So Much For Apple’s Flirtation With Openness

Kindle for iPad

Today, the *New York Times* is reporting that Apple (NSDQ: AAPL) is changing its policy for allowing apps to deliver content that was paid for somewhere other than in the app where Apple would get a cut. This came to light when Sony was forced to explain why its iPhone and iPad apps were not being released as promised. This is important to illustrate, as clearly this is not just about Sony (NYSE: SNE).

In fact, it is expected that Apple will apply this same policy to existing apps over the coming months. The most obvious target is Amazon’s Kindle store, but we have no reason to believe it will stop with e-book retailers; instead, this policy should also affect magazines, newspapers, even videos and games.

This represents a shift for Apple.

Going back to the iPod days, Apple only sold music because it helped sell iPods. When Apple added the iPhone app store, it allowed Amazon (NSDQ: AMZN) to add a Kindle app because it would only make iPhones more valuable to potential buyers. The same held true for the iPad. But now that the company has built such a powerful ecosystem of devices, content and consumers, it appears Apple is eager to ensure it can collect any and all tolls along its proprietary highways. I note this with some irony because it was just three weeks ago that I praised Apple’s surprising openness in a report explaining the iPad’s rapid growth:

“Even notoriously closed players like Apple can be surprisingly open. To create demand for the iPad, Apple had to act in a way very contrary to how people typically think of the company: It had to allow competitors access to Apple’s customers. Kindle, Netflix (NSDQ: NFLX), Pandora and Spotify are the most obvious examples of brands/companies that Apple had every right to deny entry to the iPad because they conflict with the iTunes store. But Apple could not do so: To deny those companies would be to deny Apple’s customers experiences that they clearly value.”

Clearly Apple has changed its mind. Though I haven’t seen the specifics — and Apple may choose to change them once they realize how angry the content industries are going to be about this — it appears that if you buy a Kindle book from Amazon and want to read it on your iPad, Amazon will have to report your reading to Apple so Apple can charge Amazon for delivering the book to your iPad. In other words, Apple gets the money and the customer data. Alternatively, Amazon can develop an HTML 5 web experience that allows you to read Kindle books in the Web browser on the Apple device. A substandard experience, to be certain, but better than cutting customers off at the knees, from Amazon’s perspective. And better than giving Apple an extra revenue stream.

At Forrester, our call is clear: This is a mistake. It is fundamentally at odds with the pro-consumer revolution Apple started and it is opposed to the new rules of competition I have written about in which companies both partner and compete on equal footing. That said, this move is not unexpected. Certainly, this new power of charging people for access to exclusive tollways is intoxicating. Facebook has recently revealed its intention to channel developers to arrange payments through its systems as well for the same reason. And we hear from companies developing content for every exclusive platform — videogame consoles, connected TVs, you name it — that these platform owners are all hungry to charge the same 30% that Apple has been able to set as the norm.

I underscore that the details have not been made public, and they could still change between now and when Apple ultimately makes its intentions public. But based on what we know so far, it’s clear that Apple has decided that it can get away with this move with very little consumer backlash. Here’s why: Consumers buy iPads, not developer ecosystems. The 10-plus million iPad owners in the U.S. didn’t buy it for a specific app, they bought it because it was beautiful, elegant and, yes, somewhat magical. When the Kindle reading experience either goes away, gets more expensive, or shifts to the Web browser (one of those three things is inevitable), people will blame Amazon, not Apple.

The impact of this decision will be large. I’ll mention four specific things in brief, all of which could merit their own post.

1) Other tablet makers will work very hard to seize on this opportunity, though it will largely not work during 2011. But in 2012, the message that Apple’s walled garden is a bit too much like AOL (NYSE: AOL) circa 1995 will start to catch on;

2) cable companies, telcos, and wireless providers — the people whose networks everyone depends on to deliver these apps and enable Apple’s 30% surcharge — are going to furiously inquire why they can’t charge a per-experience tax if Apple can; after all, network neutrality doesn’t do anyone any good if the content experience is ultimately gated at the level of the OS;

3) the media business is going to flog itself for being so seduced into believing that Apple was going to be the savior of paid content — not that they have any way around it, mind you, but as a remedy, they will call Google (NSDQ: GOOG) and ask what they can all do together to build the Android ecosystem;

and, 4) the FTC is going to get quite a few phone calls on this one — any company that has either a natural or contrived monopoly eventually comes under scrutiny for how it inhibits competition and innovation.

James McQuivey is an analyst at Forrester Research, where he serves Consumer Product Strategy professionals. James blogs here.

This article originally appeared in Forrester Research.

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