Here is a scenario: Imagine you are paying a bill in a restaurant for food and drink you’ve consumed and you would want to tip the waiting staff for their excellent service. A council official walks in and asks the restaurant to pay 30% of all revenue as the fee for being allowed to do business, but also wants to take 30% of all tips given. The restaurant’s manager is horrified and starts to explain that he never touches any of the waiting staff’s tips and is incensed that the official is asking the waiting staff to hand over 30% of everything they earn from tips. The council official responds ‘those are the rules, and the council gets 30% any earnings from any business activities taking place in this district.’ The waiter has no choice because the restaurant has no choice. He must either hand over 30% of his tips or leave.
Let’s see who is who in this scenario when you look at it from the perspective of the WeChat platform:
The council official = Apple
The district = Apple App store
The restaurant = WeChat
The waiter = WeChat’s official account content creator
On April 19, 2017, Apple asked WeChat to disable its tipping function, by means of which WeChat users can tip WeChat official account content creators and emoji designers AFTER they have read the content creator’s articles or after using the designer’s emojis. Tipping is a way of indicating that users think the content creators and emoji designers have done a good job or of showing that they agree with the content creator’s opinion. It’s also a way to encourage content creators to write more good articles in future. Overnight, WeChat updated its iOS version and revised the tip function so that instead of direct tipping, users can scan a QR code and transfer funds to content creators and emoji designers directly. Apple’s response? Very shortly after that Apple replied that the scan and transfer functionality still constitute a violation of its App store’s guidelines. In the early morning of April 20th, WeChat announced that it would completely disable the tipping function on iOS versions of its app.
A month later, Apple contacted WeChat and many other social app providers instructing them to either disable all tipping functions or change them to IAP (In-App Purchases). The implications of this is that if any app providers would like to enable tipping functions, they have to do so via the IAP channel and Apply Pay, from which Apple will charge a 30% transaction fee. Any app providers that refuse to comply run the risk of having their apps taken down from Apple’s App store.
Is this really an argument about whether tipping should be treated the same as an IAP?
So what are Apple’s terms? Is this ‘industry standard’ for all App stores?
Apple updated its App Store Review Guidelines last June, especially Terms 3.1.1 regarding In-App Purchases. Apple also specified the different Types of In-App Purchases. Based on these terms, tipping does not fall under any of the listed categories, since it does not unlock any features, nor provide any consumable or non-consumable product or services compared to those users who don’t pay tips. The amount given in tips is totally contingent on the user’s goodwill, and can range from as little as 0.1 to a few hundred RMB.
At present, WeChat’s tipping function still works on Android, but only because Google has so far chosen not to enforce its transaction fee terms, which also take 30% of the revenue including ‘in-app products’. Google remains free of course to start enforcing these terms at any time in the future.
For Windows’ app store, the same terms apply. The Windows App Developer Agreement (Version: 7.9, April 12, 2017) Section Six specifies that the Store Fee, which is 30% of Apps and In-App Products, will be deducted on purchases.
Therefore, the three major mobile operating systems all have the same rules and charge the same fees, so that potentially, WeChat may have two fights yet to wage. Currently, only about 20% of WeChat users in China are using Apple devices, this might also explain why WeChat would rather disable the tipping function on iOS versions, instead of taking the Apple IAP route. This makes sense strategically, since if it does opt to hand over 30% of all tips to Apple then it will be conceding the argument with both Android and Windows, which would negatively affect all of WeChat’s content creators and emoji designers.
The influence on other Chinese social apps and the booming knowledge-sharing wave
Apple’s attempt to bring WeChat’s tipping function into its revenue stream by subjecting it to the IAP procedure is just the beginning. Various Chinese social apps have been given an ultimatum by Apple to either disable any and all forms of tipping functionality or switch to the IAP channel, including but not limited to popular micro apps such as Sina Weibo and Douban, Q&A apps like Zhihu and Fenda, news feed apps such as Toutiao and UC News, as well as live-stream apps such as Momo and Yingke. If any of these apps simply refuse to follow Apple’s rules, they might find themselves experiencing technical failures when updates are released or may even find their apps removed from the App store.
