Sunday, October 2, 2022

Bypassing Apple's and Google's app tax: Tencent's Supercell extends web-based alternative for in-app purchases to its blockbuster Hay Day game; Warner, Scopely run similar web shops

Apple never made a game, but by "virtue" of its App Store monopoly abuse makes more profit from games than any company that does make games. Google has made billions of dollars from its equity position in Pokémon GO maker Niantic, yet collects even more from other companies' game revenues through the Google Play Store's app tax.

One of the world's largest games companies, China's Tencent (which is also Epic's largest shareholder besides founder Tim Sweeney), has just doubled down on its efforts to circumvent the infamous app tax. Finland-based Supercell is an almost-wholly-owned Tencent subsidiary. Its Supercell Store, which since late June has already been offering digital items (named Gold Pass and Gold Pass Bundle) for the Clash of Clans strategy game, now also comes with a section related to the Hay Day farming game, which has been an enormous commercial success for about a decade. The first iOS version of Hay Day was launched in mid-2012, and the first Android version in late 2013. It quickly became the Farmville of the mobile gaming world. Even I played it for a few years--sometimes with extended periods of absence from the game, but it was always fun to come back.

The leading Hay Day YouTuber, R3DKNIGHT (Ricky Burnett), released a video yesterday that shows how one can purchase digital currencies (diamonds and gold) as well as a premium feature called Farm Pass (which is purchased for a given month, accelerates one's gameplay progress, and provides access to additional decorative and entertaining elements) through the web-based Supercell Store, where Apple and Google can't tax purchases:

Items purchased from the Supercell Store can be used in the iOS and Android versions of the game. On the web store, they cost approximately 10% less than inside the app. This means both the game maker and end users save money:

  • The game maker grows its revenues and increases its profitability because Apple and Google would otherwise take a 30% cut-- actually, Apple even collects significantly more than 30% in some countries. If an item is purchased through the Supercell Store, Supercell gets 86%-87% (90% minus, depending on the country, 3% to 4% for external payment processors) instead of 70% (or less) of the ex-VAT in-app price, which is roughly 23%-24% more than otherwise ((86%/70%)-100% = 22.9%; (87%/70%)-100% = 24.2%).

  • Gamers save 10%, which is their incentive and reward for accepting the inconvenience of having to visit the web shop (versus just tapping on a Buy button inside an app) and potentially having to enter their billing information there (which is unnecessary when a browser instance is already logged into a service like Paypal).

On their external web shops, game makers have more flexibility with setting price points. The inflexibility of Apple's approach is, by the way, another reason (besides the 30% cut) why NFT startups complain about the app tax.

Apple's inflexibility also affects currency conversion (Apple recently announced massive price increases in the eurozone and several other countries, and many app makers might actually prefer to keep the old euro prices).

When I last commented on the pending Pepper v. Apple class action (and a study according to which Apple's App Store commission would be cut in half if only one alternative app store was allowed on iOS), I said that it's unrealistic to assume that the entire difference between Apple's current supracompetitive commission and a hypothetical competitive commission would go to consumers: some app makers might indeed reduce their prices by approximately 30%, but in most cases it would likely be a mix of developers making more money and consumsers saving some money, just like we can now see with Supercell's web shop.

Supercell is not the only major games company to offer mobile app items via a web shop at lower prices:


Apple's and Google's app tax regimes are under pressure in numerous ways. Some of what is going on has the potential for meteoric impact:

Then there are parallel developments that won't have meteoric impact, but which I would describe as potentially erosive (aka "death by 1,000 cuts"). The most interesting trend in that area is what Supercell is now doing not only with respect to Clash of Clans but also Hay Day: some major game makers increasingly give their customers the option of purchasing digital items on websites, i.e., outside the mobile apps--items that they can then consume in the iOS and Android apps nonetheless.

That is an extension of the concepts called "cross-wallet" (buying in-game currency on one platform, but spending it on another) and "cross-purchase" (buying digital items such as a decoration on one platform, but using it on another). It's the only commercially significant respect in which even Apple has for some time been less restrictive than Sony--which says a lot about the PlayStation maker and its credibility as a complainant over Microsoft's acquisition of Activision Blizzard.

For the avoidance of doubt, the websites I'm talking about don't feature gameplay. They're just storefronts, not HTML5/OpenGL games. So this is "cross-wallet" and "cross-purchase" in the sense of "buy here, play there."

Those websites must be entirely external, i.e., they cannot be accessed inside the iOS or Android version of the game (though technically apps would be able to provide web browser functionality such as through Apple's WKWebView).

That technical separation--which, again, is due only to Apple's and Google's contractual restrictions--presents game makers with the following challenges:

  1. A web shop must be set up. That is a minor effort per se, especially with all the ready-to-use web shop technologies out there, but:

  2. There must be an account system that works across platforms. A purchase made in the web shop must be credited to an account with which the user plays the game on an iOS or Android device. This means the user has to register with an email address (a phone number would also be a technical possibility) as opposed to just effortlessly using an Apple or Google account.

