Apple's Subscriptions Service Upsets the Cart

The Streaming Media Dilemma

In a way, companies such as Netflix and Rhapsody are worst off in Apple' s new scheme. These companies' subscription pricing models assume essentially that distribution is free. Users pay for their own bandwidth, whether to their home TVs and computers or to their iPads. That's not quite right: The streaming providers have to pay Internet backbone providers for the bits they move (that's what the Comcast-Netflix fight last fall was all about). But they didn't foresee also paying Apple.

Ironically, these businesses would have to pay a cable company to carry their streaming "channel" (the cable companies shell out for only the big outlets that draw lots of viewers, such as ESPN and Disney; the smaller channels all pay to be carried). Apple is acting as if it were a cable company, charging access to its subscriber base -- and blindsiding Netflix, Rhapsody, and so on.

The Book Publishers' Dilemma

Finally, there's Amazon.com and Barnes & Noble, which will need to offer in-app e-book purchases under Apple's new rules and thus pay 30 percent to Apple for each sale made via iTunes. Both Amazon and B&N charge book publishers about that amount for each e-book they sell on their websites; Apple's new rule basically takes that commission away from them for e-books sold via iTunes. Either Amazon and B&N must forgo their commissions or take it from the book publishers if they want an iOS presence.

Where the Dance is Leading

I believe that Apple's policy is shining a bright light on the media industry's dirty secret: Its business model is broken. When the iPad was first announced, media firms hoped it would provide a new vehicle for which they could charge users realistic fees -- basically relying on Apple to give them a platform where they could avoid their old mistakes. Book retailers thought they could get a free ride on iOS devices to build their sales base; the same goes for streaming media providers. Why they all thought Apple wouldn't change for that privilege escapes me.

Still, it's true that Apple is overreaching. A one-size-fits-all pricing policy of 30 percent for any digital content ignores the reality on the ground. The economics of different media segments vary. Charging developers 30 percent of an app's price was reasonable -- it costs far more to establish a presence in a retail store. The music and video industries swallowed Apple's charge because their retail sales were declining (and they pay more to retailers than Apple wanted) in favor of unpaid pirate downloads -- but they did persuade Apple to raise its initial prices, so both they and Apple netted more per sale. However, the music and video industries continue to feel ripped off.

For sales of a single-copy book, magazine issue, video rental, and the like, a 30 percent commission is probably fair. A book publisher gives a retail bookstore 50 percent or so for a physical book, after all, as do magazine publishers for their newsstand sales.

You can argue it both ways on magazine and newspaper subscriptions. Thirty percent is a huge portion relative to the usual new-subscriber bounties, and it's a much higher rate than what the printing and mailing typically costs (10 to 20 percent, based on audience size) for a print subscription. Plus, the digital production is not cheap -- it's costlier than print design and layout because of all the custom coding required -- and Apple's model doesn't account for that.

On the other hand, smaller publishers in particular face daunting costs to attract and service readers, so the Apple model likely skews in their favor -- just as the app store model favors small developers over large ones. And for publishers of all sizes, the iPad represents its best hope for new revenue.

What's fair, I believe, is that Apple charge $5 to $10 for each new subscription (not a percentage) for publications and streaming media -- but nothing for renewals -- for its passive role in signing up new subscribers. It would also be fair for Apple to charge a 5 or 6 percent handling fee for processing the transactions, including renewals, done through iTunes from that point on -- just as a credit processor does. In other words, Apple should get a bounty for facilitating the new business but no perpetual cut beyond the processing fees for handling the transactions.

As for Amazon and B&N, they should split the commission with Apple for e-book sales made via iTunes, with Apple taking 10 percent (after all, its role in the sale is more passive) and Amazon or B&N taking 20 percent. In announcing the new subscription policy, Apple CEO Steve Jobs said his philosophy was that Apple deserved a cut for the transactions it brought to the table and nothing for those that happened outside. In the case of these e-books, it took both Amazon and Apple, or B&N and Apple, to get the customer, so they should split the commission ultimately paid by the book publisher.

Rhapsody has made noises about legal issues, suggesting antitrust claims could be in the offing. The United States already lets monopolies get away with a lot, so that's a hard row to hoe. But the feds also hold platforms to a higher standard than other businesses, so at the very least a troublesome inquiry could follow. In fact, the Wall Street Journal reported yesterday that the Justice Dept. has begun an informal probe into Apple's subscription rules, and Reuters reported today that the European Union has also begun inquiries.

Apple does have one possibly strong argument to deflect such a probe: competition from Google's Android platform. Android provides a popular alternative for those who don't like Apple's terms; in fact, some publishers are eagerly developing subscription apps for Android, as well as for HP's forthcoming WebOS 2.1. Google is already offering its own One Pass checkout system for publishers to use for both their online and mobile content, charging a 10 percent commision -- much less than Apple. (But let's not forget Google's very media-unfriendly moves, such as its trying to corner the market on old books and its scraping of others' content in search results. There are two devils for media firms to dance with, not just Apple.)

Ultimately, Apple needs a thriving market of digital content to keep the iPad's value proposition strong, so it can't be so stubborn that it drives away content providers. The media industry probably needs Apple more than Apple needs them, but they still need each other to significant degrees. We've seen Apple compromise with the music and video industries, as well as with Adobe on the iOS-export-from-Flash tool that Apple initially banned. It took saber-rattling, the attention of the feds, and a public war of words.

But hey, that's business. Apple has given media companies until June 30 to comply with the new policies -- leaving 14 weeks for negotations.

If at the end of the day, media providers can finally get customers to pay reasonable, realistic amounts for quality content, everyone wins -- including customers who today are being fed increasing amounts of junk scraped from search engines and provided by unpaid hobbyists because that's how media companies handle the decline in revenues.

Apple's moves may finally jolt the media industry into pricing that makes sense for all concerned, while ending the unhealthy business models that threaten so much of that industry's very survival. Of course, Apple's moves could also have the opposite effect: Publishers could lower subscription fees even more to reduce the "iOS tax" and try to make up the reduced revenue elsewhere. That would likely mean cutting content creation costs and filling their e-publications with too many ads; if so, we can expect crap such as The Daily iPad publication (with which Apple chose to launch its subscription service) becoming the norm. Let's hope not!

This article, "Apple's iPad subscriptions: Troubles all around," was originally published at InfoWorld.com. Read more of Galen Gruman's Mobile Edge blog and follow the latest developments in mobile technology at InfoWorld.com. For the latest business technology news, follow InfoWorld.com on Twitter.

For comprehensive coverage of the Android ecosystem, visit Greenbot.com.

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