Thursday, April 8, 2021

In its latest court filing, Apple gives the term "commission" a new meaning unsupported by dictionary definitions and commercial reality

Sooner than I would have thought when I publshed the latest Epic Games v. Apple filings (688 pages in total), I already feel an irresistible urge to comment on something because it is just intellectually dishonest.

There's nothing wrong per se with Apple comparing the iOS app distribution situation to the old days of software publishing: I, too, remember the "shrink-wrapped software" business. You can find some game credits from the mid to late 1990s that list me in sales & marketing and localization functions (Warcraft II: Tides of Darkness, Starcraft, Diablo). In 1996, I served on the board of the Software Publishers Association (SPA) Europe, and even though the World Wide Web existed at the time, we were all still selling software in boxes. Apple accurately notes that consumers "had to drive to the store, find it on the shelf, buy it in the shrink-wrapped box, and load it up onto their device." It's also plausible that, according to Apple pointing to his testimony, Epic CEO Tim Sweeney "found it difficult to sell games through traditional retail channels in the early 1990s." At the same time, I also dealt with publishers, distributors, and retailers. I had to negotiate discounts, cooperative advertising allowances, or grant early-payment discounts when payments would actually arrive only months later, making mockery of the term. It wasn't a land of milk and honey for sure (though at least you had multiple retailers and not just one per platform)--and Apple has every right to point that fact out.

But there's everything wrong with Apple's reality distortion field. Let's have this debate. Let's talk honestly about how software distribution changed over the course of time. But if we want to have an honest conversation, then we must face the facts, including those facts that don't support Apple's App Store feudalism.

Now I'm going to quote a paragraph that distorts a term in an outrageous way:

"150. When Epic agreed to distribute other developers' games around 1996, it collected a 60% commission—which Mr. Sweeney characterized as a fairly favorable royalty for developers. Sweeney TT. Most distributors at the time charged at least a 70% commission. Sweeney TT; Schmalensee TT." (emphases added)

By mislabeling distributor and retailer margins as "commissions," Apple seeks to distract from structural differences between shrinkwrapped software distribution and today's app stores.

Apple doesn't take any risk, nor does it do any warehousing. Distributor margins, however, involve the physical shipment of goods, and while some agreements with distributors and resellers allowed them to return some or all of the merchandise, some didn't. Even if the customer had the right to return goods, they still incurred significant logistical costs. None of that applies to downloads from a server.

The margin that a publisher or a distributor makes is anything but a "commission." A commission is when someone gets paid without taking a risk, without warehousing goods, without producing merchandise, without giving you shelf space, which (unlike the number of apps available for download from a server) is scarce. The Free Dictionary provides multiple dictionaries' definitions of the term "commission" and none of them is comparable to a publisher or reseller margin:

  • "A fee or percentage allowed to a sales representative or an agent for services rendered." (American Heritage Dictionary)

  • "the fee allotted to an agent for services rendered" (Collins English Dictionary)

  • "a sum or percentage allowed to agents, sales representatives, etc., for their services." (Random House Kernerman Webster's College Dictionary)

Apple's App Store "commission" is largely just a tax. But it's not a margin because they don't buy from you and resell. They collect and pass certain revenues on to you.

For the many who don't even remember shrinkwrapped software publishing anymore, let me provide a quick overview. Back in the day, you could

  • grant an IP license to a publisher who would make and sell the physical product, with you receiving a royalty like a book author from a book publisher;

  • or you made the physical product and could

    1. sell it on an exclusive or non-exclusive basis to distributors (wholesalers) who would resell your product to retailers, who in turn would resell it to end users;

    2. sell products directly to retailers; or

    3. sell it directly (mail order).

    Of course, combinations and hybrids were possible as well.

For example, when my Blizzard Entertainment friends sold their first Warcraft title, the company that had just acquired them (Davidson & Associates, an educational software publisher) acted as their distributor in the U.S. market. So from Blizzard's point of view, it was model #1; from the vantage point of Davidson as a whole, it was #2. I don't remember whether they also offered Warcraft by mail order, but they might have.

In Europe, however, Davidson didn't have a distribution network or any other presence at the time. Blizzard's founders knew another games company, Interplay, which became their exclusive European partner. But it was a bad deal because Interplay merely paid Blizzard a royalty of a few bucks per unit. Interplay then made the physical products for Europe, and sold them to the channel (partly directly, partly through other distributors).

Before they launched Warcraft II, I came in. I was the first person to work for Davidson and Blizzard in Europe at the time, and I wasn't even a full-time employee, but a consultant. Blizzard's parent company thought the Interplay deal was suboptimal, and I agreed. They adopted my advice to just set up an Irish subsidiary for tax reasons, have the European versions of the product manufactured there, and to appoint exclusive distributors (in that case, importers) in each European country. We granted a 60% discount to our German distributor (Bomico). We had an alternative that would have taken only 55% (no alternatives to Apple's App Store, though). But we believed we were ultimately going to be more successful with Bomico, and we were indeed: Warcraft II became #1 in the German Media Control sell-through charts a few months before it became #1 in the United States.

We sold about 300,000 copies in Germany. When we launched in December 1995, Bomico had placed pre-orders amounting to an aggregate of 70,000 copies if I recall correctly. It was a major logistical effort. In order to make it in time for the Christmas Selling Season, we actually had to fly the first 20,000 or more copies on a chartered freight plane from Dublin to Frankfurt, while the remainder of the initial order volume was on its way by truck and ferry. So we had ship over land, sea and air--and what made Warcraft II different from its predecessor in terms of gameplay was that you had not only land units, but also sea and air units. A funny anecdote.

Nowadays, you don't need freight planes, trucks, ferries. You just upload your app to Apple using Xcode (Apple's development system) or, which is what my company did because we used Unity, we sent it to Apple from a Mac with a special uploader app provided by Apple. Apple doesn't need a warehouse: the cost of storing an app on a server amounts to almost nothing (cloud storage is really cheap, while computing time can get expensive, but if your app needs a backend, then you, the developer, have to operate it yourself on Amazon AWS or wherever).

Again, developers faced challenges in the 1990s. Retailers had significant market power, but at least they normally weren't monopolists. Even if a shop was "the only game in town" somewhere, there was nothing stopping a competing retail chain from opening an outlet across the street. With iOS, it's a whole new situation. There are not only drawbacks but also certain advantages. However, Apple didn't invent the distribution of software by download. In the late 1990s, others were doing that already, such as (which I visited in Sunnyvale in 1999--just a couple of miles from Apple's Cupertino HQ) and its acquirer, Digital River.

The net effect of a functioning market is that the gains of trade--and the gains from technological progress--are split fairly between the parties. That is not the case with mobile app stores, where developers are taxed and tyrannized.

Let's not compare apples to oranges--and let's not name apples oranges.

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