App Store refunds: Much ado about nothing

Updated at 4:00 p.m. with comment from Apple.

While Apple's App Store policies have indeed been the source of frustration for many an iPhone developer, the overblown concerns over refund charges on Thursday do not rise to that level.

Contrary to earlier reports at TechCrunch and other outlets, Apple's policies regarding iPhone application refunds, and the portion of the refund that developers are expected to cover, are not new. (CNET took note of the issue as well.) They also do not faze most developers accustomed to the reality of operating an online retail business.

The hubbub arose after TechCrunch noticed a section of the iPhone 3.0 SDK agreement that contains this clause, thought to be a new development:

In the event that Apple receives any notice or claim from any end-user that: (i) the end-user wishes to cancel its license to any of the Licensed Applications within ninety (90) days of the date of download of that Licensed Application by that end-user; or (ii) a Licensed Application fails to conform to Your specifications or Your product warranty or the requirements of any applicable law, Apple may refund to the end-user the full amount of the price paid by the end-user for that Licensed Application.

In the event that Apple refunds any such price to an end-user, You shall reimburse, or grant Apple a credit for, an amount equal to the price for that Licensed Application. Apple will have the right to retain its commission on the sale of that Licensed Application, notwithstanding the refund of the price to the end.

But upon further examination, several developers confirmed that this clause has been in the iPhone developer agreement since Day 1, and they seemed bemused at the lack of understanding regarding the world of online commerce and the iTunes Store.

First of all, returning a purchased application to the App Store is not a simple thing, and there is no provision for a 90-day refund stated in the terms of service for the App Store. The section in the App Store Terms and Conditions that pertains to refunds states:

On occasion, technical problems may delay or prevent delivery of your Product. Your exclusive and sole remedy with respect to Product that is not delivered within a reasonable period will be either replacement of such Product, or refund of the price paid for such Product, as determined by Apple. Otherwise, no refunds are available (emphasis added).

The section in the SDK agreement that mentions 90-day refunds seem to apply only if a purchaser brings a "notice or claim" against Apple in the process of trying to return the application. That's a legal term, not a request for a refund because you thought the fart application, for example, delivered six sounds when it has only five.

Apple does grant refunds for iPhone or iPod Touch applications on occasion, but developers interviewed on Thursday morning said they had seen only a very small number of returns on paid applications since the App Store opened for business in July. They said Apple had never invoked that particular clause when processing any of their returns.

Greg Yardley, who works with dozens of developers as CEO of Pinch Media, said in an e-mail that "refunds do happen, but they're extremely rare. I have *never* seen more than one a day in any sales reports I've seen."

But let's assume that applications could be returned for any reason and that Apple does invoke the clause on every single refunded application. A TechCrunch commenter did the math:

"Let's say you sell a 99-cent app. You get 70 cents per sale. You sell 1,000 copies and make $700. Let's say your return rate is a whopping 3 percent (good God! Why are 3 percent of your customers returning the product?!). So you pay back $30; net $670."

That's not exactly going to bankrupt anyone. Still, is it right for Apple to do that?

Transaction fees for online credit card processing can run as high as 25 cents to 30 cents per transaction, plus a percentage of the amount. But consider the 99-cent application, the most predominant price used on the App Store.

A micropayment transaction (less than $10) processed by PayPal carries a 5-cent transaction fee plus 5 percent of the amount. Assume that Apple has negotiated a similar fee with its payment processors; it would therefore be charged roughly 10 cents on each 99-cent purchase, reducing its cut of that sale to 20 cents. If it were charged a similar amount for a refund, its cut would be down to 10 cents.

Obviously, Apple, with the biggest music store in the United States, processes an awful lot of small transactions and therefore probably gets some sort of attractive volume discount that's less than the example provided above. But that doesn't mean that it gets that service for free: processing transactions on the Internet costs money, whether you are Apple or Joe Developer.

Updated 4:00 p.m. - An Apple representative said the company's policy concerning refunds and developers is that when a refund is granted on a purchase made through the App Store, Apple returns the customer's money and debits the developer's account by 70 percent of the application price, or the revenue the developer had gained on the sale. The company does not charge the developer an additional 30 percent during the refund process, the representative said.