Apple’s First Major Misstep – Subscriptions Fees

Even during this great run for Apple there have been mistakes/missteps by Apple

1. MobileMe launch was an absolute disaster.

2. First major iOS upgrade was released on the same day as the launch of the 3G iPhone leading to all kinds of registration problems

3. Ping in iTunes – still DOA

So mistakes but no big ones that threaten any of the primary products Mac/iPad/iPhone/iPod Touch.

Apple’s newest ruling on the App Store practices and subscription revenue split and out of store purchases might be that first big mistake that Apple makes, and it’s unnecessary and might give rivals a clear “feature” advantage which MoD stated previously was missing.

Here’s the exact language courtesy of Apple’s press release.

“Our philosophy is simple—when Apple brings a new subscriber to the app, Apple earns a 30 percent share; when the publisher brings an existing or new subscriber to the app, the publisher keeps 100 percent and Apple earns nothing,” said Steve Jobs, Apple’s CEO. “All we require is that, if a publisher is making a subscription offer outside of the app, the same (or better) offer be made inside the app, so that customers can easily subscribe with one-click right in the app. ” Publishers who use Apple’s subscription service in their app can also leverage other methods for acquiring digital subscribers outside of the app. For example, publishers can sell digital subscriptions on their web sites, or can choose to provide free access to existing subscribers. Since Apple is not involved in these transactions, there is no revenue sharing or exchange of customer information with Apple. Publishers must provide their own authentication process inside the app for subscribers that have signed up outside of the app. However, Apple does require that if a publisher chooses to sell a digital subscription separately outside of the app, that same subscription offer must be made available, at the same price or less, to customers who wish to subscribe from within the app. In addition, publishers may no longer provide links in their apps (to a web site, for example) which allow the customer to purchase content or subscriptions outside of the app.

So Apple has laid the gauntlet down. Was the hard line really necessary right now? Just because Apple won a similar battle with iTunes does not mean that it will win this battle. It seems like Apple would have better off having these kinds of discussions once the iPad installed base was 100 million plus, and Apple had a solid 50% + tablet marketshare. The massive iPhone/iPod Touch base seems less relevant for the consumption of ebooks, emagazines, and streaming content while the iPad is the perfect vehicle. The biggest applications in doubt are Kindle and Nook. Both are reliant upon on outside application purchasing through a webpage launched in Safari. It may not be possible margin wise for either Amazon or Barnes and Noble to be able to offer in app pricing that matches out of application pricing. It’s unclear if Apple’s 30 percent cut reduces Amazon’s costs so that there is a partial or complete off set or not. Amazon has been very quiet while Sony has been noisy about Apple’s stance. You have to wonder if Amazon is working with Apple behind the scenes to structure their distribution deal so that Apple’s 30 percent is all offset. For papers and magazines, again the margin of Apple’s 30 percent is unclear versus other digital distribution models and if Apple’s 30 percent comes with the requisite margin offset. At this point, publishers certainly don’t see the Apple 30 percent as anything other than extortion and publishers are bleeding cash as their previous advertising model has completely collapsed. Even more damaging than ebooks and emagazines, this new rule applies to streaming subscriptions like Netflix and Hulu Plus.

At least right now, Apple is doing a very poor job of explaining their side of this deal. It looks like a money grab as opposed to driving a seamless user friendly purchasing experience that will dramatically increase subscription rates for products. For example, it looks like Apple is trying to drive out Kindle and force iPad users to purchase books through Apple’s iBooks instead which is off to a very slow start due to lack of content and pricing issues. It looks anti competitive

Apple’s other big mistake today was from a PR standpoint and there’s going to be a PR war over this deal. Apple needed to have a kick ass fleshed out in app store from a vendor ASAP. It should have been a link in the press release to a fantastic demo on the web.

Here’s the potential downside.

The iOS loses the Kindle and Nook applications limiting the iPad’s use as an ereader. Android tablets have zero issues with these applications.

iOS loses Hulu, Netflix, Onlive Gaming, BBC iPlayer, and other streaming paid applications. These service vendors instead focus on creating applications for other platforms. Rhapsody is already telling Apple to go pound dirt. And this Apple move will look even more uncompetitive if iTunes streaming launches soon.

Publishers boycott the iOS devices, and instead sign deals with Android tablets, RIM Playbooks, and HP TouchPads. All of these vendors are going desperately going to try for mindshare/marketshare that they won’t be making any percent demands.

These three feature deficits hurt iPad sales and despite price and other application advantages, Apple loses market share to their primary competitors. Instead of selling 40 million iPads in 2011, Apple only sells 25 million devices, and loses $9 billion in revenue. It’s going to take massive amounts of subscription and content purchase revenue ($30 billion total for the iPads alone and every iPad not sold reduces App Store revenue) to offset lost sales of iPhones/iPod Touchs/iPads.

What should Apple be doing?

Flexibility in recognizing that the different content types have drastically different margins. The real issue of these vendors is going to be giving Apple 30 percent without seeing the volume sales to offset that 30 percent fee. Apple should be taking a legit channel bounty, then “commission fees” based on volume. Once the in app channel proves itself, Apple will be in a position to negotiate a bigger commission share which is completely fair once it’s driving volume traffic. Is it opening a Pandora’s box with Music companies complaining? Possibly, but the Music companies would already ditch iTunes if they could. Software guys might complain but do they really want to offer their games in a subscription model? Probably not.

MoD thinks for streaming subscription services purchased through the App Store, Apple should take a 30 percent cut of month one –  an initial sales bounty, then build some further commission fees based on total number of subscribers delivered by this app store method. The same model would probably work for e-magazines.

For e-readers clients, Apple should simply again receive 30% off the first purchase, and then again some further commission fees based on total e-reader purchases.

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