Why Apple’s New Subscription Policy Will End Up Hurting Apple, Too

10 Comments

Yesterday Apple (NSDQ: AAPL) announced its intention to tighten its hold on the payment for and the delivery of content through its successful iTunes platform. (I’ll leave off the I-told-you-so; oops, too late.) Apple will require that all content experiences that can be paid for in an Apple app must be purchasable inside the app, with Apple collecting its 30% fee. The app can no longer direct you to a browser or some other means for completing a transaction. Crucially, the in-app purchase offer must be extended at the same price as the same offer made elsewhere. Though the announcement of the subscription model was the triggering event, the policy extends to all paid content.

I do not believe this is where Apple will stop – I personally expect them to eventually deny the delivery of content paid for outside of the app without some kind of convenience charge. But my personal expectations are irrelevant here, because what Apple has done already is sufficient to make providers of content aggressively invest in alternative means to reach the market, especially for their subscription-based content.

Subscription content services are the lifeblood of the content economy. A full 63% of the money consumers spend on content of all types comes through a renewable subscription. (I’ll be publishing that data from a survey of 4,000 U.S. online adults as part of a bigger analysis next month.) Most of that subscription revenue goes to pay-TV providers, but 17% of it goes to newspaper and magazine publishers, including their online or app content experiences.

The economics of subscription content are simple enough: Keep your costs as low as possible to maintain an active base of subscriptions against which future content and distribution investments can be justified (and against which ads can be sold, if applicable). Subscriber certainty fuels the business; subscriber uncertainty undermines it. This is why one-off content businesses like movies and books are so dicey and blockbuster- or bestseller-dependent, because without the guarantee that the same million or so people who read or watched you last month will do so again next month, content investments are hard to justify.

Certainly Apple knew this when it responded to magazine publishers like Conde Nast that requested a subscription model for iPad content to stem the dropoff in interest its iPad magazine editions were experiencing. Apple has the industry over a barrel in this regard and you can’t fault the company for exploiting its advantage for economic gain. In this light, a 5% tax on content providers would seem like a fair exchange: Apple offers access to desirable customers and deserves a facilitation fee for making the delivery of the content possible (even if it doesn’t technically bear the cost of the delivery, the consumer does, paying a premium to own the device and funding the connectivity, either via 3G or wifi).

However, you can fault the company for choosing not to anticipate that seeking a 30% toll would bring any subscription model of any type to its knees. Remember, subscription content is priced as low as it can be to drive interest while paying off reasonable costs. Taking a 30% toll amounts to a massive increase in the cost basis of a content business that will kill it. There is not a subscription business alive that can bear that additional cost without passing the cost along to subscribers, even if the content is unique, which most content is not.

But a content provider can’t pass the cost along only to Apple’s subscribers, which would seem the one solution Apple could offer that would make economic sense but which Apple has specifically proscribed. In other words, if your subscription costs $5 a month even if you never access it on an Apple device, it must be offered for $5 a month through the Apple device as well, but with Apple culling out $1.50. What’s a content provider to do – pass the 30% tax on to all users to ensure that they don’t get killed by the uptake on Apple devices only to see subscriptions dwindle? Or keep the price low across the board and desperately hope that no one takes advantage of the iPad app they spent months developing?

None of this is Apple’s fault; I staunchly defend Apple’s right to price its products and services any way it wants. But it is shortsighted. Because now Apple has given every publisher, producer, and distributor in the business a reason to actively pursue alternatives to the elegant apps that Apple had hitherto taught us to depend on. I don’t really have to encourage my clients to add urgency to their already furious Android app development efforts. But it will also lead to non-app content experiences as well, most of them developed in HTML5 – Steve Job’s own panacea for the future of content delivery.

Whether publishers can feel betrayed, as some have suggested, is a matter for psychologists and ethicists to ponder. Perhaps it’s healthy that the content industries were able to so quickly see that Apple isn’t really a savior for their businesses after all. At least now they can make decisions based on market facts rather than market hopes. And if the sour taste in their mouths is good for anything, let’s hope it motivates them to get out there and show everybody that they still have content experiences to offer, content experiences we want, content experiences worth paying for.

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.

