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Apple’s Subscription Model: Who’s the Breadwinner

September 26, 2016

Raymond Lowe
UX/UI Designer
...

Exploring the transition to subscription models for delivering digital products

Since its introduction in 2008, the Apple’s App Store has fundamentally changed the way we purchase software. The digital revolution has dematerialised media and the same happened to the boxes of installation discs that software used to be packaged in. The change was necessary to unlock the full capability of portable devices by allowing 3rd party applications to be installed via a digital distribution service. However, other than the incremental releases with each subsequent generation of devices, there hasn’t been major changes to the economic functionality. That is until Apple announced the App Stores shift towards a subscription model.

 

The Change

The App Store has always operated by a 70-30 split where Apple gets a 30% cut of the revenue from app purchases as well as further in-app purchases. The policy changes do not affect this but adds a different proportional division for subscriptions. If developers are able to maintain a subscription with a customer for longer than a year then Apple’s cut (the so called Apple-tax) reduces down to 15%, meaning more money goes to the developers. The option to sell subscriptions have been expanded to allow tiered pricing and encompass all categories of apps rather than just media and content apps like music and magazines. With iOS 10 there is ever more diverse categories of apps (eg. iMessage sticker extensions) that can exploit subscriptions.

Revenue division change

Subscription Models

The software market is shifting towards a subscription model, with key enterprises such as Adobe replacing their Creative Suite product (packages containing different combinations of design software) in 2011 with their Creative Cloud subscription service (software installed over the internet on-demand as long as subscription remains valid). This allows consumers to only download what they request, but also enable developers to rapidly distribute their products and updates. Similarly, Microsoft started offering their Office 365 service which uses the same model for productivity software. Adobe and Microsoft are software giants in the tech industry so can adopt rolling releases to keep subscriptions up to date. This may prove to be more difficult for smaller companies and individual developers who strive in the App Store.

Microsoft and Adobe
Rewarding Success

The total revenue in the App Store has reached billions. This shift in the economics encourages developers to sell their apps for a recurring fee rather than a one-off payment. Increasing the developer cut to 85% for the second year rewards developers and companies for retaining users. This can inspire confidence in companies because it demonstrates a level of success in their product.

 

Episodic Gaming

The inclusion of the gaming apps for subscriptions is significant because it is the most dominant category of the app store, accounting for about 75% of total worldwide revenue in the App Store. Pokémon Go is making $10M a day. Almost all of the top-grossing games on the charts are free-to-play relying on in-app purchases for profit. Depending on the genre of the game, in-app purchases are in most cases optional, applying a ‘freemium’ business model (basic functions are free but premium features require purchase). The new subscription option may favour games that are more narrative driven where new content extends the overall length of a games playing time. Episodic games such as Telltale Games release content in seasons periodically like television shows.

Telltale Games: The Walking Dead
Continuous Updates

The recurring payment from the consumer does implant expectations of regular updates and new content. This emphasis on continuous delivery may place pressure on start-ups and individual developers who are struggling to get their products released, but it is also an opportunity to refine sales strategies. It is common for clients to break their ties with companies’ post-release since their goals is just to get their products in market. There is now incentive to establish long term partnerships so there is continuous engagement for new content and lucrative projects.

 

To Sum Things Up

While Google Play may have almost double the number of app downloads than the App Store, Apple still leads in terms of the revenue generated. This new scheme could increase this lead tremendously as more apps within the App Store ecosystem adopts subscriptions. Adoption may be fragmented though with services such as Spotify currently needing to sell their subscriptions at a higher in-app purchase price compared to their own website to make up for the portion of the purchase going to Apple. WhatsApp recently abandoned subscriptions showing that the strategy may not even be suitable for all products. For developers and businesses this is a chance to refine marketing strategies, turning mobile first into a revenue stream. For consumers this may mean higher quality content since it will bring in the subscriptions. It may also comfort consumers knowing that the reduced “Apple-tax” means more of their money is supporting the developers and creators of the content that they love.

Top Grossing iPhone Apps September 2016