Why Apple is right on subscriptions

Apple has built an incredibly valuable distribution platform. It’s perfectly reasonable for them to say “if you make money using our platform, we want a piece of it.”

Distribution costs money. Facebook charges developers on its platform 30% for using Facebook Credits. It’s not uncommon for distributors to take significantly more than Apple is taking. I’ve done deals where the other company does all of the heavy lifting and my company received more than half the revenue for bringing in customers. Google pays AdSense distributors 68% of the revenue it earns off content network ads. And that’s for no-name distributors. That number can be much higher for branded players.

Groupon has local businesses (which have hard costs for each person served) discount their product or service 50%, then takes 50% of that and sticks the business with 3% for processing. Merchants net 22% of what they would normally charge.

Retail gross margins are generally much higher than 30%. Would anyone argue that Apple should sell Microsoft Office in Apple stores at cost?

A seamless experience can benefit all parties. As a consumer, a key appeal of the App Store is that it’s seamless. I recently purchased two wonderful coffee table books on Vincent Van Gogh and Monet. These were quick and easy purchases. But I’ve resisted buying other products because I’ve just never been motivated enough to fill out all of my information again.

Game publishers such as Rovio (of Angry Birds) fame have been paying 30% for a long time. Apple is essentially closing a loophole that allowed some publishers to free ride on its platform.

We are still very early in the tablet content race. As popular as the iPad is, only a small portion of the population has one. If publishers believe that their content is so valuable and object to Apple’s terms, they should shun the iPad and develop for platforms with lower distribution costs. Heck, a brand name publisher like The New York Times could offer a platform provider an exclusive partnership in exchange for lower fees or even upfront payments or marketing support.

If their content is really that valuable, fewer people will buy iPads and Apple will be forced to lower its distribution fee. That’s how the free market works.

The sad reality is that publishers don’t have that kind of market power. If they opt out of iPad, it’s more likely that they’ll lose. That’s not Apple’s fault.


About Rakesh Agrawal

Rakesh Agrawal is Senior Director of product at Amazon (Audible). Previously, he launched local and mobile products for Microsoft and AOL. He tweets at @rakeshlobster.
This entry was posted in apple, ipad, journalism, newspapers, publishing. Bookmark the permalink.

4 Responses to Why Apple is right on subscriptions

  1. Rob Pegoraro says:

    First, one of the reasons iOS is so valuable is because of all of the apps contributed by third parties. I seem to recall an ad or two from Apple making that point. So let’s not go too far in giving Apple exclusive credit for this platform’s appeal.

    Second, I would find Apple’s stance much more understandable if it didn’t also forbid developers from even linking to their own Web stores in iOS apps. (I called this out in my post, but I haven’t seen too many other people note that angle.) It’s one thing for Apple to push its App Store, another for Apple to require developers to use it, and yet another for it to ban them from linking to alternatives.

    Yes, it’s a free market and that’s where the final say will come from. That doesn’t mean we can’t question Apple’s judgment now.

    – RP

  2. Absolutely, apps have contributed to the platforms appeal. And most apps have played by the same rules. The most popular paid apps are games and have been paying 30% since the beginning. Apple is (in essence) closing a loophole that has existed for off-site subscriptions. Facebook essentially did the same.

    I could see Apple’s requirement to do it within the app as much of a UX play as a revenue play, given their obsession with UX. Few users would go through the trouble of clicking a link to re-enter all of their credit card info if the other alternative was 1-click to buy.

  3. Walt French says:

    “If publishers believe that their content is so valuable and object to Apple’s terms, they should shun the iPad and develop for platforms with lower distribution costs.”

    This is exactly correct. And because it’s so obvious, you know that Apple has examined it seven ways from Sunday, concluding that it will not happen.

    Not by Adobe, whose production tools are a goodly part of the eBooks’ workflow but NOT of the consumer-facing side.

    Not by Google, who is just as likely to tell some hapless magazine publisher about how wonderful VP8 will be one day, and that the open web of HTML and JPEG is where the action is.

    Not by Sony, which seemingly slips farther behind every year.

    And certainly not by the publishers themselves, who have been blindsided by the rush to iReading and are utterly incapable of dealing directly with readers. Doubly so for 99.9% of authors.

    So Apple has taken a calculated gamble. I’d put my money on the over.

    “If their content is really that valuable, fewer people will buy iPads and Apple will be forced to lower its distribution fee. That’s how the free market works.”

    You, sir, are one optimistic idealist. Or maybe, an idealistic optimist. Anyway, this is not a free market by any economist’s definition. Apple may not yet be a pure monopoly, its efforts notwithstanding, but as long as there is Android, BlackBerry, Nokia and others, Apple can hardly be accused of leveraging its monopoly in mobile devices to fatten profits at its store.

    People more expert in the Law than I am have wondered whether this will be seen to have crossed the line. But you just know that Apple’s lawyers had to have given enough of a signoff — worst case, “if DoJ bugs us, we’ll deal with it” that Apple plowed ahead in its pursuit of its own interest.

    • Walt-

      I’ve read some of the discussion on monopoly power and I agree with you that it’s going to be hard to make that claim. If the DoJ hasn’t done anything about Apple’s power in music distribution, it’s not going to step in here.

      Besides, that is a dangerous path for other players in the market to go down. If you claim Apple as a monopolist here, than you seriously to have look at Google’s position in search and Amazon’s position in e-Books. And those markets are much further advanced.

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