This piece will give you important insight that hasn’t been covered about Apple’s developer announcement last week. So, keep reading. I promise it will be worth it. But we have to get into the right frame of mind – and for that we must first visit Sweden.
Stockholm is one of my favorite cities in the world and has become a real FinTech innovation hub. Stockholm is the largest city in the small country of Sweden that’s famous for a few other things, too: charming and beautiful people, long dark winters, short but amazing summers, generous government and social benefits, and having one of the most progressive tax systems in the world.
Sweden’s highest marginal tax rate is 57 percent, which most people actually pay since that rate applies to all income over 1.5 times the average Swedish income. In U.S. dollars anyone earning more than $88,000 a year would pay that top rate. There’s a capital gains tax of 30 percent, too, and a sales tax of 25 percent. Can you feel the Swedish Bern???
Given that a fair chunk of the 9 million people living in Sweden turn over nearly 60 percent of their paycheck to the government, you’d think that they’d feel much the same way about their taxing authority – the Skatteverket – as we in the U.S. feel about the IRS: pure and simple hatred.
But nothing could be further from the truth. In fact, the word “skatte” means “treasure.” (I won’t mention what some have suggested the letters “IRS” stand for.)
The reason that the Swedes actually do seem to treasure their taxing authority is because they are so very easy to do business with. Anything that triggers an opportunity to levy a tax or track income that can be taxed, they already know about and therefore make it easy to pay up.
And this is all according to the official site of Sweden that goes into great detail about how the Swedes have managed to pull off “the ultimate confidence trick.”
They point out a number of things.
Having a baby, it says? When it’s born, parents register it with the Skatteverket that issues a personal identity number. Every move that little bundle of joy makes is now tracked for life. The Skatteverket also gets to weigh in on the name of that new little munchkin, too. Ever wonder why you’ve never met a Swede named River, Apple or North in Sweden? Now you know.
When it comes time to get married, they say that the Skatteverket will decide if you can, e.g. you aren’t a deadbeat or owe any back taxes. Moving? They say that the friendly tax authority must need to know within a week. At death, the doctor who pronounces the dearly departed, departed, must file a form with the Skatteverket before a funeral or cremation can happen.
It seems that in Sweden, taxes happen first and important life events, second.
And if you think that you can sneak around and use cash to avoid those friendly tax collectors knowing all of your business – surprise! In Sweden cash is practically outlawed. Its cash usage is among the lowest in the world because it’s truly inconvenient to get and to use. And if you do manage to pay cash at a cash register — well, that is linked to guess who?
Now since the Skatteverket is totally and 100 percent up to speed on what’s happening with the Swedish citizen’s life in and outside of work, when it comes to paying taxes, they make that easy too – sending a completed tax form, ready for signature, to its happy and well satisfied tax-paying customers.
Since most Swedish citizens can’t avoid paying their fair share, the Skatteverket’s mission is to at least make them feel good about doing it by delivering the highest levels of customer service at every turn. After all, it’s hard to really begrudge someone who’s taking almost all of your money when they’re just so darn nice and helpful while doing it.
Apple, and its latest announcement related to developer fees for subscriptions, has taken a page out of the Skatteverket’s playbook.
All of the tech media just gushed last week that Apple has done the most amaaaaazzzzzzing thing ever: they’ve given developers a raise by giving up 15 percent of their cut.
Instead of taking 30 percent of their revenue on subscriptions, effective this fall, they’ll take only 15 percent after the recurring subscription has been in place for a year.
But that’s not all!
Apple says that it has expanded the ability for developers to offer subscriptions for any app category now. In addition to subscriptions for digital content - newspapers, streaming music or other digital content - any developer with any app can now enable a subscription program using one of the 200 permutations of subscription price points and programs that Apple will permit under their rules. Apple’s app categories are massive – health, education, productivity, travel, food and drink – and shopping. The pot of gold at the end of that recurring subscription rainbow will be that developers get to take home 70 percent of the take in the first year and 85 percent every year that the subscription remains active after that.
