February 22, 2021

Testimony before the Arizona House of Representatives

I delivered this testimony before the Arizona House of Representatives today in support of HB2005, which will give all app developers the right to choose their own payment processor, as well as protection from retaliation if they do so. It was a closely contested bill, but in the end passed the committee in a 7 to 6 vote. You can read my live-tweeting thread from this morning.

Madam Chair, Members of the Committee,

My name is David Heinemeier Hansson, I'm a developer, and the co-owner of a Chicago-based software company. We nearly had our new email service HEY.com, which launched last summer, destroyed by Apple when we refused to pay their 30% tax. So I'm going to focus on Apple in my testimony, but the complaints apply equally in spirit to Google, and the relief proposed by HB2005 would apply to both.

Apple's tax of 30% on developers is more than five times the rate of the Arizona state sales tax, and more than fifteen times the rate of other payment processing services. Apple boasts that this exorbitant tax only applies to 17% of developers, but that merely proves the tax is not universally applied. And there's nothing stopping Apple from expanding who the tax applies to or even keeping it at 30%. The guidelines that dictate who pays and who doesn't is under total control of Apple, and they've changed the rules or their interpretation many times to carve out exemptions for businesses they cut deals with or to start collecting from companies they weren't in the past. And internal deliberations, uncovered by the House Antitrust Subcommittee, show that Apple has previously considered raising the tax to 40%. Apple has an iron grip on the market, and if they say "you now have to pay", all developers can reply is "how much".

The absurd thing is that Apple is already being paid hundreds of millions of dollars by developers to operate the App Store. Everyone who publishes on the platform has to pay $99/year for the privilege. And this is all huge companies like Uber, Facebook, or Google pay, because Apple either lets them use their own payment processing services or because they monetize their services through advertisement. How is it fair that billion-dollar companies that use thousands of times more of Apple's App Store infrastructure get away with paying $99/year, while a mid-sized software company making $10m/year has to pay $3m? It isn't and it doesn't.

As David Cicilline, the chairman of the House Antitrust Subcommittee, has said: This is highway robbery. Apple operates a tollbooth on the only road to distribution of mobile software for the dominant iPhone platform. And this doesn't just hurt app developers, but consumers as well. When Apple tried to shake down our company for the 30% cut of revenues, they explicitly encouraged us simply to pass on the cost to consumers. And that's exactly what other developers have done.

Apple is now involved in offering credit cards, producing TV shows, curating news, offering fitness classes, commissioning video games, streaming music, running digital radio stations, making heart-rate monitors, selling audio speakers and headphones, and of course manufacturing and selling computers, phones, watches, tablets, and controlling the operating system for all of the above. Oh, and apparently they're also close to getting into the car-making business - woohoo! Standard Oil would have been green with envy at how Apple has used their monopoly in one area to further their business interests in every other. This is classic tying and bundling behavior, as long recognized by antitrust laws as harmful to a fair market place.

If Arizona passes this bill, it would not only provide immediate relief to Arizona developers and consumers, it would instantly make the state the most desirable place on earth to start a new software company. Not only would escaping Apple's 30% tax be a huge competitive advantage, the protection against retaliation would make for a much more predictable marketplace. That's a two-punch combo for investment: lower costs, predictable rules.

Apple already has an incredible advantage over any company that dares compete with them, and soon that might well be most of the economy. Giving us at least a fighting chance by enforcing a choice in payment processing is the right thing to do.

Past testimonies on the topic of monopoly app stores: Before the North Dakota Senate, Before the democratic side of the House Antitrust Subcommittee, Before the House Antitrust Subcommittee.