Revenue Sharing Design for Small Businesses

Small-Business Oriented Revenue Sharing Scheme Surprisingly Benefits the Platform the Most

Tech giants such as Apple, Google, and software platforms such as Atlassian and Auth0, offer third-party developers or producers a platform on which they can create and sell digital content. These products enhance the platform's customer traffic and demand, enabling it to generate revenue via a transaction marketplace (e.g., App Store or Play Store). Platforms motivate a diverse spectrum of producers, large and small, to participate by sharing platform revenue with them, predominantly under a linear revenue-sharing scheme with the same commission rate regardless of producer power or size. This approach has dominated for decades since iTunes' revenue sharing formula for mp3s, and previously the royalty fees charged by gaming consoles to game developers. In a recent interview, the Snapchat CEO Evan Spiegel (CEO of Snapchat, a leading developer on the iOS platform) acknowledged the value that the platform provides, noting that “We're happy to pay Apple 30%'' in exchange for enabling hardware, software infrastructure, and marketing reach”.

However, these digital platforms have accrued enormous power and scale, leveraging cross-side network effects between the sides they connect (e.g., producers and consumers; or creators and viewers). Judiciary Committee Chairman Jerrold Nadler (D-N.Y.) and antitrust subcommittee Chairman David Cicilline (D-R.I.) said in a joint statement that “As they exist today, Apple, Amazon, Google, and Facebook each possess significant market power over large swaths of our economy. In recent years, each company has expanded and exploited their power of the marketplace in anti-competitive ways". Under pressure from society, lawsuits, and antitrust investigations, major platforms have announced revenue sharing designs that favor smaller businesses, i.e., the small-business oriented (SBO) revenue sharing scheme. Apple launched the “App Store Small Business Program'' in January 2021, reducing its standard 30% fee for in app purchases to 15% for smaller businesses with revenue below $1 million on App Store.

In a recent paper published in the premier academic journal, Management Science, Dr. Hemant Bhargava from the Graduate School of Management at the University of California, Davis, Dr. Kitty Wang from the Department of Marketing & Entrepreneurship at the University of Houston, and Dr. Luna Zhang from the University of Washington Tacoma build a game-theoretic model and examine the impact of a small-business oriented (SBO) differential revenue sharing design on the platform’s welfare and outputs.

The biggest winner is surprisingly the platform

Smaller producers always benefit from the more favorable revenue sharing rate by design, but interestingly spillover effects in the ecosystem can also make large producers better off. Crucially, platforms are the most likely winner under a differential revenue sharing scheme, due to an increased ecosystem scale and despite giving up a greater share of revenue. Being more generous to producers does not necessarily cost the platform. Although the differential revenue sharing scheme is designed to benefit small businesses, platforms are the most likely winner. The SBO schemes can propel greater participation and increased output from both small and large producers, and all parties can be better off under it, including the platform and larger producer. This is because the true provider of the subsidy provided by the higher revenue-share rate is more often the larger producers than the platform! Large producers have to produce more under

SBO due to naturally occurring competition amongst producers when small producers increase their output.

Internal actions may be better than external regulations

Because platforms gain most of the time from SBO, internal actions---better business design decisions by platforms, perhaps guided or goaded by light regulation---could be more effective at delivering better social outcomes than external actions such as heavy-handed regulations that restrict platforms' design space and cause other distortions. A “be more generous”' imposition on a platform need not be a top-down decision from lawmakers or regulators. Instead, it can be a market-driven decision that benefits not only the producers but also the platform.

To cite this paper, use

Hemant K. Bhargava, Kitty Wang, Xingyue (Luna) Zhang (2022) Fending Off Critics of Platform Power with Differential Revenue Sharing: Doing Well by Doing Good?. Management Science 68(11):8249-8260. https://doi.org/10.1287/mnsc.2022.4545

The early version of this paper won the 2021 Best Paper Award in the Conference on Information Systems & Technology (CIST). Dr. Luna Zhang is an Assistant Professor of Business Analytics. Her research interests include Consumer Behavior, Mobile Commerce, Platform Economy, Revenue Sharing, Business Analytics, Large Scale Data Analysis, and Information Systems and Operations Management Interface. Dr. Zhang’s current project focuses on consumer search and purchase in mobile commerce and revenue sharing in the platform economy. She won the 2023 Distinguished Research Award and the 2023 Distinguished Teaching Award Nomination from the University of Washington, Tacoma.