Notes on Apple’s Subscription Billing

Update: Read Tim O’Reilly’s take.

Tech publisher Tim O’Reilly has just posted a very thoughtful case against the 30% number in Apple’s subscription model. He thinks it should be more like 5%.

The post and the comment thread are very informative, and I highly recommend reading them if any of this interests you. Here it is on Google Buzz, incidentally proving that Google Buzz has a few actual users. Who knew?

One minor point on which I disagree with O’Reilly, but in which we’re both just wildly speculating: I don’t think Apple is arrogantly trying to price the competition off its platform (e.g. Netflix vs. iTunes). Rather, I think they have considered those businesses and, perhaps just as arrogantly, assumed they should be smart enough to make a profit while still coughing up 30%. I sort of imagine Tim Cook saying, “Well I could do it in a weekend, so why shouldn’t Reed Hastings?”

Apple, which still has nothing like a viable competitor to its ragingly popular iPad tablet device and happens to also make most of the profit in the smartphone world, recently announced new rules for in-app content purchasing, particularly for magazine and newspaper subscriptions.

In a nutshell, they are:

1. For anything bought inside the app, Apple gets a 30% cut.
2. You can’t sell anything outside the app that you don’t also sell inside the app.
3. You can’t charge more for in-app purchases than for their out-of-app equivalents.
4. Collection of subscriber data is limited, optional (opt-in), and revokable (by the user).
5. Subscriptions may be cancelled at any time, inside the app.

I’ve been following the reaction online for a while now. As you might expect, publishers and various other middlemen, as well as a typical assortment of irrational Apple-bashers, are raising a stink. Or at least trying to; with Rupert Murdoch on board, it’s hard to argue there isn’t money to be made by publishers.

I see the arguments against Apple’s new policy falling into three main categories, which I will briefly address below. My gut feeling is that this new model will work in most instances, and in a few instances will fail so utterly that exceptions will soon be made.

“Apple Will Destroy Publishing”

This argument usually has little to do with the 30%, which after all isn’t that much compared to traditional printing and distribution costs. Instead, the big fear is that publishers have built a business on selling subscriber data – usually to people who turn around and try to sell crap back to the subscribers. Ever wonder where all those catalogs come from?

If Apple limits what data you can collect, and requires it be easy to opt out, what becomes of this revenue stream?

Well, in fact a good part of it will probably go away. I expect people will still happily provide enough personal data that you can reasonably prove the value of your “demographic” to the advertisers.

But according to what logic, exactly, should a business be allowed to harvest as much of my personal data as their little database elves know how to, without my consent and directly against my better interest? I understand that this helps keep subscription prices low, but then making sandwiches out of your customers’ own flesh would keep sandwich prices low. How is that good?

So Apple is in effect forcing the publishers to be honest if they want to be on Apple’s platform. We’ll see how it goes, but I mostly expect that they’ll grumble but give in, exactly as far as they absolutely must and no further.

There is also some minor echo on the Innernets suggesting that easy subscription cancellation is an unfair burden for publishers, to which the only reasonable response is a much simpler blow me.

“Apple Will Destroy Kindle”

Here the argument is very much about the 30% cut. Content resellers tend to have fairly low margins, thanks in no small part to Amazon. I would expect that a large portion of a la carte content sales, particularly books and essays, simply can not survive a 30% reduction in sales.

This would effectively force someone like Amazon to raise prices, but how will the market react to that?

On the one hand, the market probably wouldn’t much care. Books in Europe cost a lot more than books in the US, and people don’t read less as a result. Steep discounts are not a requirement to secure readership, at least not if your content is any good.

However, with the same-price stipulation for in-app and out-of-app purchases, Apple is sending a very clear message: if you want to sell content on our platform, the content had better be of sufficiently high quality to be priced above a 30% cut in revenue.

Or it had better be sufficiently dirt-cheap that all the money’s in the resale. This is probably not what Apple has in mind, and it’s already a problem in the iBookStore as well as the App Store.

I expect some retailers, and especially Amazon, will feel their backs are to the wall, and will try to find a way out. That might well be regulatory: changing the contract terms on your direct competitor, effectively denying them shelf space in your store, may not go over well at all in the EU, especially regarding cultural goods.

But I think it’s more likely that some folks will try to give you an upside to purchasing outside the app, and Apple will generally not approve those apps except in the cases where they sorta-kinda have to. For example, what does Apple do if Amazon lets you buy content in-app that is tied to that app (i.e. to your various iDevices), but lets you "buy once read anywhere" if you purchase outside the app?

A lot of publishers also bundle digital and dead-tree editions. In Germany, publishers charge a lot for subscriptions but usually offer gifts (a toaster, a Zune, whatever) for new subscribers. (Jetzt Prämie sichern! they shout at the consumption sheep.) Does that mean physical items purchased through the app also have to give Apple a 30% cut? Or that you can’t run a different promotion in each store? What about eBay? Does Apple get 30% of your auction price, or 30% of eBay’s premium?

Here I think Apple has once again failed to address the inevitable grey areas that exist or will soon exist in the app ecosystem. I expect that a combination of regulatory challenges, untenable implications of rules (e.g. the eBay case), and market nuances will force Apple to revise the rules, and possibly the percentage, several times over the next year.

If I had to guess at an outcome, I would guess they’ll allow you to sweeten the deal however you like as long as the part that goes on your iDevice costs the same in-app or out. And I think they will clarify that they don’t expect a cut of anything that doesn’t go on the device; and maybe even clarify that you can sell Kindle for iPad for $20 while giving away Kindle for Android free, if that’s your best solution. And finally that yes, you can sell your newspaper for half price on Android as long as the Android subscription doesn’t give you iPad download rights (at which point I think most smart product managers would give up the 30% instead of taking on the engineering challenge).

“Apple Will Destroy My As-Yet-Unproven Business Model”

This argument is really fascinating, and is being applied not only to fly-by-night startups trying to fill some app market niche that was miraculously still empty an hour ago (e.g. subscription aggregators). The interesting ones here are the purveyors of digital media.

The gist is that streaming media services are built on such impossibly thin margins that it’s completely absurd to give up 30%. The only way to survive that and not go bust is to raise prices, and that’s like raising taxes, and so on.

The problem with this argument is that most streaming media services are built on such impossibly thin margins that they are not, by themselves, viable businesses. That doesn’t mean the 30% cut isn’t onerous, but when the people who created the work in the first place are getting as small a cut as they are from the streaming services, I don’t have a lot of sympathy for the middlemen.

I expect this will be a tempest in a teapot at most. The additional charge won’t invalidate anybody’s fake valid business model, nor will it put any real business in the red. Some startups may go belly-up as a result, but isn’t that why they call it venture capital?