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Comment by offtotheraces | Hacker News Reader

The article doesn't have to say it because it's just the way that google ads work. It's a bidding-based system, so at the most basic level the person who bids the most wins the auction and their ad is shown. If the LTV of a customer is $100, and there's a 3% processing fee for web transactions, then Tinder will bid up to $97 to acquire a customer. So Apple has to pay at least that much to acquire that same customer in order to win the ad auction. Once Applr has paid that $97, the user now downloads the app and subscribes via Apple’s IAP system. Apple takes 30% of those revenue while Tinder gets 70%; so Apple gets 30%*$97 = $29. So they've spent $97 and received $29 ----> they have a negative $68 margin on that spend.

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I agree that that's one way it could work, but it seems really unlikely to me that Apple would be willing to lose so much money on a project like this. Some other possibilities that I think are more likely:

* Apple has a higher LTV estimate than Tinder for this traffic.

* Tinder has less available capital, so they are not able to outbid Apple even though they think that they would still earn lots of money at that price.

* Perhaps someone who is looking to subscribe to Tinder is likely to succeed even without advertising, but without Apple's ads it won't be via Apple's IAP. The amount it's worth to Tinder for a subscriber to come to them directly instead of via Apple and the amount it's worth to Apple for a subscriber to come in via IAP are about the same.

(Disclosure: I work on ads at Google, but not search ads. Speaking only for myself)

Remember, it's not that much money for Apple especially considering their whole app store business model depends on taking their 30% tax. Maybe we're talking about $50m/yr vs app store revenues of $10b (?) a year (and 70%+ margins per docs in recent court cases). They would absolutely be willing to lose this money if it extended their stranglehold on app developers - it's the same reason they fight tooth and nail in every jurisdiction around the world to prevent regulation of their app store behaviors and fees (Japan, Korea, Netherlands, UK, Australia, Arizona, US federal, etc). These lawyers probably cost them about $500m/yr (without revealing my identity trust me that thats a very reasonable estimate).

As to your bulletes points:

- Tinder is owned by Match Group who - before Tinder - spent 20 years building a paid acqusition machine. In order to do paid acquisition you have to deeply understand the LTV of your users. That methodology, refined iver years at Match was ported to Tinder (just read Matchs earnings calls). While Apple has access to all ybe transaction data of apps on iOS, so do then defelopers, who are highly resourced and highly motivated to understand their LTV/CAC. So no, I dont believe for a second that Applr has an advantage here. And even if they did, applr only collects 30% of the revenues - how could they ever guy profitable when bidding for the same slots as the developers who Are getting 70%?

- Capital - nope. Match produced close to a billion dollars a year in cash flow. HBO billions. Capital isn't an issue for either of them.

- I disproves this hypothesis with the LTV illustration above. To be clear: Theres no scenario where apple can be profitable on this spend when they can only ever get 30% of what the consumer spends.

Sorry, I don't understand how your response applies to my third point? Tinder would not be willing to spend $97/user because that is only worth it for users they would not otherwise acquire. In this case, I'm positing that these are users who already want to subscribe to Tinder, and are going to do it somewhere, the only question is whether Apple can get them to sign up through the IAP flow and take a 30% cut. If I'm thinking about this right, this means that it is worth just as much to Apple to get one of these users to sign up through IAP as it is worth to Tinder to get one of these users to sign up directly?

Ok maybe i’m not following your question then - do you mind rephrasing and asking again?

Sure! Imagine we're talking about users searching in a way that indicates very strong intent to subscribe, like "how do I subscribe to Tinder". These users are almost certain to subscribe. There are two ways that can happen:

a) They can click through to a Tinder site, where they subscribe directly.

b) They can click through to the App Store, where they end up subscribing via Apple's in-app purchases. Apple gets a 30% cut.

Assuming your $100 LTV from before, in (a) Tinder makes $97 and Apple makes $0 while in (b) Tinder makes $70 and Apple makes $27. Tinder clearly prefers (a) while Apple prefers (b), but by how much?

