What if, in trying to help app developers, regulators unintentionally make their work harder and more complex? The more we talk to small app developers, the more we hear concerns about the growing costs of market fragmentation and complexity. As regulators drive regionally distinct app marketplace business terms that work differently for example in the UK than the EU, regulators seem to be overlooking the impact that a divergent and increasingly fragmented set of marketplace terms and rules has on small and medium sized developers.
We’ve heard how developers want a trustworthy and integrated app ecosystem that enables them to seamlessly reach potential new customers across the globe. But increasingly, regional differences that force distinct localized pricing models and requirements have made their life harder.
That’s why European regulators likely heard a collective sigh of relief when, after close collaboration with Europe’s Digital Markets Act regulators, the European Commission welcomed Apple’s recent announcement of a new unified set of EU business terms for developers. The changes, which take effect October 1st, replace a more complex fee structure and eliminate a per-install fee, an initial acquisition fee and store services fees. Commission rates are now significantly lower too — ranging from 5% to 26%, depending on how the developer chooses to sell its app — whether through the built-in app purchase system, an alternative payment provider, or by linking-out of the app. Recognizing the vital role that small businesses play in the app ecosystem, they benefit from a small 5% commission.
We think these are important steps toward bringing more regulatory certainty to the EU and reducing complexity for app developers by moving every developer that distributes apps in the EU to a single set of unified business terms.
While the EU has taken an important step forward toward more regulatory stability and uniformity, the UK’s Competition and Markets Authority (CMA) could undermine these gains by creating another layer of complexity for developers. By proposing its own distinct business term requirements under its Digital Markets, Competition and Consumers Act (DMCCA), the CMA risks fracturing the market further by undoing the uniform gains developers have just begun to realize in the EU. Rather than aligning with an existing framework to create more cohesive terms for developers and unifying markets, the CMA is poised to add new regionally specific mandates which can add another layer of complexity and create additional burdens for developers.
The CMA and DMA efforts, both stating they are trying to achieve similar goals, are often framed as targeting the biggest technology platforms in order to help the little guy better compete. But the practical effects of their mandates can create uncertainty and new layers of complexity that can make it harder for smaller and medium-sized app developers to compete with their bigger brethren. In regulatory debates between billion-dollar entities, the needs of small startups — who represent the majority of the app marketplace — are frequently overlooked.
These small and medium-sized developers seeking to scale globally rely on the features provided by digital platforms, their trust driven marketplaces, and consistent business terms in order to compete. They depend on these integrated digital marketplaces not only to reach new customers, but to handle essential back-office overhead and maintain the consumer trust necessary to spur a consumer to download an unestablished new app. When regulators fragment marketplaces, they introduce unnecessary operational friction, undermining the secure, scalable infrastructure these smaller entities need to succeed.
The CMA’s proposed changes create additional new operational frictions for developers.
While the EU now has a single consistent uniform approach, the UK’s CMA is now in the process of considering a different and more complex structure that will likely add additional complexity for developers seeking to monetize their innovations across all of Europe. For example, if the UK’s CMA creates a separate, divergent steering rulebook, UK-based app developers trying to simultaneously serve both the UK and EU markets will face an unnecessarily fragmented compliance landscape that requires them to create increasingly unnecessary technical overhead to meet the divergent terms.
In our Trusted Future feedback to the CMA, we explained how some features of their proposal specifically undermined efforts to advance a more dynamic, competitive and trustworthy digital ecosystem in the UK.
Rather than adopting a more simplified and uniform approach for developers trying to serve all of Europe, the CMA’s new rules could create additional complexity in three operational areas.
- To create a more uniform transaction architecture, under the new EU framework, developers have a simplified single set of business terms based on a predictable fixed percentage commission. In contrast, the UK proposal introduces a bespoke, cost-plus audit model, leading to an approach that will stand at odds with the EU’s simplified and uniform approach.
- To allow users to choose the most trustworthy payment option, EU developers can now offer the platform’s built-in payment system (which simplifies technology implementation and compliance) alongside alternative payment options. To provide consistency, after developers choose their approach, they will need to maintain their chosen payment options for 12 months. By contrast, under the CMA’s proposed rules, developers may need to further rework transaction flows based on a consumer’s geographic location.
- To ensure children are appropriately protected, apps in the EU’s kids category are forbidden from linking to external sites for purchases to reduce the risk of scams targeting children. Likewise, users under 13 cannot be sent out to external sites for the same reason. For users between the ages 13 and 17, apps can use third-party payment processors and external websites, but a parent or guardian must approve the purchase first. These are important protections, but the UK is contemplating a vaguer construct that leaves both developers and parents’ expectations subject to a new and more ambiguous legal necessity test.
