Apple's Subscriptions Service Upsets the Cart

Apple is not a shy company, and its new iOS subscription capability for iPads, iPhones, and iPod Touches is a bold grab for a cut of the digital content action. Publishers and media companies aren't happy about Apple's new scheme -- particularly the requirement they offer in-app purchase for subscriptions at the same or better price as they mak

e available outside iOS, as well as the fact that Apple gets 30 percent of all revenue from in-app digital media purchases. Media developers don't want to give Apple that much money for being a distribution channel to their readers, listeners, and viewers -- especially when Web distribution is significantly cheaper.

But this is not simply a case of a greedy, powerful Apple strong-arming defenseless media companies. Apple's move exposes a long-flawed business model at most media companies, one that Apple has clearly decided will not be its burden. I doubt that Apple cares about reforming the media industry's broken business model, but that may end up the result nonetheless. As the industry and Apple work their way through this -- you can expect some changes as the corporate dance gets serious -- we may end up with a healthier business model for online media, and thus for creators, developers, distributors, and customers.

[ InfoWorld's Neil McAllister shows how the Mac App Store may be the norm for future developers. | Keep up on key mobile developments and insights with the Mobile Edge blog and Mobilize newsletter. ]

The Publisher's Dilemma

Bear with me as I explain the real problem, so I can then illustrate how Apple's move could lead to a better result for developers, content creators, and customers. Actually, make that problems (plural), as what ails print publishers is different from what's eating music and video streaming businesses and what concerns online bookstores -- all of whom are upset by Apple's policy.

In the print publishing world, most magazines and newspapers are sold through heavily discounted subscriptions meant to create a large base of readers. These subscribers are then sold to advertisers, through both ads and direct marketing. That's why you see subscription prices of $12 per year for monthly magazines that cost at least that much just to print and mail (roughly $1 per copy, and as much as $4 for the thick, glossy magazines). The subscription fees don't pay for the creation of the content, nor for the circulation marketing that gets the subscribers in the first place. Publishers make their money from advertisers.

At least they used to, back before Web advertising and search advertising decimated the print ad business for most publications. Today, print publications depend more on their print subscription prices, which is why they've risen in recent years. At the same time, print publications have learned the hard lesson that having given away their content for free online has trained readers to believe it has little value. And now that online advertising income is proving insufficient to pay the bills -- the money is instead flowing to Google and perhaps soon to F

acebook -- publishers want to charge for online subscriptions.

Of course, nearly everyone is afraid to start charging for online content, fearing that a world of readers used to free won't pay up. But the iPad could change that; thanks to the success of paid apps and games, publishers figured they could charge for content on the device. Apple figured the same, so it wants a cut for making all that possible. What surprised publishers is that Apple wants the same cut it gets for everything else -- and won't let publishers circumvent Apple's share by linking to their own websites rather than using iTunes as the payment system.

Apple has made it clear that publishers can sell subscriptions outside of iTunes and thus not pay Apple, but they must also sell through iTunes, where Apple does get a cut. Thus, publishers fear that most users will subscribe or renew on the iPad, where they're accessing the content. As a result, iTunes will become the default subscription vehicle, making Apple's 30 percent cut the norm. Publishers already cough up cash to firms such as Publishers Clearinghouse to bring new subscribers, but these are one-time payments, while subscription commissions to Apple would be permanent and ongoing.

Publishers that charge realistic fees for print and online content are thrown off by the potential loss of revenue. Take the Economist, for example. The weekly costs about $125 per year for a print subscription that includes free access on the Web and via the iPad. (The Economist's iPad app is one of the best.) The electronic subscription costs $110. My estimate is that it costs the Economist about $50 per year per subscriber to print and mail its issues, so the net income for the print subscription is about $75.

Compare that figure to the net income on the online subscription if sold via iTunes: $77. It's a wash, even after Apple's 30 percent cut. But the Economist's classified ads aren't in the iPad or Web versions, so that revenue is lost. The $33 that Apple would get as its cut from an iTunes sale is money that the Economist is surely counting on keeping. And from the data I've seen, it would cost $10 to $30 -- but just once -- for the Economist to get a new subscriber through other channels. The economics for the New York Times and the Wall Street Journal are similar.

Granted, few magazines cost as much as the Economist, which charges a high price in return for high-quality content and is much less reliant on ads. A more typical magazine is Martha Stewart Living, which charges $24 for 12 monthly issues. The typical new-subscriber bounty for it would be about the same as its first-year subscription income, whereas if it accepted Apple's model, it would pay $8 per year and keep $16. MSL would lose money only on subscribers who subscribe via i

Tunes and renew three times via iTunes. So the get-'em-in-with-a-low-price publishers may actually prefer Apple's approach. (Interestingly, MSL charges iPad users $4 per issue and newsstand customers $5; after commissions, they each net out to about $2.75 in revenue.)

There's also the pesky issue that Apple doesn't acknowledge: When a publisher does its own direct marketing or hires a firm to which it pays a bounty, that's active marketing. Apple's not actually going out and getting subscribers; it's just processing the subscriptions of those who have already found the publisher's iOS app. In that case, Apple doesn't deserve anywhere near the reward of a direct marketing firm for each subscriber.

Still, once you get past the definition of a fair price, the fact remains that the underlying issue is that you have an industry that has devalued its own product for years by emphazing low- or no-cost subscriptions but now needs subscription revenues to fill in the ongoing advertising shortfalls. And you have Apple saying it wants a cut of those revenues for distribution on the platform it owns -- and which happens to be where publishers think they have the best shot at picking up paid subscriptions.

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