Developers, Apple acknowledges, really have it tough. It’s hard to get the attention of consumers in an apps store that now has 1.5 million apps to choose from. Apple is working hard to help developers out – to stand out in a store that has become incredibly popular. Developers can now pay to be featured and apps will be easier to find. Apple also acknowledges that most consumers only use a couple dozen apps regularly or semi-regularly, even if they’ve downloaded more than 100 on their home screens.
Subscriptions, Apple says, are a way for developers to make their apps sticky and banish the free trials that rarely lead to revenue - and for those developer revenue engines to hum because they can market those services in the app store.
And, in the face of slowing device sales, to help close Apple’s revenue deficit.
Here’s the real deal about what went down last week.
Apple says that details are forthcoming, so no one knows how this will really shake out, but reading the website straight up, Apple’s announcement didn’t seem to be only about making friends with developers even though, perhaps, just maybe, that’s what they hoped the tech media would notice.
Instead, as I see it, it was also, and more importantly, about taking a big, bold and deliberate step into declaring itself a commerce platform - by expanding the number of apps they can tax to just about anything – from digital media to products to enterprise apps to you name it – as long as it comes with a subscription initiated from within the app itself.
And about extending the tax to any app that happens to have a recurring subscription revenue stream.
(Btw, I really don’t mean to be a smart aleck with the term “tax,” but it sounds so good. In fact, Apple is charging developers a commission for marketing their stuff through their fabulous app store. So, feel free to replace “commission” with “tax” where you see it from now on – or not.)
Apple isn’t hiding this either. Right smack on the Apple Developer website, they make it very clear that any and all app categories now can offer subscriptions inside the app – any category. If that’s true, then Dollar Shave Club, The Honest Company, BarkBox, Birchbox, Trunk Club, Stitch Fix, Weight Watchers, Jenny Craig, Blue Apron, PetFlow and the slew of consumer apps in the apps store that now offer subscriptions, this 30 percent tax is for you – for the first year if your consumers activate those subscriptions within the app.
And, if consumer behavior holds, 30 percent for probably pretty much the duration.
Consumer research supports that fact that there’s a 6 percent churn every month on subscriptions and that most consumers cancel after 3 months. I’m quite sure that Apple has those data, too, otherwise, they’d do like Google did and make the low cut available to subscriptions from Day 1.
But why give away 15 percent when you can advertise that you will, but not have to deliver much? It’s sort of like extending an invitation to your crazy Uncle to spend Father’s Day with you when you know he’ll never make the trip. You still get the goodwill and family brownie points for making the offer.
Here’s another important detail.
Apple also implies when the new subscription program rolls out, that existing subscriptions that have been in place for a year will also begin getting taxed at the low, low post-first year rate of 15 percent. One report that I saw suggested that anything in place as of June 16 and renews would be “eligible” for this new 15 percent tax.
“All current subscriptions are eligible,” it says on the site. So, Dollar Shave Club, The Honest Company, BarkBox, Birchbox, Blue Apron, PetFlow and the slew of apps in the apps store that have subscriptions initiated in the app and that have been active for a year, if they are still active this fall, this 15 percent tax looks like it could also be for you. And, I’m pretty sure when Apple says they are “eligible” they don’t mean if you really want us to take 15 percent we will; it is more like the Skatteverket telling Swedes they’re “eligible” to pay a 57 marginal tax rate.
But that’s chump change when compared to where the real opportunity for Apple really lies: the enterprise and SMB app subscription market.
Apple’s courtship of the enterprise market isn’t just about devices, it’s about getting developers to write apps for those devices. Its partnership with IBM in 2014 has already produced a bunch of them. Its partnership with SAP this past May is intended to do that same thing. SAP has 310K customers and more than 100M SAAS subscribers worldwide, according to an article in CIO and designed to reach the 2.5 million developers who are part of SAP’s developer community. Tim Cook told reporters when the partnership was announced that “76 percent of business transactions touch SAP systems.”
On the SMB side, there are apps galore intended to streamline and make more efficient the operations of a small business, whether it’s basic sales and CRM management tools or more specific industry functionality.
Depending on how the subscription activations happen – in app or on the web – Apple might be able to back up that 15 percent revenue truck to those enterprise SaaS apps, since most of those apps that are part of business operations don’t have the churn that consumer apps do - and dump that revenue straight to Apple’s bottom line!
