Action at a Distance

On Apple’s subscription payments

Apple finally launched the long-rumoured iOS subscription pricing for content producers. The important bits are:

“Apple today announced a new subscription service available to all publishers of content-based apps on the App Store, including magazines, newspapers, video, music, etc.”
“Apple processes all payments, keeping the same 30 percent share that it does today for other In-App Purchases.”
“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.”
“Customers purchasing a subscription through the App Store will be given the option of providing the publisher with their name, email address and zip code when they subscribe.”

This seemingly simple announcement has seriously knotted the blogosphere’s collected panties.

Marco Arment, developer of Instapaper, called it “a dick move”. John Gruber of Daring Fireball said this is a positive move for consumers. Music streaming service Rhapsody have already announced they will not be accepting the terms. MG Siegler at TechCrunch says this is a big move that could backfire badly — but that calling this an “evil” decision is pretty stupid. Also at TechCrunch, Jason Kincaid asks “why are you people defending Apple?” There’s a lot more where this came from, on all imaginable sides of the debate. At Macworld, David Chartier says “what Apple is imposing doesn’t seem as out of line as the initial uproar might have you believe”.

Here’s how I see things.

Part of this new scheme is certainly positive for users of iOS devices. When you subscribe to a magazine, the publisher harvests a fair bit of personal data on you and it sells that data to its advertisers. “Look!” it may say, “60% of our readers earn $100k a year or more, so you should definitely place your ads for luxury watches in our lifestyle magazine.” Apple are tightly restricting the information that publishers can gather from their customers when they take subscriptions out, and whilst publishers can ask for more data, this has to be optional. Less personal data being given out is a good thing, right?

Well, not so fast — because that personal data allowed magazines to obtain a good rate for their ads, they can substantially discount subscriptions. It’s why the copy of Empire I have to hand here has a cover price of £3.99 but costs just £30/year to subscribe. With the ability to collect data curtailed, there is less incentive for magazines to offer such keen pricing. You might argue that customers shouldn’t have to give personal data up but when you consider the success of services like Facebook it does seem to be a popular choice. So that’s a possible downside to the new plan. Also note the price protection clause Apple has inserted — publishers have to charge the same price for subscriptions sold off the App Store as well as on it. So a publisher can’t, say, offer price breaks to customers who do its survey.

The second “customer centric” angle here is the user experience. Previously, there were apps you’d download from the App Store that might be blank, or with some demo content. Then you’d either have the app kick you out to Mobile Safari (ugh) or use a different computer (double ugh) to sign up on the publisher’s website and pay for the subscription. Under this new scheme, you click a few buttons in the app itself, confirm your iTunes password, and your iTunes credit card is billed. That’s definitely nicer for the user. Even better, there’s a page in iTunes which shows all your recurring subscriptions payments in one place and allows you to review and cancel them at will. Again, this is great stuff.

Now, there’s also the small matter of Apple’s cut — 30%, which is the same as it charges App Store developers for all other transactions. 30% is not small, but then again if you consider the print magazine model it’s arguably not onerous either when compared to the price of printing and distributing all those glossy pages.

Beyond print

It’s when you start looking beyond print magazines that Apple’s move begins to look more contentious. Music streaming service Rhapsody was quick to state that it will not comply with the rule and that a 30% cut to Apple is “economically untenable” for their business model. If it does not comply by 30th June it will have their app removed from the App Store. Although few companies are talking on the record yet, this will surely affect even big-hitter content streaming companies like Spotify, Netflix and Hulu, unless Apple starts applying the rules to some companies and not others (which I think everyone can agree is a terrible idea).

Then there’s ebooks. Sony’s Reader App was rejected from the App Store for — Sony claims — offering content purchases outside the apps in a manner identical to how Amazon’s Kindle app works today. If you aren’t familiar, the app has a link that opens the Safari web browser on the device. The user signs in with the Amazon account, browses and purchases books through Amazon’s payment gateway, then returns to the Kindle app and the books magically appear. Note that this is expressly forbidden in the new Apple T&Cs. Lots of people are assuming that the 30th June “comply or get out” deadline is ticking on the Kindle app too, although I haven’t found seen definitive from either Amazon or Apple that states this is true.

How might companies react to this? Some of them might be able to make room for the payments and trade the lower profits for higher sales volume via the App Store’s hordes of users. This is more likely where the company is also the creator of the content, as with magazine publishers. Where the company is a middle-man, however, this tradeoff might be simply impossible. If Amazon sell an e-book for $10, give the publisher $7, and keep $3 for themselves, then there is no way for them to pay $3 to Apple without going out of business in the process.

Similarly, it’s not impossible to imagine that Netflix’s retained profit on the bottom-tier $9/month streaming plan is less than $3; so after Apple takes its 30% cut they are suddenly making a loss on each and every customer. We might see companies like Netflix launch a special “iOS streaming” subscription tier which can only be purchased in-app and has no overlap with the normal web streaming plan. By segmenting product offerings they could vary pricing across the two plans without falling foul of Apple’s pricing protection clause. Of course, customers who wish to stream to iOS devices as well as laptops would have to buy both plans.

