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The iPad 2: lipstick on a pig

Apple’s new subscriptions policy takes the lustre off launch.

As Apple gathered its fans to a convention centre in San Francisco last night to announce its latest wares - including a thinner, lighter, camera-touting iPad 2 - away from the razzmatazz a row is growing about Apple's latest attempt to screw even more profit from media, music and other content publishers.

The brouhaha centres on Apple's App Store, an online archive of applications from which users can download apps to their iPhones and iPads. In mid-February, Apple quietly announced a new App Store subscription model, designed to further line its already-bulging pockets.

The new subscription model stipulates that from 1 June, any publisher of content in the App Store that wishes to sell subscriptions to that content must pay Apple 30 per cent of the subscription revenue. That includes publishers of newspapers, magazines, even music and video. Thirty per cent.

But Apple went further. It announced that it will not allow publishers to charge more for a subscription in the App Store than it charges punters directly, via their own websites for example. It also won't let publishers put a link to an external subscription page in their applications available in the App Store, in an attempt to bypass the "Apple tax".

Frustratingly for publishers, but undoubtedly actually in consumers' interest, Apple also said that customers subscribing via iTunes and the App Store must opt in to sharing their data with the publishers, potentially denying publishers a lucrative source of information about their subscribers they can use for marketing and tailored advertising.

Break any of these rules, and Apple will simply kick the publication out of its App Store. Apple defended all of these moves by saying that its new subscription technology that links iTunes (where 200 million people already have their credit card details stored) to applications running on the iPhone or iPad will take the hassle out of subscriptions for customers, and this will in turn drive more subscribers to publishers' products. In the words of Apple CEO Steve Jobs:

"Our philosophy is simple-when Apple brings a new subscriber to the app, Apple earns a 30 per cent share; when the publisher brings an existing or new subscriber to the app, the publisher keeps 100 per cent and Apple earns nothing. 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. We believe that this innovative subscription service will provide publishers with a brand new opportunity to expand digital access to their content onto the iPad, iPod touch and iPhone, delighting both new and existing subscribers."

Unfair play

First to cry foul play were subscription-based music services such as We7, Last.fm and Rhapsody, who said their margins are already far too thin for them to afford to give Apple 30 per cent of subscriptions just for letting them put their application in the App Store. We7's CEO and founder Steve Purdham said that Apple's subscription model was "economically unviable", while Last.fm co-founder Richard Jones stormed: "Apple just fucked over online music subs for the iPhone."

Rhapsody said in a statement that, "An Apple-imposed arrangement that requires us to pay 30 per cent of our revenue to Apple, in addition to content fees that we pay to the music labels, publishers and artists, is economically untenable. The bottom line is: we would not be able to offer our service through the iTunes store if subjected to Apple's 30 per cent monthly fee vs a typical 2.5 per cent credit card fee."

The objections from subscription-based music services like Rhapsody are particularly noteworthy: Apple doesn't currently have a rival offering in the space but after its acquisition of music streamer Lala last year, it's widely rumoured to be about to enter the throng. Making life tough for the music streamers, who survive on particularly slim margins, makes good business sense for Apple if those rumours are true.

The chief executive of Pearson, the publisher of the Financial Times, said on Monday that it may pull the FT out of Apple's ecosystem if it refuses to give up customer information. "It is unclear how their proposal is going to work, we are still talking to them," said Marjorie Scardino. "The important thing to remember is there are many, many tablets coming out and multiple devices ... [from] Kindle to mobiles. If indeed Apple are not happy to give us customer data then maybe we will get it somewhere else."

Natural monopolist

So what's really going on here? The incredible success of Apple's iPhone and then iPad mean that Apple has become a natural monopolist in the distribution of applications and content for the biggest-selling smart, non-PC devices. It's sold over 16 million iPads and 100 million iPhones. It's in an enviable position, and it knows it.

As the launch of News Corp's iPad-only newspaper The Daily in February demonstrated, news organisations know they must tap into this potential audience, not least because other ways of getting readers to pay for content online have had little success. In other words, publishers are desperate. Desperate enough, Apple reckons, to give up a whopping chunk of their subscription revenue for the "honour" of being in the App Store.

Apple's attitude seems to be that the publishers have little option but to play in its sandpit, so it can charge them pretty much whatever it likes. But with Apple already making record sales and profits - it made $6bn profit on $27bn in sales in its latest financial quarter - that 30 per cent and the other restrictions are hard for publishers to swallow.

It's little wonder that if the Wall Street Journal is to be believed, the Justice Department and Federal Trade Commission are "looking at" Apple's new rules for possible antitrust violations. At the heart of the issue isn't the 30 per cent fee but that requirement that in-app subscriptions have the same price as offers outside the app.

Rhapsody has said that, "We will continue to allow consumers to sign up at www.rhapsody.com from a smartphone or any other internet access point, including the Safari browser on the iPhone and iPad. In the meantime, we will be collaborating with our market peers in determining an appropriate legal and business response to this latest development."

If Apple sticks to its guns, and there seems little likelihood of it changing its mind, it's possible that quite a few publishers will have no option but to abandon the Apple ecosystem. If they can't afford the 30 per cent levy they can't put up prices without putting them up across the board, and that is sure to make them look expensive compared to rivals who may or may not be in the Apple fold.

Of course they do have alternatives: Google has an application store for its Android smartphone devices and it's said it will only charge publishers 10 per cent of subscriptions. That could suddenly make the Android platform rather attractive to publishers, though they are of course mindful that Android trails Apple's iOS operating system by market share.

As of September 2010 Apple had 56 per cent mobile web consumption market share with iOS, compared to 25 per cent for Google's Android, according to Quantcast. But Android was shown to be gaining ground on iOS, according to the figures, and this news may give it another shot in the arm.

As for consumers, many will be unaware of the terms Apple is enforcing on content providers, and those who do may care less. But if some of their favourite content providers start to boycott their beloved iPads they may just find tablets from the competition like Motorola, Samsung, HTC or HP that bit more attractive. So all in all Apple's news looks like it could be something of an own goal, and one that should be getting more attention than their latest shiny gadget.

 

Jason Stamper is NS technology correspondent and editor of Computer Business Review.