Apple's Policy Harms Subscription Providers Today, Apple Tomorrow


Yesterday Apple 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.

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 this data from a survey of 4,000 US online adults as part of a bigger analysis next month, hang tight). 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.


Apple should've learned from Sony

I've seen this coming for years. Apple has been remarkable for making it this long without making bad for partners and bad for consumers moves motivated from being in both device and distribution businesses. Sony did the same thing in many ways with proprietary everything-- flash memory form factor, compression, copy protection / DRM as they moved from being king with the analog Walkman franchise to being loathed by customers and partners alike as they tried to re-create that success in the digital world. Since Sony both distributed content and made content (music and movies) they could've made even worse steps but the buying models of the day seem to have kept them from going there.

Though bitten by trying to do the right thing, Sony eventually learned at least partially and tried to be more open and a better partner. Their latest eReaders are a good example. Unfortunately their biggest part in that space was Borders who just filed bankruptcy. Together they may have proven have much abuse the consumer is willing to take to get the most fashionable device / brand. Why by the Sony Reader Daily when all the buzz is about Amazon's Kindle and then Apple's iPad? Sony lets you borrow from libraries online and uses a not unique to Sony Adobe approach to DRM -- that's nice. Lock me in to Kindle's .prc or Apple's approach whatever the add'l expense and loss of rights to the media I "bought".

Apple's brilliant in that they gained enough consumers before making this move that they can now hold the content companies over the proverbial barrel. "Go it alone or be on our platform, the choice us yours." But if you thought 3-5% credit card fees were bad wait until you taste 30% fees.

30% is a fairly normal cost to distribute a software product in the traditional business world. It is not at all normal in the subscription content world. We may next see the content companies work overtime to fire up the consumers to tell Apple to stop abusing their market power the same way we've seen cable carriers pull consumers in to their side of the battle with networks and content sources by making sure critical negotiations happen around the same time as the most critical live, perishable content is scheduled. Sports events are a big lever since watching them before everyone knows the score and outcome is higher value. SI could use the Swimsuit Edition.

In the end it comes down to market power as it always has but the new twist is that it is market power as measured by who can best get the consumer on their side.

The big question then is, as a group, how much of these outrageous costs will end up getting passed to the consumers and will the consumers ever make a stand? Many feel it is wrong that eBooks cost more than real books or that iTunes songs cost more than buying a CD at Target or Walmart or Amazon. But they overlook it because it is close enough and they like the convenience and love the device. Is this love endless or is it playing with fire to push this much more cost into the market? Time will tell.

In many ways Apple has taken on the worse of Sony's bad decisions and then gone further. So far it has fueled, not hurt, their success. If this move or future moves prove to be too much, who steps in next to be what Apple has been to Sony? That's an investment I'd like to be in on. Treating your partners and consumers fairly while making a fair profit is always the better long term business model.

On the other hand if you want to see who is next to wrong the market through their combined product and distribution business model keep an eye on Comcast + NBC Universal.