Or, there’s the scorched earth approach: withdraw affected apps from the App Store, and (most likely) publicly commit to a competing platform in a blaze of publicity. With Android, Windows Phone 7, and RIM all vying for smartphone market share, there’d be no shortage of leverage to negotiate a better deal… and as a wildcard suggestion, what if (say) Amazon re-released the Kindle app in the Cydia, the unrestricted app store for jailbroken iOS devices? That’d be one way to definitely poke Apple in the eye.

Antitrust issues

A cynical person might note that all of the apps I mention above compete directly with Apple’s own content offerings via iTunes and iBooks. It is possible that Apple sees this as a heads-I-win, tails-you-lose situation; either it takes a juicy a cut of its competitor’s offerings, or its competitors leave the platform and its own content becomes more attractive to consumers. Nathan Koppel at the Wall Street Journal found a few law professors to speculate about possible antitrust actions being brought against Apple because of this angle but there are two problems with that approach.

Firstly, suppose that Apple drive every other media supplier off the App Store entirely (and ignore for a moment that consumers can still rip CDs into iTunes). Saying in this situation that Apple has a monopoly on media for iPhones is still rather like saying that Honda has a monopoly on selling Civics. Unless iOS is itself so dominant that it constitutes the entire market, it’s meaningless. Across smartphones, iOS market share is about 15% world-wide. In tablets, it is dominant right now, but that is likely to change throughout 2011 as credible Android tablets finally ship in large numbers. There’ll always be Android OEMs willing to make cut-price tablets cheaper than Apple will, and there’ll always be consumers looking for alternatives to Apple’s ecosystem for philosophical reasons (or possibly just to avoid the creaking awfulness that is iTunes for Windows). And hell, the world might go crazy and we might even see a non-vapour BlackBerry Playbook in the next ten months.

The second reason that antitrust suits are probably irrelevant is suggested by a quote in Koppel’s piece from Herbert Hovenkamp, an “antitrust professor at the University of Iowa College of Law.” Hovenkamp says “Millions will be spent litigating how broad the market is,” but what he doesn’t go on to add is that this will take years, during which time the fast-moving tech market will have rendered everything being debated in court thoroughly moot. Consider the spectacular lack of useful changes from the European Union’s decade long antitrust investigation of Microsoft. Antitrust is very often a red herring in the technology sector.

The heart of the matter: who owns these customers anyway?

When Apple launched the iPhone, it was successful in preventing any of its partner operators in doing anything at all to the phone’s software layer. In so doing, they stole the customer. All those people who lined up on launch day are Apple customers first and customers of their cell operator second — a principle Apple might extend to its logical extreme one day.

If I buy a digital subscription to a magazine for my iPad through the App Store, I feel that I am a customer of the magazine publisher and a customer of Apple in roughly equal proportions. It doesn’t feel like a big deal to me that Apple want a cut of that. The content is only for Apple’s device.

However, if I buy a Kindle book, I feel that my commercial relationship is much more with Amazon that it is with Apple. That single purchase allows me to read that book on iOS devices, but also on PCs and my Kindle e-reader and any future Android devices I may own. Similarly, I wouldn’t buy a Netflix subscription purely to stream to iOS; I’d be doing most of my streaming to my Boxee so it doesn’t feel wrong to me to do the business transaction with Netflix directly and not Apple. In these use cases, and many more, the content isn’t only for iOS devices; in fact I’m much more interested in using the content on other devices.

It doesn’t feel right to me, on some level, that Apple take the same cut on content that is exclusive to their platform as they do on content that is non-exclusive. I’m not sure this is a rational position, but I do think a lot of people agree with it on some level — and consumers do not always make rational purchasing decisions.

Conclusion

Debating whether or not Apple is “evil” or “greedy” or other loaded emotional terms is neither meaningful nor useful when discussing a profit-making company. The only question that matters is this: “on balance, is this change good or bad for Apple’s users and Apple’s shareholders?”.

In the short term, the neatness of in-app purchasing of subscriptions is certainly a win for users, as is the privacy angle. And all those thirty percents are likely to add up to a ton of money too, which is good for shareholders.

But in the medium term the picture might be less rosy. If significant vendors like Amazon, Netflix and Spotify are forced to introduce complex pricing tiers that require users to pay twice for access to the same content on different devices, I think it’s hard to call that a win for Apple’s users — and if they’ve got the minerals to play hardball and withdraw their apps altogether, well, that’s even worse. My choice between an iPhone 5 and some hot new Android handset becomes harder if only the Android phone can access my Kindle books. And if things get that far out of hand, a platform weakened by a lack of third party apps isn’t good for the shareholders either.

Apple isn’t omniscient. It makes mistakes, and then sometimes it corrects those mistakes. It’s too early to say that these changes to the App Store are a mistake — but it’s also too early to say that they aren’t. Apple has thrown down the gauntlet. Your move, app publishers.