Blog Post

So Much For Apple’s Flirtation With Openness

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.

14 Responses to “So Much For Apple’s Flirtation With Openness”

  1. James McQ

    It’s amazing how much of a response you can get out of people by suggesting that Apple has done anything wrong. Let me just say that what Apple has is a classic monopoly (@Chuckie) in every meaning of the word. Monopolies, when abused, restrain trade. It is a clear fact of history and one that Apple has to steer clear of or it will get investigated by the FTC. That’s why Apple reversed itself last year on the question of allowing third-party development apps, because it was in danger of abusing monopoly power. For everyone that just says, “Apple can do what it wants,” I don’t disagree that Apple should try to make as much money as it can. But to do so by abusing monopoly power will actually harm Apple in the long run. As an exercise in evaluating whether you are being objective on this, ask yourself if you were ever angry at Microsoft for the way it crushed the browser market. That was classic restraint of trade due to monopoly power, yet Microsoft didn’t make a cent from it directly. Now imagine how angry you would be if Microsoft had crushed Netscape and managed to charge a few dollars for every copy of Internet Explorer? You’d be furious. This situation is not unlike that. So I encourage all to study up on trade law, policy, and precedent before you defend Apple so vigorously.

    And to all of you who think you know what happened between Sony and Apple (and all the other companies who have spoken about this privately but won’t go on record because they don’t want to upset the Apple cart), you have made it clear from your comments on this post that you don’t actually know what happened there. There’s a lot more going on than I’ve even revealed. As we learned in Ingrid Lunden’s PaidContent piece yeseterday, “Apple said yesterday that that in their policy with Sony Reader, they are not changing anything, just enforcing existing rules. But when they talk to publishers direct, they are saying something else.” If you keep defending Apple without any knowledge of what really happened, you have become the company’s best line of defense against the facts.

  2. I would say that Amazon won’t need to do as you say.
    Amazon may need to drop whispersync and if really happens users will be able to upload .mobi files to Kindle app through iTunes or Amazon can register the Kindle app as compatible with .mobi files so you can download them from the Web.

  3. I just thought that Sony is making Apple life so hard with music and video content licensing, and with the other hand they are going around the appstore selling books.

    Maybe Apple think that Sony is not playing fair, being tuff when licensing its content and trying to avoid Apple fees when selling on their platform.

    If I am right then it has nothing to do with the big picture it is just a business fight with Sony specifically.

  4. Kevin Bradshaw

    What’s most pertinent here is the end-user experience. I don’t really care who collects the revenue if my experience is good. So, maybe Apple just wins. Everything else is too fragmented, who doesn’t like convenience? The media cos need to understand this. User experience wins. Apple provides it, they get to take the payments. Is it really such a problem?

  5. “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 ”

    When you purchase a book from that app, you are taken directly to the Sony store and Apple makes nothing on the sale. The Kindle App uses Apples’ in-App purchasing system according to the rules, and is in no danger. It’s not about the money. The rules are there so that everyone has an equal opportunity to do some honest business, so that everybody wins.

    I’m quite sure this is all well known to James McQuivey, of Forrester Research, who wrote the above anti-Apple BS. Don’t let “Though I haven’t seen the specifics…” get in the way of a good Apple hater story, James. And how is it that someone from Forrester Research is writing anti-Apple propaganda for a Microsoft controlled site? I’d love to know.

  6. >Alternatively, Amazon can develop an HTML 5 web experience that allows you to read Kindle books in the Web browser on the Apple device.

    Maybe I’m missing something but how would Amazon handle the DRM on HTML5 e-books?

  7. It’s amazing how with every change in licensing wording, Apple gets called a monopoly, especially with everyone heralding how Android has more market share. Want to say well, Apple has a monopoly in this segment or that segment, eg., smartphones, tables? I keep reading how that the Android army of devices, smartphones and tablets, are anticipated to have a larger market share than iOS devices.

    Do any of these pundits know what the term monopoly means or are they, as usual, just trying to grab headlines (I vote for the latter).

  8. I would advise everyone to wait until tomorrow. News Corp and Apple are announcing the Daily and the new itunes subscription model. Sony has not said that Apple is refusing to approve out of app purchases. The Sony app used in app purchasing outwith itunes. The other stuff in the NY Times about out of app purchases being banned is unsourced and unverified.

    One other thing to bear in mind. Some of what Apple does is to protect consumers. For example, they are rejecting magazine/newspaper apps that try to charge customers for content that is available free on the publication’s website. I suspect that is what happened to the European newspapers that have had emails from Apple.

    We will find out more tomorrow.

  9. $500AShareIsAnnoying!}:-D

    If you want to cross the bridge, you have to pay the toll. In Apple’s case, that toll is 30%. What company wants to be shorted due payment? If you pay, you stay. It seems relatively simple to understand. I fail to see how is this policy is “extortion”? I have heard taxpayers say that the government is extorting them. I’ve even heard customers go into local shops say that prices they charge are high so they must be running an extortion racket. I guess the term is used loosely when people feel they’re being cheated in some way or another. Any policy that Apple has seems to be up for criticism as dishonest and evil intent. There sure are a lot of unhappy souls in this world. One app is pulled and now there’s a rash of articles based on conjecture of how Apple is going to cancel ALL in-app payments or something. So weird.

    If anyone is unhappy with Apple policies, the simple solution is just not to buy Apple products and iOS doesn’t even have major mobile market share so I don’t think there are any monopoly problems involved. I personally think bloggers are merely jumping the gun based on assumptions. Apple has not made any statement as of yet so it might be wise to wait and see what they say about Sony’s app being pulled.

  10. This does not represent a shift for Apple. This has been a long-standing policy. This is the reason that the Kindle app takes you outside of its app when taking you to the Kindle store. Sony failed to comply with long standing policy and was rejected. Calm down.

    • Staci D. Kramer

      @JYR Yes, but the big question mark is about access to content purchased
      outside the app. The Kindle solution only works because you can open
      purchases in the app.