside the App Store. He revealed he initially voiced reservations about this fee structure.

Potential Risks and Developer Relations

Schiller suggested the commission posed a potential compliance risk and could foster an “antagonistic relationship” with developers. He also indicated it might necessitate Apple having audit rights to verify payments owed for transactions occurring outside the App Store.

The Epic Games Ruling and Commission Adjustments

Typically, Apple levies a 30% commission on in-app purchases. However, the 27% rate resulted from the Epic Games-Apple legal proceedings.

In 2021, the court ruled that while Apple wasn’t a monopolist, it had to permit developers to direct customers to alternative payment methods beyond Apple’s in-app purchases (IAP).

Compliance and the 3% Reduction

Apple technically adhered to the ruling by modifying its App Store Guidelines to allow developers to link to their websites for alternative payment options.

Despite this change, Apple only reduced its commission by 3% for these external purchases.

Epic Games’ Criticism of “Bad-Faith” Compliance

Fortnite creator Epic Games CEO Tim Sweeney criticized Apple’s compliance as “bad-faith,” asserting the tech company undermined U.S. District Judge Yvonne Gonzalez Rogers’ 2021 order. This order granted developers the right to include buttons or links to alternative purchasing systems alongside Apple’s IAP.

Return to Court and Ongoing Dispute

Apple and Epic Games have since revisited federal court to allow Judge Rogers to assess whether Apple violated her initial order, which aimed to increase competition within the App Store.

Schiller’s Initial Objections

Schiller’s testimony highlighted his early opposition to commissions on purchases made outside the App Store.

He expressed concerns about Apple’s evolving role, stating, “… I had great concerns about the collections of funds from developers,” and the shift towards becoming an organization focused on collecting money.

Concerns About Becoming a “Collection Agency”

Schiller worried about pursuing developers who didn’t remit commissions, potentially transforming the App Store into a “collection agency” with “rules around how we handle nonpayment and whether ultimately it means we’re going to have to do audits of developers.”

Impact on Developer Relationships

He feared these changes would negatively impact the relationship between Apple and developers, deeming it “detrimental.”

Internal Debates and Decision-Making Process

The hearing revealed the extensive internal discussions Apple conducted while evaluating the implications of continuing to charge a fee.

Numerous documents and emails detailed the internal back-and-forth as executives considered various compliance options.

The Role of the Pricing Committee

Despite Schiller’s initial concerns, a pricing committee—including Apple CEO Tim Cook, former CFO Luca Maestri, Apple’s legal team, and Schiller—ultimately decided to impose a commission on these external purchases.

Commission Reduction for Small Businesses

The company also extended the 3% fee reduction to developers within its Small Business Program, lowering their commission from 15% to 12% for transactions outside the App Store.

Financial Modeling and Customer Behavior

Court documents showed Apple analyzed the financial impact on developers who linked to their own websites.

Apple modeled how a “less seamless experience” with non-IAP methods might lead to transaction abandonment, identifying a tipping point where links would no longer benefit developers and encourage them to revert to IAP.

Link Restrictions and Partner Exclusions

Apple also explored how restricting the placement and formatting of links could reduce adoption of external payment options. The company assessed the financial consequences of excluding certain partners, such as those in its video and news programs, from the new program.

Commission Timing and Warning Text

Apple considered different timing options for charging commissions, initially contemplating a 27% fee on purchases made within 72 hours of clicking a link. This timeframe was later extended to seven days.

Lawyers indicated Tim Cook was involved in crafting the warning message displayed to App Store customers when clicking external links. The initial version warned customers they were “no longer transacting with Apple,” later subtly suggesting potential privacy or security risks with web purchases.

Concerns About Perceived Internet Charges

During a meeting, concerns were raised about Apple being perceived as charging for transactions occurring on the internet.

One meeting note stated, “This might be perceived like we’re trying to charge for what happens on the internet.”