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Like a team of over-caffeneinated cartoon bears bouncing to the rescue of the battered, beleaguered consumer, Apple this week announced the terms for its in-app subscription purchase service. Key takeaways from the announcement included:
Apple will handle payments and keep a 30% cut for subscriptions made in-app, while publishers can keep 100% of subscriptions sold outside the app even if users view the content using an iOS app.
Users may share their information with the publisher or not, at the user’s discretion.
In-app subscriptions offers must be the same or better than those offered outside the app.
Reaction in the blogosphere seems to be centered around the first bullet, with the 30/70 profit split and how “grossly unfair” this is to publishers/providers of subscription content. This pointless drivel amounts to nothing more than empty saber rattling and adolescent whining on behalf on an industry that has consistently failed to adapt to a changing market, for a number of reasons.
The Walled Well-tended and Very Profitable Garden
Apple has created a walled garden of sorts with the iOS platform, and this is a useful metaphor to analyze the current situation. A garden is for planting seeds and growing things (which translates roughly to acquiring users and reaping the profit from their purchases). Gardens do not magically appear, however; they require careful construction, routine maintenance like pest control/weeding, as well as various inputs like water, fertilizer, and upgrades to the materials in use. Apple has done all of these by building iOS and the devices on which it runs, carefully cultivating a plethora of developers and high quality apps in the store, and, most importantly, laying the plumbing and running a hose from the faucet to the garden that carries all the water (money) that developers need for a bountiful harvest. Take the example of the Kindle—the first truly successful digital replacement for print media. Amazon had to build out an enormous infrastructure in terms of manufacturing the device,[link widoczny dla zalogowanych], setting up their storefront, supporting the device, and ensuring delivery methods via the Whispernet platform. Apple certainly deserves compensation for their effort, as well as reasonable fee for bringing new subscribers to publishers.

Every publisher who wants to address a market with a digital product (be it something new like streaming music or an extension of an existing product like a magazine or newspaper) has to consider the costs required to get that product to market. As proven with the burst of the 2001 tech bubble, simply slapping “.com” on the end of a product does not a guaranteed profitable platform make. In business, there is a concept of fixed costs (buying a building/equipment) versus variable costs (buying raw materials for the product). Variable costs obviously go up the more products are sold, but the up front nature of fixed costs often makes it impossible for nascent businesses to get off the ground. Established companies like News Corp, Conde Nast, or Amazon may well have sufficient capital to create their own platform, user devices, and distribution platforms, but a scrappy startup with the next big idea in digital subscriptions may not be able to make it over that hurdle. In the iOS universe, the only fixed cost is the $99 fee to become a registered developer, and then a variable fee of 30% for each new customer. This is unimaginably empowering for new subscription services, and perfectly adequate for existing publishers who can choose the alternate route of selling their subscriptions through their own storefronts where they keep 100% of the revenue. The potential access to millions of new subscribers who are actually comfortable making purchases (iOS is the most profitable mobile platform) is a source of value that is overlooked in the “Apple’s not playing fair!” arguments.
Why “Something Old” Just Won’t Cut It
Does anybody feel nostalgic for the good ol’ days of being forced to buy a $15 CD or $7 “single” disc just to get the one good song an artist put out? How about the magazine industry’s tactic of sending you three copies of a magazine, and then sending a notice that “Your subscription is in dire peril of being cancelled unless you renew NOW NOW NOW for the bargain price of just $$$!!!!?” They are both cheap and dirty tactics designed to extract more money out of consumers, and neither one worked very well. Sign up for one magazine or make one catalog purchase and suddenly the floodgates of junkmail open and you find yourself in need of a forklift every time the postman comes by. Music sales were deflated by the one-two punch of free music and 99¢ singles, while print media circulation has been consistently down for years. The U.S. auto industry woke up to the fact that Americans do not want crappy cars after Japanese makers began mopping the floor with them, and have been (with varying degrees of success) improving their products. Publishers need to do the same thing.