    Apple forces app developers to support Sign-in with Apple as an alternative to registering with an email address. However, at least Supercell has gotten away with giving users various in-game incentives for signing up by email. Not only can they play the game alternatingly on Android and iOS if they do, but they also get other benefits from having a Supercell Id. I remember that Hay Day again and again encouraged me to obtain a Supercell Id, and at some point I did.

  3. The game maker has to raise awareness for the new purchasing option while abiding by Apple's and Google's restrictions in that regard (in case of non-compliance, the game will be ejected from the App Store and the Google Play Store). However, most people don't visit a game's website if they're already playing the game. Word-of-mouth may help to some extent. For example, Hay Day gamers typically join a "neighborhood" where they play and chat with other players. And the most avid Hay Day players follow R3DKNIGHT and other YouTubers. But in the end, the question is: how can a game maker promote its web shop to its customers if it can't simply offer the web-based alternative within the app (with a link to click on )?

That question leads us to some recent class-action settlements and court rulings.

Until recently, Apple and Google even prohibited app makers from sending promotional emails to registered users that would draw attention to alternative purchasing options. In this regard, they've made concessions lately--concession that in my view don't go far enough to address competition concerns, but which nevertheless represent (limited) progress.

On June 10, 2022, Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California formally approved (PDF) a class-action settlement between small app developers and Apple. While some of the terms of the agreement benefit only companies that fall under Apple's Small Business Program, others apply to all "U.S. Developers" (developers "who self-identified as U.S.-based when registering for the Developer Program").

Section 5.1.3 of that settlement agreement "[p]ermit[s] all U.S. Developers to communicate with their customers via email and other communication services outside their app about purchasing methods other than in-app purchase, provided that the customer consents to the communication and has the right to opt out." Apple agreed to revise its App Review Guideline 3.1.3 accordingly.

However, "[i]n-app communications, including via Apple Push Notification service, are outside the scope of this provision." It means Supercell can't link from the app itself to the web shop. It can't tell customers that a given item costs X amount if they buy it via Apple's IAP system, but 10% less on the web. That is a painful restriction:

  • Especially in-game purchases are impulse purchases. Many of those purchases happen because someone just wants to surmount a hurdle in the game, and wants to do it now. That is not the situation in which many gamers would proactively search for cheaper options of which they don't even know whether they exist.

  • By not being able to communicate with users in the app about cheaper alternatives, Supercell can't promote those cheaper options as a key reason for obtaining a Supercell Id in the first place.

A similar class-action settlement has been reached (and will presumably be approved) between some small app developers and Google.

What about the injunction that Judge YGR granted Epic against Apple last year?

For now, it's not presently enforceable anyway. But the United States Court of Appeals for the Ninth Circuit will hear the parties' cross-appeal in less than three weeks' time (on the 21st to be precise). It's possible that the injunction would be affirmed, and would then be enforced. However, the anti-anti-steering injunction was just a consolation prize, and it's not even something Epic specifically asked for. What really matters is market definition, and if that question is resolved in Epic's favor (as I believe it should be), the UCL part will become pretty unimportant because app makers could then offer alternative purchasing options within an app, so there would be no more need to visit external websites.

While Epic should prevail on the part that really matters, Apple does have strong arguments against that injunction, especially in a scenario in which Epic's federal antitrust claims would fail. I consider it rather unlikely that--when all is said and done, which will include an appeal to the Supreme Court--the outcome would be the same as last year. A winner-takes-all scenario (one way or the other) is most likely, especially in light of California case law (Chavez) according to which a claim that failed under federal antitrust law can't succeed under the Golden State's UCL. However, the State of California will argue otherwise at the October 21 hearing (and already did so in an amicus curiae brief).

Let's now assume, just for the sake of the argument, that the injunction does enter into force, and that it actually matters (which it won't if Epic prevails on its Sherman Act claims). What it would certainly enable game makers to do is to highlight inside the app the fact that lower prices are available outside the app. This means Supercell could strongly encourage gamers to obtain a Supercell Id and to visit Supercell's web shop.

But even in that scenario, those web shops would still have to be completely external. The injunction was never meant to allow IAP alternatives in the sense of alternative payment systems within an app. Judge YGR clarified that in an order last year, thereby validating what this blog had been saying all along. While Judge YGR's order didn't explicitly mention in-app browsers like WebView, there can be no reasonable doubt about that part.

So, while I very much hope for the meteoric events outlined further above to bring about fundamental change, there is a possibility of major game makers like Tencent/Supercell chipping away at Apple's and Google's app tax revenues in the meantime--and the injunction that Epic won could accelerate that process.