But all you developers that today enable subscriptions for your SaaS-based services and pay zero, don’t feel bad. You will get paid, Apple says – when you didn’t used to – for all of the time and work it takes to keep those apps up to date. Oh, you kept those apps up to date anyway? And didn’t have to pay anything to Apple? As long as you’re in Apple’s app store that’s all that really should matter to you now.
Apple will also make it as easy as the Swedish Skatteverket to pay your fair share. They’ll just take it each time the subscription payment is made by the consumer or the business. Apple’s rules – so that they can collect the tax – is that all of these subscriptions have to be run through iTunes. You say that now you are able to ask the customer for their name and email address and have them attach their favorite method of payment to the subscription?
Probably not for much longer.
Starting this fall when this program rolls out, if the program parameters work the way they do today in the digital content world, apps with subscriptions activated inside of the app will have those subscriptions attached to an iTunes account. Apple is in payments processing not because it wants to be or even likes being in payments, but because it wants an easy and 100 percent rock solid way of being paid the commissions on the apps that are in the apps store.
And so many of you laughed when I wrote the Apple Tax Man Cometh a few weeks ago. But I think that this may be the first shot across that apps store tax bow.
As I’ve written, Apple’s bottom line needs some love. The developer fee-slashing love that was uncharacteristically announced in advance of WWDC tomorrow is an interesting way to deflect what those experts in device features and functions say is the real news: the release of the iPhone 7 won’t be all that exciting.
Analysts predict that total iPhone sales for 2016 will be down. Ming-Chi Kuo, dubbed the most accurate Apple analyst out there, projects iPhone sales to drop to between 190 million and 205 million in 2016 against 2015 shipments of 232 million. He doesn’t think that iPhone 7 will “have many attractive selling features” and won’t do much to push consumers to upgrade the phone. That means that Apple, therefore, has no choice but to find other ways to pay the bills – and expanding the types of apps that are subject to the 70/30 or 85/15 split is one of those ways.
Subscription commerce is an interesting choice, since as I’ve mentioned it’s where the action is on both the consumer and enterprise side of the world. It’s tough to find accurate information on the size of the subscription economy, but Zuora’s CEO was quoted in 2015 that if only 10 percent of the companies in the world shifted half of the revenues to subscriptions, that subscription commerce would be a $20 billion market – he obviously believes that it is much more. He also said in 2012 that there were 15 million businesses using SaaS-based services at that time. As the CEO of the largest player subscription commerce enabler out there, he’s in a good position to be reading and reporting on those tea leaves.
The bottom line is this, at least as I read my own tea leaves, Apple needs to prop up its revenue from sagging device sales. Taking a cut of app sales has been part of Apple’s DNA since Day 1. Announcing a cut to subscription fees while expanding what is subject to their fees is is step one to two big potential moves.
One, expanding the scope of what’s taxed to more apps – maybe even all apps. Apple’s announcement of subscription fees to all apps category – if we take them at their word – is a big, big move that was blunted by reducing the take to 15 percent, but now on a much larger base. Moving to tax all apps really wouldn’t be much of a stretch or certain categories in the app store like transportation and the tax wouldn’t have to be 15 percent either. Asking Uber for a 1 percent take each time a ride was booked via the app would be quite the payday. And what choice would Uber have to pay given its dependence on the app store and the iPhone to support its business.
Two, wresting control of payments by moving everyone to iTunes. Want to know how Apple may be thinking of igniting Apple Pay? By using the power of its app store and requiring the use of iTunes and Apple Pay for those consumers to conduct commerce. We all did it willingly when we wanted to download music and later subscribe to Apple Music, didn’t we?
Hey, listen, Apple provides an amazing platform that has spawned commerce in ways that we might have never imagined. But let’s put Apple’s announcement in the proper context – monetizing the app store.
Today, that appears to be one subscription at a time. Tomorrow? Maybe one in-app purchase at a time.
Long live the mobile browser? It may be to the iPhone and the app store, what cash is in most countries (except Sweden).