In a posting over at Forbes, Jeff Bercovici pines that the rules Apple has put in place are tragically unfair to publishers, because Apple is exerting control over pricing (the lowest out-of-app price must be available in-app as well). In addition, publishers are not guaranteed access to subscriber demographics, which could lead to lower ad revenues.

This argument misses two key points: First,[link widoczny dla zalogowanych], online ad revenue is dismally low—people simply do not click through enough ads to make the ad supported distribution model truly feasible (hence the failure of previous online subscriptions). Second,[link widoczny dla zalogowanych], and more importantly, Apple is not-so-subtly telling publishers that it is time to innovate. This is not an opportunity to foist your same sinking business model into a new distribution channel and hope that it revives your business. What about targeted content? Test whether consumers would be willing to pay more for a subscription to a magazine that shows them articles similar to ones they have read and enjoyed in the past (like Netflix movie recommendations).

It is very easy to whine that Apple is not building the platform the way publishers want it, but the utter dearth of viable online subscription models (apart from the Kindle, which still sells mostly books and not magazines) means that the publishers have not figured out the right method either. Given Apple’s track record with music and building the iOS brand, they might just be on to something, even if the platform comes with restrictions that offend the delicate sensibilities of publishers. If you fail to do something for yourself (build your own content garden), you often have to pay someone else to do it for you.
The “Open” Alternative
TechCrunch posted a spot-on article about the more publisher-favorable terms of Google’s One Pass subscription system. Google keeps only a 10% cut of the subscription and shares the subscriber’s demographics, including name, zip code, and email address, which translates into more marketing opportunities for the publishers. Unfortunately, the announcement of Google One Pass is heavy on details for website-style subscriptions, but neatly dodges the issue of Android implementation (in-app Android purchases currently carry a 30/70 revenue split just like iOS). This alternative does not provide a clear path for a true revolution from older systems that have failed to perform, and it certainly does not cover the transition to mobile computing paradigms like tablets because there is no Android tablet yet. Netbooks were a stumble out of the gate that heralded a shift to lightweight anywhere computing, with the iPad stepping up to truly meet users’ needs. The fact that the device is so popular is what gives Apple license to charge its revenue share; building a user-accepted platform has taken time and effort by Apple, and they deserve to be compensated for that hard work.

Apple has successfully managed to monetize digital content in a way that few others have, as evidenced by the iTunes Music Store and App Store. Old guard companies like BMI and News Corp have had over a decade to come up with a way to deliver content in the ways that consumers want it (not just in ways that maximize profits), and yet they have failed time after time after time. Apple is disruptive to existing business models for such an obvious reason as to be painful—consumers will buy more if they are getting what they want. Think about it—record companies recognized the popularity of singles, but offered them bundled with some other junk as a “single” to increase profits. Apple gave easy access to exactly what consumers wanted and achieved a dominant position in online music.

Any company wishing to offer a subscription is still free to go it alone and handle subscriptions through its own website, with a free reader/streaming app for iDevice users. But think about how many small companies with great ideas can springboard with these high-quality tools Apple has provided and access to the premier mobile platform. Just look at the success of minor league player Pixelmator in the Mac App Store—the goodwill, respect, and eager-to-buy users Apple can deliver to a subscription provider are worth every cent of the 30% revenue cut.

Why is it that in the world of mobile computing publishers want to stick to a tried-and-failing business model? Rupert Murdoch slammed Google for “stealing” content by providing aggregation services, Conde Nast’s new president Bob Sauerberg noted that the old model of ad-subsidized print media was unsustainable, and efforts to put online content behind paywalls have been abject failures.

Change hurts, publishers, but do not let fear of the unfamiliar keep you from making the leap to something better. Blockbuster did the same thing with Netflix, dismissing it as a fad…and now Blockbuster is a minuscule player while Netflix has assumed the throne of movie rental king. Much of the reader badwill is your own fault, with endlessly irritating blow-ins, sale of reader demographics for marketing purposes, and the use of dirty tactics to trick readers into buying subscriptions. Take some bold steps and develop strategies for publishing content in this new mobile world—but for heaven’s sake, quit whining when the only successful business partner wants a perfectly fair cut of the profits to rescue you from your sinking ships!