App developers’ payments dilemma: Easier with or without Apple and Google?

Last week, South Korea passed the world’s first-ever law that blocks Apple and Google from only offering their own in-app payment system. The bill, pending presidential approval, could be enforced within weeks. Once enacted, South Korea’s app companies can avoid paying commissions of up to 30% to the tech giants if users opt to pay them via alternative payment platforms.

South Korea represents the first test over how similar regulatory efforts in motion around the world affect the market for apps.

More payment options could lower prices in South Korea for digital content accessed through apps, local business groups and app makers say. But consumers might balk at the inconvenience of taking extra steps to buy items sold within games, digital comics and other online content. Many mobile-app companies may opt for the status quo—and keep paying commissions to Google and Apple—over the complexity and cost of setting up their own payment platforms. Either company could levy separate fees to make up for a decline in revenue from lost commissions, industry analysts say.

Meanwhile, the two U.S. tech giants have yet to publicly declare how they will respond, though they expressed concern over the negative implications for their app-store operations. Apple warned of greater fraud and privacy risks. Google said commissions help keep access to the Android operating system free and the company was reviewing its options.

While the South Korean law focuses on in-app payments, efforts in the U.S. and Europe look at additional areas together with billing arrangements. Those include scrutiny of “sideloading,” when users install apps without going through an app store. Google allows the practice, while Apple doesn’t. Regulators have also homed in on Apple’s practice of disallowing competing app stores to be installed in its iPhones, and U.S. lawmakers have criticized the two companies for how they have wielded their market power in mobile software.

With a population of about 52 million, South Korea’s total app spending ranks fourth globally, behind only the U.S., Japan and China, according to Sensor Tower, a U.S.-based analytics firm, which tracks global spending on Apple and Google’s app stores.

A year ago, Google said it would start requiring all developers world-wide to use its payment system for in-app purchases and pay a 30% commission by this October. Previously, Google had allowed some developers to bypass the requirement by prompting users to alternative payment systems. Google later gave app makers until March 2022 to comply. It also slashed the commission to 15% for small developers, following a similar move by Apple.

Google’s proposed move drew immediate backlash from South Korean app developers and local tech giants including Naver Corp. and Kakao Corp., which would be forced to switch to Google’s in-app payment system. The Korea Internet Corporations Association, which represents information-technology companies, projected the commission would reduce domestic app developers’ mobile-content revenue by about 2 trillion South Korean won annually, or the equivalent of about $1.7 billion.

That amount would have been a significant chunk out of the roughly $6.5 billion earned last year by South Korea’s mobile apps and content industry. About 58% of the spending was for mobile games, according to the trade group the Korea Mobile Internet Business Association, about 17% for lifestyle apps, such as news and healthcare, and about 7% for “webtoons,” or digital comics.

After the bill’s passage last week, the office of South Korean President Moon Jae-in, who has 15 days to sign the bill, said the new law would guarantee fair profits for local companies and improve the mobile ecosystem. South Korean business groups considered it a victory.

“The law resolves the concerns of content creators that the forced usage of Google’s in-app payment system would have led to price hikes for digital content that could have driven away consumers,” said Seo Bum-gang, chairman of the Korea Webtoon Industry Association.

The law applies to Apple and Google. But it has been referred to locally as the “Google power-abuse-prevention law,” as about three-quarters of South Koreans use smartphones made by hometown vendors Samsung Electronics Co. and LG Electronics Inc.—both of which use Google’s Android operating system and app store.

After the law takes effect, Google and Apple could decide to allow alternative payment options but block app companies from offering aggressive discounts or special offers to users who select external payment systems, said Guillermo Escofet, principal analyst specializing in digital consumer platforms at Omdia, a tech market researcher. Such a move would allow Google and Apple to argue that they are liberalizing their payment channels in line with the South Korean law, he said.

“In those circumstances, most users would likely stick with app-store billing,” Mr. Escofet said. “This would of course still meet resistance from app publishers.”

Google or Apple could find ways to charge commissions on purchases made via external payment systems, or charge higher fees for new apps seeking listings on either of their app stores, said Kwon Se-hwa, general manager at the Korea Internet Corporations Association.

Breaking free from Apple and Google’s established system also may be a logistical challenge. It could be onerous for some mobile-game companies to create an independent payment platform for South Korea while relying on Google or Apple everywhere else, said a spokesman for the Korea Association of Game Industry, a trade group.

Smaller-size game developers may also lack the staff or resources to create a separate payment system to replace those offered by app-store operators, the group’s spokesman said. Google and Apple, no matter how users pay, will retain influence over game makers inside the app stores, as distributors and marketers.

Separately, consumers could be resistant to change. Unless the savings are significant, users may not be tempted to leave the app, access an external website and enter their credit card information again, said Randy Nelson, head of Mobile Insights at Sensor Tower.

The Coalition for App Fairness, whose founding members include “Fortnite” maker Epic Games Inc., Spotify Technology SA and Tinder owner Match Group Inc., said South Korea’s new law would spur competition that can bring down the 15% to 30% “app tax” imposed by app-store platforms.

The South Korean law proves that regulations challenging Apple and Google’s app-store dominance are no longer impossible, said John Bergmayer, legal director at Public Knowledge, a U.S.-based public interest group that tracks tech policy issues.

“The biggest open question is how much further this will go,” Mr. Bergmayer said.