Tinder: they make $97 - $70 = $27 more in (a)

Apple: they make $27 - 0 = $27 more in (b)

This means both companies are willing to bid approximately the same amount, since their profit on winning, relative to what would've happened otherwise, is $27.

So are you saying that the clearing price for the ad inventory they’re competing over is $27? (If so I’ll explain why that’s not the case)

Yes: I would expect them each to be willing to bid up to $27

I would expect Tinder might be willing to bid more than $27 (per conversion) even if they only ever used Apple payments.

Any marginal conversion that Tinder creates (either against a competitor or non-consumption) is worth over $50 net to them using Apple payments. ($50 would assume a generous $20 marginal cost to serve.)

That doesn’t mean that the data that Tinder’s ROAS team is looking at will guide them to spend more than $27 in this case, only that it might.

Likewise Apple could spend $27 on every customer they converted who was already going to be paying Tinder on the web to buying via the App Store plus $27 for every user they added to Tinder who paid on the App Store who would have not bought or would have gone to a competitor (minus any credit Apple would have earned there) plus an amount of cashflow and enterprise value created by people seeing ads for Apple’s store and concluding that Apple has more/better apps than their competitors.

If we confine only to first-order effects and assume advertising is exclusively about changing payment preferences of users who would convert anyway, I’d expect both companies to be willing to bid close to $27.

> Theres no scenario where apple can be profitable on this spend when they can only ever get 30% of what the consumer spends.

I mean, maybe if tinder's margin was less than apples, but that's pretty unlikely.

Think about this way: both companies are bidding on the same keywords. One party (the developer) collects either $97 if the consumer signs up on their website directly or $70 if the consumer downloads the app and signs up via the app store. The other party (apple) collects only $30 (at a maximum) if they drive the user to sign up via the app store (30% of a $100 LTV).

If they’re both bidding on the same keywords, which they are, then the price of the keywords is the same to each of them. It’s an auction, so whoever bids the most will win the auction. The developer can spend up to $97 to bid on that keyword and still be profitable or at worst break even, while apple can only spend up to $30 to stay profitable or break even. So if Apple is winning auctions, it means they’re spending more than the developer, despite having less than half the purchasing power of the developer. So they’re spending negatively almost no matter what.

Both ads are shown though with Apple in the 2nd slot. So HBO is bidding more and I doubt Apple is going into negative margins.

Again, by definition theyre going into negative margins because they can only ever get 30% of the revenues; how could they compete with the developer who gets 70% of the revenues without going negative?

They're not beating the developer. They're getting the #2 slot.

Remember two things:

1) more demand in auctions means higher prices. so if apple is taking the second slot they’re almost certainly increasing the cost of the 1st slot for hbo. which is apples whole point: to increase the cost (literal and figurative) of hbo’s efforts to get people to sign up via web rather than via app.

2) in the world of search marketing - including both on google and the app store - there is a strong belief by brands that they MUST be the #1 paid result for their branded search terms, no matter what. so what you’re seeing here is hbo saying “we always have to be #1 on our branded search no matter the cost”. This is exactly why people complain constantly about google showing competitors ads when the original company’s brand is specifically searched for by the user - effectively the competitor is freeloading on the incumbents brand searches to drive traffic (by paying to show ads on those searches). Google doesn’t care because they make more money this way (more competition for the branded keyword drives up CPCs).

all of this is to say that apple being in the #2 slot doesn’t say anything about the intent of their actions here, which is to make it uneconomical for companies to move users off apples rails onto their own systems.

Both sides run services which have costs, the customer acquisition needs to take into account the potential profit of having the customer and not just raw revenue.

Maybe Apple clears 15% of the user's purchase price after credit processing, tied-in platform development costs, customer service/hosting fees, and the 70% payout to HBO, and HBO clears 15% after licensing, hosting, app development costs and the 30% fee from Apple.

In this case, HBO would be motivated to have a website sign-up to raise their 15% to closer to 40%, and Apple would be motivated because otherwise they are negative for the lifetime of the subscription.

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