Complexity is the silent enemy of the startup ecosystem.
When regulators in adjacent markets set conflicting business terms, commissions, steering link-out constructs, child protection measures, and disclosures, developers are forced to bear the cost of the added complexity. Instead of writing code that improves user experience or launching new features, the lack of uniformity forces software teams to divert critical engineering hours to deal with the added differences.
Because the proposed CMA rules will force distinct localized pricing models and rules, a UK or EU developer who wants to monetize their app across Europe will likely need to make significant changes to their app. They would need to create dynamic new code logic that is geolocation-aware to determine whether an end-user is in the UK or EU – with conditional run-time logic that for example can route UK users to a dynamic link-out and their bespoke UK payment gateway. In the EU, the app will need to activate its DMA-compliant payment flow enforcing 12-month payment options and standard EU child-protection gates. This overlay of different rules not only dramatically increases code complexity, but it expands the attack surface bad actors can use to intercept payments.
For the largest brand name app developers, the cost of developing these divergent frameworks may be small. They already employ an army of coders and compliance lawyers who can accommodate change. While they may be able to weather shifting and divergent fee structures and build the more complex app payment flows, the smaller app developers cannot. Small and medium developers won’t just have to hire new coders to implement these complex and different regulatory regimes, but they are also likely to need to hire specialized legal counsel.
Being an app developer is extraordinarily difficult because creating a successful mobile product requires balancing a multi-disciplinary stack of skills — engineering, design, cybersecurity, backend infrastructure, product marketing, customer support, and regulatory compliance — in an already hyper-competitive market. Adding fragmented, region-specific digital marketplace rules and business terms to this workload (as the CMA proposes) creates additional new operational burdens. Because alternative payment systems and link-outs steer users away from built-in platform billing systems that small developers traditionally rely upon for their back office overhead, in order to meet divergent rules, developers will have to to create their own alternative payment system, and build custom regional Merchant of Record (MoR) integrations, custom web checkout flows, and localized customer support and billing infrastructure to handle disputes and chargebacks across the multiple payment routes.
The common perception of app developers is of the well established big name apps, but the reality of the app economy is dominated by micro-enterprises and small studios. These small developers often lack dedicated legal or compliance departments. Navigating child protection guidelines, tax frameworks, data privacy, and store policy submissions already occupies a disproportionate amount of a small team’s time and budget. When regulators force developers to adopt non-uniform business terms or to build localized child protection systems and consent screens, it can hit teams that do not have spare software engineers or legal counsel to handle the additional framework burden.
For small developers operating on razor-thin cash reserves, creating a European-wide architecture to implement non-uniform business terms, to provide different levels of consumer transaction transparency, or different approaches to parental involvement in transaction safety is an immense task for a small team. For developers seeking to monetize app purchases across all of the European region, the additional complexity from the CMA’s rule could easily require more than 100 engineering hours for code development, and the acquisition of specialized legal and tax counsel. Spending £30,000 to £60,000 on the coding and compliance to meet the new complexity demands represents a significant financial diversion.
For a 3-person startup, spending two months re-engineering their systems for additional new UK business terms and steering requirements means spending two months not building features necessary to compete and survive. These smaller developers seeking to gain a share of the European marketplace are likely to benefit more from a more uniform approach that reduces their burdens.
We expect the big app developers who have already come out against the new EU App Store business term agreement to continue to seek a different outcome in different jurisdictions like the CMA. You can’t blame them for seeking terms that may benefit their ‘big app’s’ bottom lines, and do so while knee-capping the smaller app developers who may be trying to compete against the bigger apps. But if the goal of digital marketplace regulators is to create a better digital market competition, then they would be wise to be thinking about the disproportionate burdens.
Simplifying the way forward.
The CMA now finds itself in the awkward position of having to choose app winners and losers — between supporting the large, loud and well financed app developers (like Epic and Spotify) versus the rest of the UK and European based app ecosystem who could be disproportionately burdened by the additional market complexity that the CMA is contemplating.
Innovation requires predictability, not fragmentation. The CMA must decide: do we want developers advancing innovative new ideas or managing bureaucratic overhead? By harmonizing with established standards, the UK can empower its startups to compete globally. Choosing consistency over complexity is the smartest path to a vibrant, innovative, and trustworthy digital ecosystem