This came as a shock for a lot of WeChat official account content creators and emoji designers, including those who have not yet enabled tipping. The knowledge-sharing wave, pay-to-ask, pay-to-read, online learning, individual media (also called we media or self-media) culture and the UGC (User Generated Content) industry are only starting to emerge in China.
The WeChat User & Business Ecosystem Report 2017 by Penguin Intelligence shows that 67% of users are willing to pay for valuable content and information. Among those users of apps that were imbued with tipping functionality, a statistically and monetarily significant 58.6% had engaged in tipping for WeChat official account articles, whereas some 17.3% had tipped WeChat emoji creators. For Zhihu and Sina Weibo articles, the corresponding figure was about 30%, whereas some 20% tipped in response to original music or video creations.
Source: The WeChat User & Business Ecosystem Report 2017 by Penguin Intelligence
The tipping function in WeChat is only available for original articles published in the official accounts, it is an encouragement and gratuity for original content creation, which serves to generate more subscribers and drive organic traffic. It is a sustainable way to maintain and grow the fan base, and also for WeChat, it is a healthy way to increase the app’s stickiness, i.e. to keep users in the app for longer. According to WeChat’s 2016 annual report, some 80% of its users subscribe to WeChat official accounts. With 938 million MAU and an average of 1965 minutes spent by WeChat users per month on the platform (Q1 2017, data from Quest Mobile and Tencent). In fact, it is the enormous traffic volumes and the significant amount of time spent in the app that is the very foundation on which WeChat’s ability to generate revenue through its advertising activities.
In the UGC (User Generated Content) era, users have become more willing to pay for content in exchange for ‘shortcuts’. Professional medical/finance/IT advice on pay-to-ask or pay-to-read channels, continuing education platforms or KOL (Key Opinion Leader) column subscriptions, all represent ‘shortcuts’ to knowledge and information, niche expert advice, previous experiences or professional interest. Being a content creator on these media channels has become both a full-time career and part-time job. Many different business opportunities have emerged and continue to arise thanks to the success of UGC, such as subscriptions for more detailed insights, KOL referrals, ecommerce, real-life talk shows, conferences and meetings etc. According to Penguin Intelligence, the main revenue stream (88.8%) from these different media channels is generated by advertising, whereby only 14.3% comes from tipping, 9.1% from ecommerce and 4.5% from subscriptions and memberships.
According to various Chinese internet company reports, the amount of users who are willing to pay for content has increased three-fold in 2016 alone, reaching more than 50 million people in China. 2016 Data from Sina Weibo shows the total tipping on its platform was about 44 million RMB, while total pay-to-read was about 28 million RMB. Up to the end of Q1 2017, the estimated paid content economy in China was worth 10-15 billion RMB and by the end of 2017, the number is expected to reach 30-50 billion RMB.
In addition to this, since in order to go through the IAP channel, users need to link a bank card or their Alipay accounts to their Apple Pay accounts, this to a certain extent represents a negative inducement for users with no Apple Pay account to participate in tipping or paying for content on their iOS devices. What results is a conflict between WeChat and Apple, or between WeChat Pay and Apple Pay, which can only hurt content creators and damage users’ experiences. But if Apple applies this policy across the board to all of the apps available on its App store, then this will almost certainly have a profoundly negative impact on the booming knowledge-sharing economy that is now just starting to leverage the functionality of mobile apps.
As pointed out by Gaofei Wang, the CEO of Sina Weibo, there is also a potential tax issue here. Tipping content creators has up to now been considered as bestowing a gift or making a donation, which is not subject to tax in China. However, if tipping now takes place via the IAP channel then it will have to be categorized as a form of income for the sale and purchase of digital products and services. Apps store operators will be responsible for collecting and surrendering taxes from these tips just like online e-commerce businesses like eBay or Amazon do for any sales executed by private third-party sellers on their platforms.
Will users in China choose WeChat over Apple?
