How Spotify and Google reduce in-app purchase fees – Billboard

Spotify’s quest to improve its margins has taken another step forward, expanding to the US and additional markets as a pilot program for billing customers using Google devices. Called “user choice billing”, the system allows app developers to offer Google Android smartphone users the option of paying the developer directly – at a low fee – or through Google Play.

Last week, Google’s user choice billing pilot expanded to the US, Brazil and South Africa, and Google announced that dating app Bumble had also joined the program. Spotify was the first developer to join the pilot program in March, with test markets in Australia, India, Indonesia, Japan and the European Economic Area. User-choice billing will be tested in the world’s largest smartphone markets and most valuable music markets, along with additional markets.

With user-choice billing, potential Spotify customers are presented with two payment options in the Android app side-by-side: Spotify and Google Play. Selecting Spotify will take the user to a form to fill in credit card information to sign up for a subscription. Importantly, this all happens within the Spotify app, not on Spotify’s external website. Selecting the option to pay with Google Play prompts the user to enter a password to pay with a credit card held by Google.

Billing is an under-appreciated but important issue in the subscription music business. Because music streaming is inevitably tied to smartphones, and because consumers have come to expect simplicity when engaging in e-commerce on smartphones, in-app billing helps a company like Spotify sign up customers. The problem for a music service like Spotify operating on thin margins, however, is that the app stores run by Apple and Google have traditionally demanded a cut of in-app purchases. This is why music companies are either paying the App Store fees themselves, without raising prices, reducing the profitability of each subscription, or increasing the price to cover the fee, which may turn away potential customers. Huh. Prior to 2016, Spotify charged users 30% more for in-app upgrades to Premium to offset Apple’s 30% fee.

There’s another option, of course: To save fees, a music service might disallow in-app subscriptions and encourage the customer to take some extra steps and subscribe on their website. The process runs the risk of losing potential customers along the way, but even so, Spotify has gone this route and hasn’t allowed in-app purchases on its Apple app since 2016.

Companies have faced this crisis for years. For example, in 2019, Pandora raised the price for customers who used Apple’s in-app purchases premium subscription service from $9.99 to $12.99 to offset the fee. Pandora reported paying $50 million in fees to Apple and Google in 2015 – 3.7% of its annual revenue.

“It certainly puts independent music services at a disadvantage where we’re paying 30% of the economics on the platforms that distribute our apps, that compete with us, and for the same users, and the same economics.” Pandora’s then-CFO mike herring told investors in 2016.

Apple typically charges 30% for in-app purchases during the first year of membership and 15% thereafter, according to Apple’s website for developers. Neither Apple nor Spotify have publicly stated how much Spotify fees are paid for subscriptions. The fees paid by Spotify to Google are also private.

A spokesperson for Spotify explained, “We will not comment on the terms of our agreement with Google as they are confidential.” Board“But it’s safe to say that our [user choice billing] The partnership is based on business terms that meet our standards of fairness.”

Typically, subscription services like Spotify charge a 15% fee for in-app purchases, but the fee can be lower. App developers in Google’s Play Media Experiences program, which integrate apps into Google’s ecosystem of wearables and other hardware products, could get paid as little as 15%, for example. For subscription-based services with significant licensing costs – such as music, video, books and audiobooks – the fees “can be as low as 10%,” according to a Google spokesperson.

User Choice Billing provides additional savings for app developers on top of any other programs or discounts. If an Android user presented with User Choice Billing opts for the app developer’s payment system, Google reduces the fee by 4%. So, if an app developer is paying a 10% fee to Google, the user’s choice of billing will reduce the fee to 6%.

Small improvements in gross margin are significant for a music service that pays more than three-quarters of its revenue to rights holders. Spotify’s gross margin on its premium subscription service was 28% in the third quarter of 2022, meaning Spotify paid 72% of its subscription revenue for licensing fees and some small costs of sales. Based on past earnings and Spotify’s fourth-quarter guidance, each percent of revenue represents $100 million in subscription revenue in 2022. If Spotify can move its gross margin by even a small amount, it will greatly impact the company’s free cash flow. To put this into perspective, Spotify’s net cash flow from operations for the first three quarters of 2022 was $109 million.

While Google is willing to consider alternative methods of in-app billing, Apple is not. Major app developers including Spotify have been fighting for better terms for years. In 2019, Spotify filed a complaint against Apple with the European Commission for anti-competitive behavior, alleging that Apple “continues to give itself an unfair advantage at every turn.”

Additionally, Apple is currently involved in a lawsuit brought by Epic Games regarding its control over the App Store. Although the judge has mostly sided with Apple in this case, the judge did order Apple to allow apps to provide links to payment options outside the App Store. The lower court’s requirement has been delayed until an appeals court rules on the case. The two sides began oral arguments on Monday (Nov. 14) in the Ninth Circuit Court of Appeals.

Apple’s tighter rules have been especially intrusive for Spotify’s latest attempt to improve its margins — audiobooks. In September, the streaming service began selling 300,000 audiobook titles following its acquisition of audiobook distributor FindAway in June. The plan makes sense: Audiobook purchases on its platform could provide Spotify with 60% gross margin — nearly double the margin in music streaming — and audiobooks are a natural addition to its growing podcast business.

But Apple’s rules for in-app purchases make audiobooks purchased through iOS apps a less profitable — and less straightforward — process. While the Google app provides “a beautiful experience,” the CEO daniel a Said during an October 25 earnings call, the process of purchasing an audiobook through Apple “is inherently broken because Apple decided it wanted to be broken.” Spotify had lawyers “in the room” working with the developers, but according to one, Apple rejected Spotify’s app multiple times. “It holds back developers and holds back creators,” he said. “And that’s bad for consumers.” Plus, there’s the added element here that Apple is Spotify’s main competitor for music streaming.

As with audiobooks, Spotify currently sells titles on its website rather than inside the app to avoid fees (the user can listen using the Spotify app after the title has been purchased). But simply driving people to its website is not easy. As Spotify claims on a website called Time to Play Fair, Apple does not allow Spotify to explain how to buy audiobooks outside the app, include a link to direct the user to the Spotify audiobooks page, request Or get an email with instructions. How to purchase an audiobook or reveal audiobook price in app or email. Spotify’s Android app doesn’t sell audiobooks, but allows app users to receive an email with a link to Spotify to purchase the title.

In its June Investor Day presentation, Spotify management looked beyond music, podcasts and audiobooks. Over the next ten years, Spotify will add sports, news and education to the platform and double its current average revenue per user Alex Norstrom, Chief Freemium Business Officer. The Billing Pilot Program of User Choice can only help in that goal.

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