Innovation, Free Apps, and the App Store

By Michael Mandel

Tech platforms should be judged on how well they foster consumer welfare, innovation, investment, productivity and job creation. Sometimes these values will conflict with each other, but they provide a good framework for thinking about the benefits and costs of platforms that go beyond the usual antitrust issues.

From that perspective, a recent opinion piece in Wired levies a criticism of the current design of Apple’s App Store that is important, if true. The authors, the legal director of Public Knowledge and then executive director of the Coalition for App Fairness, argue that when “Apple demands 30 percent of developers’ revenue, it limits their freedom to offer novel and innovative customer experiences.” They go on to say that the “biggest loss” from the App Store “has nothing to do with developers and users who have to work around Apple’s restrictions — it’s those apps and services that don’t exist at all because app store rules make them impossible.”

However, this criticism — that the pricing structure of the App Store results in too little app innovation and too few apps–is an odd one. As of the end of 2020, the App Store stocked 1.8 million apps. According to marketing research firm Sensor Tower, 85 percent of those apps were “free” to users, in the sense developers did not charge for downloads or collect in-app charges.

But note that these apps are “free” to developers as well, in the sense that Apple receives no other revenue other than the fee for the developer account ($99 per year for an individual account, with a waiver for nonprofits, accredited educational institutions and government entities that will distribute only free apps ). This pricing structure creates very low barriers to entry for new apps, spurring both innovation and competition.

Free apps are responsible for much of the consumer welfare, innovation, investment and job creation enabled by the App Store. For example, consider the banking apps which are offered by virtually every large and small bank today. Despite the large amounts of financial transactions flowing through these apps, they fall into the “free” category to both consumers and the banks. Banking apps were absolutely essential during the pandemic, enabling customers to do banking transactions including depositing checks, without having to go into branches. Indeed, banks compete to see what new functions can be added to their apps to make them more useful for their customers.

Another growing category of free apps are designed to control and interact with connected devices–the “internet of things.” These connected devices can be anything from electric bikes to power tools to automobiles to smart homes to agricultural sensors. The variety is nearly infinite, but one common characteristic is that their associated apps are directed toward innovation and making the connected device more useful. These apps are often a key selling point for the product, with the customer getting them as part of the purchase rather than paying to download separately.

Free apps also run the gamut of nonprofit organizations, from innovative educational organizations such as Khan Academy to nonprofit health service providers such as Kaiser Permanente to churches and other religious organizations. Donations can be made through these apps as well.

In an era of rampant ransomware and supply chain attacks, a free or nearly-free distribution channel that is carefully vetted for malware would seem to be a plus for innovative apps. Especially as the internet of things becomes more important, apps associated with connected devices will become the leading edge of innovation. Despite what the authors of the Wired piece argue, the pricing structure of the App Store fosters rather than impedes innovation and creativity.

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