Mobile in-app spending is a giant $130B+ market. The payments keep flowing through Apple and Google app store billing platforms. Apple and Google's control over in-app payments for virtual services remains intact despite significant external pressure by regulators and private companies to lower platform fees and allow third-party payment processors. Given the size of the opportunity, the trend of providing payment options bypassing the in-app monopoly of Apple and Google is on the rise, along with payment infrastructure companies facilitating this trend.
Overview of in-app payments on the app stores
Apple first introduced in-app purchases in 2009, the following year after the App Store was revealed to the public. The in-app purchases became a popular mobile app monetization strategy alongside ads. In-app payments made it simple to allow free app downloads and monetize by unlocking premium features in the app. Google followed this monetization model with its Google Play store. A little more than a decade later, consumer app store spending amounts to a massive $130 billion (as of 2021 based on SensorTower data) and continues growing by more than 20% annually.
The rise of in-app subscriptions
Historically games were driving the largest chunk of in-app spending, accounting for roughly 70% just five years ago. But the growth rate of non-gaming apps has been higher in recent years, powered by in-app subscriptions. Developers of all sizes are widely adopting in-app subscriptions. Giants like Microsoft, Snap, Adobe, Twitter, Telegram, Tinder, and Duolingo are examples of companies that introduced consumer subscriptions on the app store, earning hundreds of millions in the app stores.
Even Facebook recently announced plans to introduce a subscription model similar to Twitter. Many others in the verticals like productivity, social media, streaming, dating, fitness, and education embraced the benefits of recurring monetization with auto-renewable in-app subscriptions. As a result of this trend, non-gaming apps' share of mobile in-app spending reached more than 50% for the first time in Q2 of 2022.
Monopolistic approach and governmental scrutiny
While Apple and Google's app stores became powerful mobile app distribution platforms, they also captured a significant share of in-app revenue while enforcing payments through their payment gates. This situation has become the subject of government scrutiny and numerous litigations from private companies.
Apple and Google used to take a 30% commission from all in-app revenue. Applying that rate to $130 in-app spending, we get to 40B in net revenue. So there is a significant monetary incentive to keep things as they are for Apple and Google.
So far, under external pressure, Apple has reduced the fee to 15% for small developers making under $1M in annual revenue. And Google followed Apple by reducing its fee to 15% of the first $1M of earnings each year.
But even 15% is strikingly higher than the 3-4% fee charged by companies that provide payment services like Stripe, Adyen, and others. It's easy to see why there is a lot of pressure on Apple and Google to reduce the commission further and allow third-party payment options within the apps providing digital services.
Epic games vs. Apple. Market expectations.
The lawsuit by Epic Games was probably the most publicized story when a private company tried to strong-arm Apple on the subject of in-app payments. Apple removed Epic's Fortnite game from the App Store for implementing a third-party payment option. The case made many headlines, and many market participants expected it to end Apple's control over in-app payments.
So much so that companies providing payment services, especially subscription management, have started preparing solutions to facilitate third-party in-app subscription payments.
One of these companies was Paddle. Paddle provides subscription management for SaaS and web-based companies and raised $200 million at a $1.4 billion valuation in 2022. Paddle’s team planned to offer their subscription management solution for mobile apps to tap into lucrative mobile subscriptions. They even prepared the landing page for the product launch, which is still available on their website.
Similarly, Revenuecat, a company managing $1B+ of in-app subscription revenue on app stores, hinted it was working on tools to facilitate quick in-app implementation of third-party payments.
The company I run, Qonversion, enabling in-app subscriptions and managing $400M+ in mobile subscription revenue on Apple and Google, was also eyeing supporting alternative payment options with our iOS and Android SDKs.
But the Epic vs. Apple case went differently than most expected. The court decided Apple was not acting as a monopolist and could control payment options on its platform. It became apparent that the market expectations needed to be revised, as any solution providing third-party in-app payments would violate the current App Store policy. Paddle announced it could not launch its mobile payments offer until further clarifications from Apple. And there has been no news ever since. Likewise, we at Qonversion postponed releasing tools to facilitate 3rd party in-app payments.
Alternative payment options outside of apps
At the same time, in the Epic vs Apple trial, the court ordered Apple to allow developers customer communication on external payment options outside an app. Arguably this is a significant opportunity missed by many developers at the moment and the direction where a lot of in-app spending started moving to.
While third-party payments can't be integrated directly into an app selling virtual services, they can be used outside of an app. This does not violate Apple’s payment policies. Using an external payment option for one-off purchases is problematic though, as it creates an awful user experience. But providing a web-based onboarding and payment experience for a subscription-type app is more logical. Users can go through a web onboarding and subscribe before downloading an app. Once a user starts a subscription managed by Stripe or any other payment web payment processor, a developer provides him with the link to download an app, authenticate him on mobile and unlock premium access. While this requires additional development, the commission reduction from 15-30% to just 3-4% is usually worth it.
Web-to-app subscription management trends
So companies providing subscription management are introducing tools to bridge the gap between web and mobile subscription management. The required infrastructure includes a cloud back-end to store subscription states, APIs, and mobile SDKs to make it easy for mobile developers to get subscription data within the app.
From my company's data, we see that 30% of mobile apps monetizing with in-app subscriptions have either introduced a web payment option already or looking to do it this year. And based on our client's feedback, the most popular web subscription provider across the board is Stripe. Stripe is winning due to its global footprint, simple interface, and light-weighted KYC account opening process.
As this trend evolves, we expect to see more revenue shifts from native in-app subscriptions to external payment gates with the help of subscription management companies. While Apple and Google continue their fight to control app payments, they are already losing some revenue to the web. The massive difference between commissions on app stores and the web creates a significant incentive for this shift. And if there is demand, the technology will facilitate it.
Payments control is not the only problem
Pressure from governments on Apple and Google remains high. For example, South Korea has passed a law that Apple and Google must allow developers to use other payment systems on the app stores in 2021. European Economic Area (EEA) obligated app stores to allow third-party payment options. But the app stores are being criticized not only for high payment fees. The lengthy and obscure app review process is another major concern of app developers. Some developers claim the process is biased, and apps can be rejected or removed from the App Store without a clear explanation.
Here is the message Telegram's founder Pavel Durov posted in August 2022 on his Telegram channel:
.. we're often unable to distribute the new versions of Telegram due to the obscure "review process" imposed on all mobile apps by the tech monopolies. For example, our upcoming update – which is about to revolutionize how people express themselves in messaging – has been stuck in Apple's "review" for two weeks, without explanation or any feedback provided by Apple. If Telegram, one of the top 10 most popular apps globally, is receiving this treatment, one can only imagine the difficulties experienced by smaller app developers.
So the battle with app stores is not only on the payments but also on the overall control of what's available and who can distribute the apps on the 7 billion mobile devices.