10 Comments

Martha Lorini

In response to Jeremy, I don’t think 30% is a fair cut for Apple because this sale is not analogous to a partnership or rev-share situation. Apple’s selling the telephone (speaking metaphorically)…what comes through the telephone is what gives the device value. And no, publishers do not have the kind of billing relationship with their existing customers to facilitate digital sales.

Couldn’t agree more with McQuivey’s point: it’s high time we discuss profits and losses around these deals…more here: http://wp.me/pU94g-1j

9_9

It has always been about the shareholders. They need to be put on a leash.

iAmJasonPaul

The App store was deviously smart of Apple (and necessary to an extent) but I think it’s short-lived. If we had better/stronger data on our phones (or ubiquitous wifi) we could manage nearly everything through open web apps on our mobiles and bypass closed apps entirely. If web app development was invigorated this debacle could be bypassed and it would be Google One Pass that definitively wins the day. I wrote about the long-term advantages of sticking with old fashioned web apps over the newer labyrinth of closed apps (app store). Here’s an essay about this specific issue I wrote a few months ago: http://www.jasonpaul.net/2010/12/open-vs-close/

Majipoor

@Matthew Green
Google take 10% but it only covers the cost of the service according to Eric Schmidt. Moreover, Google only offer a centralized payment service while Apple bring on the table the AppStore (#1 digital store) and 200m existing customers eager to purchase content. Apple also want to make some profit.

Is it worth 30%? I don’t know for sure, but it is worth more than Google’s 10% offer.

Nigel Peacock

How can Apple police this?

They would have to block any link out of any App to any web page in the world, in case it had a “Subscribe here” link.

If I am reading this correctly, products like Flipboard, Stitcher and in fact, any App which use web pages, just died.

David Chartier

Matthew: Apple takes 30%, not 70.

Amazon, until last December, took 70%, but only takes 30% now if you meet specific qualifications, including providing your content in various formats that are compatible across all the platforms on which its Kindle apps are available. If you don’t meet them, you only get 30%.

Most other centralized content providers and platform gatekeepers (Zinio, Barnes & Noble/Nook) do not make their revenue sharing public knowledge.

Matthew Green

With Google announcing today they will seek to only take 10%, instead of the 70% Apple ask for, is there the potential for content creators to promote Android further knowing they will make more money off of the sales? Also, what do Kindle charge? Finally, will this prevent the trip the Amazon Kindle iOS app does where it redirects to a webpage when attempting to purchase a book through the app?

Jeremy

Not sure I see the sky falling as much as everyone else.

30% (and less customer info) is a fair exchange where they are bringing the customer. The source of a customer in any digital customer acquisition channel (mobile carrier for mobile content sales, online affiliates for online subscription products where sign-up bounties represent a large % of total customer LTV, MSO for pay-TV) exacts a rev share or pay-per-signup bounty of at least that percentage. This becomes an issue mostly for lower margin products who have significant sharing of the consumer dollar (eg royalties to content providers for music services, etc.)

The ability for publishers to bring their own customers for free is a win even if an iTunes option needs to be present. Many customers will already have the billing relationship with the publisher for a broader service offering, of which the app is one part. Yes, some customers will prefer the one-click of Apple where they have that option but again, in that scenario Apple is bringing the customer and frictionless purchase experience to the table — both of which will drive far more incremental sales that should justify a 30% cut on the (relatively) small % of Apple customers that might otherwise pay the publisher directly.

Question — is the requirement that only the app be offered within iTunes? Or if the publisher has a bundle of the app and another offering (Magazine, Online service, Pay TV, etc.) must Apple have the right to sell the bundled product as well?

iadvize

That’s going to seriously tick people off. But it was inevitable. Why stop at a pound of flesh if you can fleece the entire body?

Mike Donatello

What you’re seeing here is a confluence of typical Apple hubris (e.g., if the phone gives you problems, “just avoid holding it in that way”) and the newspaper industry’s learned helplessness. Although publishers SHOULD shift to emphasize other platforms — thereby stoking those platforms’ growth at the same time they stick it to Apple — many will probably suck it up and deal with Apple’s demands, because the 70 cents of which they’re certain is better than the dollar they might never earn if forced to rely on their own innovation.

As you note (and I’ve complained elsewhere), almost anything a publisher would offer through an app can be offered through a browser, without the attendant micromanagement by Jobs & Co. If I were a publisher, I’d quit the Apple-as-broker habit right now, cold-turkey, before doing so is financially impossible.

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