Photo of Phil Schiller by Kevork Djansezian/Getty Images

APP STORE 2.0 The App Store changed the way we buy software. Can Apple do it again?

By Lauren Goode

Apple’s annual conference for developers, which kicks off next Monday, is normally when the company previews its newest software for iOS and Mac OS X. But this year’s WWDC isn’t just about new operating systems: starting next week and continuing throughout the fall, Apple will begin rolling out new incentives for developers in its App Store, including a new revenue-share model and the introduction of search ads in its iOS App Store. In a rare pre-WWDC sit-down interview with The Verge, Phil Schiller, Apple’s senior vice president of worldwide marketing, said that Apple would soon alter its revenue-sharing model for apps. While the well-known 70 / 30 split will remain, developers who are able to maintain a subscription with a customer longer than a year will see Apple’s cut drop down to 15 percent. The option to sell subscriptions will also be available to all developers instead of just a few kinds of apps. "Now we’re going to open up to all categories," Schiller says, "and that includes games, which is a huge category." If the new subscription model becomes widely adopted, it will represent a fundamental shift in the economics of the App Store. Developers will be incentivized to sell their apps for a recurring fee instead of a one-time cost. It could change the way consumers pay for certain apps, but it also presents a massive opportunity for developers, many of whom feel the app economy has become moribund in recent years. And as iPhone sales growth slows, a move to app subscriptions is another way for Apple to wring more profits from its existing user base. Apple is also going to start showing search ads for apps in its iOS App Store search results for the first time, something the company had previously resisted. "We’ve thought about how to carefully do it in a way that, first and foremost, customers will be happy with," Schiller says, adding that he believes the ad auction system in App Store search will be "fair to developers, and fair for indie developers, too." (Bloomberg News recently reported that Apple was exploring paid search results in the App Store.) Finally, Schiller says that the App Store has been speeding up app review times — to the point where 50 percent of submitted apps are now reviewed in 24 hours, and 90 percent are reviewed within 48 hours.

The new emphasis on subscriptions and the more favorable revenue split could be an inflection point in the history of the App Store. The changes are coming at a time when App Store revenue is in the billions, but also at a time when some app makers — especially small or indie app developers — have become increasingly vocal about their inability to run sustainable businesses making apps. In January of this year, Apple says that developers around the world have earned $40 billion since the App Store launched in 2008 — with over a third being generated last year alone. For those counting, there are four "app stores" now, five if you separate iPhone from iPad: iOS, Mac, TV, and Watch. But on iOS, specifically, the overwhelming majority of revenue comes from one app category: games. According to App Annie, an independent app data and insights firm, games made up 75 percent of total revenue worldwide in the iOS App Store as of April 2016. Almost all of the top-grossing apps are free-to-play, offering some type of in-app purchase once you’re in the app. The middle class for apps is shrinking, will subscriptions save it? For most other mobile app makers, revenue generation is more challenging, or at the very least more complex. As The Verge’s Casey Newton wrote in his profile of the makers of photo-editing app Pixite, the middle class for apps is shrinking. There are the whales, the game makers; there are the well-known social networking, cloud service, and entertainment apps; and then there’s everybody else, left to figure out whether a one-time download fee, in-app purchases, or a subscription model could possibly work for them. (It often doesn’t.) One respected app maker I spoke to last fall downright refused to port his app to the iPad Pro when it launched because, he says, his company had "no reasonable expectation of earning back on our investment." Developers have been asking Apple for lifelines; features like free app trials — so customers can try before they buy— and paid updates, which means software developers can actually charge customers when they issue significant updates, not unlike the old shrinkwrap software model. But these are feature requests that Schiller won’t comment on, at least for now. It’s doubtful that they’ll be rolled out this fall along with the other App Store changes. All he will say about free trials and paid updates is that Apple "looks at everything. We evaluate what will be a better experience for the user, and we make choices based on that." What Phil Schiller does want to talk about, while tapping intermittently on a giant, 12.9-inch iPad Pro in a stark white conference room in Cupertino, are subscription models and search ads.



This past December, Schiller took on an expanded role as overseer of the App Store, though he stressed that Apple senior vice president and iTunes lead Eddy Cue is still very much involved (Cue oversees engineering and international App Stores, while App Store marketing now officially falls under Schiller). Schiller is still the company’s senior vice president of worldwide marketing, reporting directly to CEO Tim Cook. But his day-to-day now includes more meetings specific to the App Store, he says, "more me getting involved with the engineering team, the search team, things that I just didn’t spend a lot of time on in the past because I didn’t need to with the things I was doing." "Somehow that one moment of someone saying, ‘You’re taking more responsibility’ did cause me and others to take a step back, take stock of where we are, and think about how much more can we do to make it better, faster," Schiller says, adding that there’s a "renewed focus and energy" around the App Store now. "For the second year and beyond, the revenue split goes to 85 / 15. So developers can retain a lot more of the revenue." Part of that energy has been channeled into figuring out how to sell developers on subscription services, and not only that, but how to keep them keeping on with those subscriptions. Previously, only apps classified as news, cloud services, dating apps, or audio / video streaming apps could sell subscription content. Now it’s open to all product categories. For the first year of a subscription Apple will maintain its 70 / 30 revenue share; after one year, the new 85 percent / 15 percent revenue share will kick in (applied per subscriber). The new app subscription model will roll out to developers this fall, though if app makers have subscribers they’ve already retained for a year, the new revenue split starts June 13th. All of these changes underscore Apple’s intent on getting developers to sell subscriptions — so much so that the company is willing to reduce its revenue share. Internally, Apple has even been referring to the rollout as "Subscriptions 2.0." In a way, Apple is treating subscriptions as a proxy for paid upgrades; rather than doing a big update, and charging customers for it once a year, developers are now supposed to do this on a rolling basis. For Schiller, subscriptions are a proven model. And it doesn’t hurt that they’re much easier to implement than free trials or paid upgrades. "The developers who do have access to the subscriptions have been very happy with them," he says. "The system works really cleanly and nicely." There will also be new tiered pricing options for app subscriptions, up to 200 of them across different currencies and territories. This is something that could impact companies like Netflix, which offers one rate for streaming services in the US, but might want to lower the subscription price when launching in an emerging market.