Since this issue came to a head in April, discussions on Chinese social media but also mainstream Western media outlets has been intense with many asking why Apple would go down this path, whether it is acting fairly and more importantly how this will likely play out for the Apple brand in China. Specifically many see this as presenting a binary choice for users between WeChat and Apple. The Wall Street Journal has published two articles on May 18th and May 30th respectively, both of which have generated their own reactions on Chinese social media. Most commentators recognize that although the Chinese may love the status that having an iPhone gives them, they simply cannot function in China without WeChat, since it is so central to day to day life here.
Data from IDC (International Data Corporation) shows that in Q1 2017, Apple’s iPhone market share dropped from 16% in 2015 to only 9%, ranked the 4th after the three leading Chinese brands Huawei, Oppo and Vivo. Sales revenue for Apple hardware in China dropped 34% in Q1 2017 since Q4 2016 (Apple Financial Report). According to Kantar Worldpanel’s latest report on Smartphone Operation System Market Share Q1 2017, in China, the market share of iOS fell 8.6% to 12.4%, while Android’s rose 9.1% to 87.2%. In the U.S., iOS increased 5.2% to 38.9% while Android decreased 4.2% to 59.2%. On the other hand, according to App Annie Ltd, in Q4 2016, China surpassed the U.S. to become the biggest market for Apple’s App Store, forking out USD$2 billion via Apple IAP.
Source: Smartphone OS Sales Market Share Q1 2017 by Kantar Worldpanel ComTech
These figures illustrate the rationale behind Apple’s move on its app store and IAP channel. In the U.S., due to its huge market share, Apple has much stronger bargaining power over app developers and companies. It can basically be fatal for any app if it is removed from the Apple App Store.
Apple’s iTunes Movie and TV content competitor Netflix used to only allow users to subscribe to its services via its own website and made it possible for them to log in to an existing membership on their iPhones and iPads because it couldn’t come to any agreement with Apple over the 30% IAP charge. But now this subscription option is available via Apple’s TV app and at the same price as on its website and via iTunes.
Apple’s iTunes Radio and Music competitor Spotify is gaming the iOS IAP rules by charging USD$12.99 per month on the Apple App Store but encourages users to subscribe via its own website for USD$9.99 per month.
Apple’s iBook competitor Amazon, does not have any IAP at all in its Kindle app on iOS. Users need to purchase books from Amazon’s own website or Comixology (now owned by Amazon), and then sync any purchased content with their devices’ Kindle app.
However, in China, it is another story. Even though to some extent, iPhone represents social status and a symbol of wealth, and every time a new iPhone is released huge numbers of people line up for days and nights outside Apple Stores to buy one (with the resale price being up to 150% of the original purchase price), but it is nevertheless undeniable that a lot of the hot air is going out of this trend thanks to the wide range of choices and improved hardware performance on Android phones (particularly native Chinese brands). Not to mention that Apple’s online media content ecosystem has run into some potentially life-threatening roadblocks with China’s powerful internet and censorship regulators, with iBook and movie/TV downloads being blocked since last year.
In addition to this, WeChat actually does have some IAP functions other than tipping, such as WeChat official account’s subscription for live audio shows, special analysis reports, joining professional groups, or referral e-commerce etc. In fact these functions generate much more revenue than tips in some well performance accounts and also for WeChat, it helps to keep the cash flow within WeChat’s own payment system since users are getting more familiar with and starting to use WeChat Pay as the default mode of paying for anything, both online and in the real world. What’s more, WeChat’s Mini Programmes functionality is considered a threat to app stores, because it allows users to use some apps within WeChat itself, obviating users of the need to install and keep a large range of separate apps on their phones.
In the final analysis, the choice between Apple and WeChat is a false one, since these two mega companies cannot afford to go to war with one another and sacrifice their hitherto profitable symbiotic relationship. After all, this is not a zero-sum game. What is certain, however, is that in China Apple has less bargaining power than it likes to throw around in the U.S. Like all companies that come to China and engage with this massive, dynamic and distinct market, they need to make some important cultural adjustments and learn how Chinese consumers think, behave and … well, consume.