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

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.