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How an invite-only meeting at Apple's luxury loft in New York set the stage for one of the biggest subscription businesses in the world

  • Apple's App Store may be the world's largest software distribution platform.
  • But there are concerns that the competitiveness of the marketplace may make it difficult to maintain high-quality utility apps.
  • Apple is strongly encouraging developers to transition to a subscription, software-as-a-service model, and held an invitation-only meeting in the spring of 2017 to convince developers to lean in to the new business model.

In April 2017, a group of over 30 software developers gathered at a luxury loft in New York City's trendy Tribeca neighborhood after receiving an invitation from Apple. They didn't know exactly why they had been summoned, but all of them had one thing in common: they developed apps for Apple's devices, according to people who attended the event.

The developers at Apple's loft soon realized the hardware giant needed something from them: Apple was a few months into a major shift in the App Store's core business model, and it needed buy-in from developers.

Developers, Apple said, needed to realize the business model of apps was changing. Successful apps tended to focus on long-term engagement instead of upfront cost. Indie developers who wanted to capitalize on this needed to move to a subscription model, as Apple had made possible in the past year in a splashy announcement.

Why Apple, one the strongest forces in the world of technology, held an invite-only meeting for smaller, often one-or-two person indie developers is a story that goes back to the beginning of the App Store in 2008. Shortly after the App Store was turned on for iPhones, people realized that the market for apps had a tendency to drive prices for software down.

Eventually, iPhone owners got used to apps costing only $1 or $2.

Months after the App Store launched, former Apple CEO Steve Jobs referenced the shifting market for apps in a 2008 interview that was recently unearthed.

"I think some of the folks have come down from $10 to $5, and see their sales go up more than 2X. I think these guys are trying to maximize revenue and they're experimenting," Jobs said at the time. "They could ask us, 'What should we do?' and we're going to say, 'We don't know.' Our opinions are no better than yours because this is so new."

10 years later, the App Store isn't new anymore, and Apple continues to tweak its rules so that developers can create sustainable business models, instead of selling high-quality software for a few dollars or monetizing through advertising. If Apple can't make it worthwhile for developers to make high-quality utilities for the iPhone, then the vibrant software ecosystem that made it so valuable could decay.

Apple's main tool to fight the downward pricing pressure on iPhone apps is subscriptions.

Some apps are "hammers" Some software is like a network, and other software is like a hammer.

For example, an app for connecting you to friends and family, like Facebook or Snapchat, is a network. On the other hand, an app that allows you to, say, crop or alter a photo is more of a tool, like a hammer.

The advent of the App Store in 2008 made most software for iPhone and iPads ever-cheaper as Apple's userbase was exploding, which was great for network-style apps: they got access to a huge userbase, and since they make money through advertising or other methods, the race to the bottom in terms of pricing didn't hurt them.

But the App Store put a lot of stress on hammer makers, people and small businesses who developed tools for people to draw, or write, or program — basically, apps called "utilities" in the App Store. These developers would sell an app for a few dollars in a one-time transaction, and then they were stuck paying server costs and upkeep indefinitely with free updates.

"Once the customer is acquired and they pay the money, they don't get charged again. So what keeps the app up?" Ish Shabazz, an indie iOS developer, said.

In response, in 2016 Apple introduced what was reportedly internally called "Subscriptions 2.0," a way for developers that made utilities and other kinds of apps to bill their customers on a regular, recurring basis, creating the cashflow necessary to keep a hammer-style app up-to-date and effective.

It also, according to developers that Business Insider spoke to, made it possible to create a large and sustainable software business based on App Store sales.

This September, "Subscriptions 2.0" turns two year old. Subscription-based apps remain a very small fraction of the 2 million apps available from the App Store, but Apple is pleased with the uptake.

"Paid subscriptions from Apple and third parties have now surpassed $300 million, an increase of more than 60% in the past year alone," Apple CEO Tim Cook said during a conference call last month.

"What's more, the number of apps offering subscriptions also continue to grow. There are almost 30,000 available in the App Store today," he continued.

A secret developers conference

The emphasis Apple is putting on subscription business models for app makers is clear from the invite-only meeting that the iPhone giant held in New York in 2017.

Apple holds an annual developers conference in San Jose, but it held a separate session that year for smaller developers encouraging them to adopt subscription business models.

But if the transition didn't go well, and developers stopped making hammer-style apps, Apple could lose some of the vibrant software that made its iPhone and iPad so valuable.

Up until 2016, when a developer sold an app to a customer, 30% of the transaction went to Apple, and the other 70% arrived in the form of a check to the app's creator.

The new way Apple wanted to promote: Instead of users paying for apps once, they'd pay on a regular basis, putting money into developer coffers on a regular schedule. Apple would still get a 30% cut of the subscription's cost, but if a customer continued to subscribe after a year, Apple's cut would go down to 15%.

At the meeting, Apple underscored that the app model was changing. The meeting touched on topics including launching, customer acquisition, testing and marketing, engagement, retention, monetization, and paid search ads.

An Apple representative said at the meeting that paid apps represent 15% of total app sales and is on the decline, according to a person who was there who did not want to be identified to maintain their relationship with Apple.


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