The newspaper and magazine industry needed a savior. Apple was ready to save print publications with the iPad and digital subscriptions. Then something went wrong. The problem wasn’t the iPad or the subscription system, but rather a new policy—Apple demanded 30% of all revenue from certain content performed through App Store apps, and threatened to exclude content that was only sold outside its Store. Announced in February, this policy was to have gone into effect at the end of June, but Apple quietly changed it this week due to publisher and developer protests—ones that imperiled some of the best existing App Store apps, and led new developers to kill their plans to create new ones.
Apple’s eleventh-hour change isn’t a complete reversal, though, so questions remain as to what will happen with iTunes subscriptions and subscribers going forward. There are also some lessons to be learned from the mistaken original policy, which unquestionably delayed and possibly stopped the iPad’s industry-wide adoption as a replacement for printed publications. This article takes a look at the policy, some of the responses, and what can be taken away from the experience.
The Background, The Policy, And The Responses
Subscriptions of some sort for iTunes have been discussed since at least 2003, a year that saw Apple specifically rule out the rental-style subscription model for iTunes music downloads—a position that it subsequently maintained for everything from audiobooks to TV shows, movies, apps, and conventional books. However, as iTunes grew further to include newspaper and magazine apps, Apple began to view subscriptions as a worthwhile business model for these particular types of media, and a further revenue stream for the App Store, which was already taking a 30% cut of all app sales, and an identical 30% cut of all content sales made through the apps.
From Apple’s standpoint, the problem was that some developers weren’t selling their content exclusively or at all through their apps. Apple didn’t seem to mind that a store like Sears could place its department store catalog on the App Store and Apple wouldn’t get a cut of the pearl necklaces or power drills it sold. But an online music streaming business such as Rhapsody could offer subscriptions through its own web site, or a bookstore such as Amazon could do the same with reading materials, and Apple wouldn’t share in the revenues that were arguably depleting its own sales. So Apple apparently decided to use the magazine and newspaper subscription service rollout as an opportunity to bring other digital content vendors under its yoke, or drive them out of the App Store.
In February 2011, Apple updated its App Store Review Guidelines to include the following provisions within Section 11.13:
“Apps can read or play approved content… sold outside of the app, for which Apple will not receive any portion of the revenues, provided that the same content is also offered in the app using [In-App Purchasing] at the same price or less than it is offered outside the app. This applies to both purchased content and subscriptions.”
An Apple press release quoted CEO Steve Jobs as providing a clearer explanation of the policy:
“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.”
On its face, Apple’s new policy appeared to be consumer-friendly—particularly for iTunes customers, since publishers had to give Apple’s subscribers the best deal offered elsewhere. But in reality, the policy was making two negative changes to Apple’s prior guidelines. First, it went beyond newspaper and magazine subscriptions, as the language applied “to both purchased content and subscriptions,” which could now include everything from downloaded books to music and video subscription services. Popular apps such as Hulu, Netflix, and MLB could be impacted on the video side, Napster, Rhapsody, and Slacker on the music side, with Amazon’s Kindle and Barnes & Noble’s Nook on the book side. Second, Apple was telling content vendors that they either had to absorb a 30% hit on their current prices, or raise all prices—App Store and outside—to somehow accommodate Apple’s cut. The policy’s “same (or better)” language prevented developers from charging only App Store customers a premium; everyone would have to have the same higher price.
Developers were rightfully outraged. While some stayed quiet, music subscription service Rhapsody went public with a particularly pointed challenge to Apple. “[A]n Apple-imposed arrangement that requires us to pay 30 percent of our revenue to Apple, in addition to content fees that we pay to the music labels, publishers and artists, is economically untenable,” the company blogged. “The bottom line is we would not be able to offer our service through the iTunes store if subjected to Apple’s 30 percent monthly fee vs. a typical 2.5 percent credit card fee.” Rhapsody finished with a threat of its own: “we will be collaborating with our market peers in determining an appropriate legal and business response to this latest development.”
Media responses to the policy were not particularly positive, either. Apple normally can count upon a collection of cheerleaders for any announcement it makes, so the fact that many of the company’s most ardent defenders went silent or spoke out against the policy was another clear indication that something was wrong. Customers were also left to wonder for nearly four months as to whether their books and subscription media were about to get swept unceremoniously out of the App Store.
Seemingly in response to widespread complaints—and despite grudging agreement to the terms by a relatively small number of publishers—Apple quietly changed the App Store Review Guidelines this week to read as follows:
“Apps can read or play approved content (specifically magazines, newspapers, books, audio, music, and video) that is subscribed to or purchased outside of the app, as long as there is no button or external link in the app to purchase the approved content. Apple will not receive any portion of the revenues for approved content that is subscribed to or purchased outside of the app.”
Absent is the prior requirement that “the same content” need be “also offered in the app using [In-App Purchasing] at the same price or less than it is offered outside the app.” Again, the new language doesn’t sound problematic on the surface: it suggests that a publisher can keep selling content outside the app, as long as the app doesn’t directly link out to purchase that content. On the other hand, Apple is no longer barring a developer from offering higher-priced content to iOS customers. The change to the Guidelines suggests that nothing is stopping a publisher from offering iTunes customers a worse deal than other subscribers.
As much as we have appreciated the App Store’s great deals on software, and Apple’s past pledges to offer fair pricing for other media sold through its online stores, the company as a whole puts out very mixed messages about its pricing strategy. Once the iTunes Store become a dominant retailer of music, its famously popular 99-cent songs and $9.99 albums faded away in favor of higher pricing, a change Apple blamed on greedy labels and hasn’t rolled back. In its retail and online Apple Stores, the company routinely charges the full MSRP for third-party products it sells, without offering discounts; it has actually pushed some suppliers to increase their MSRPs to previously unthinkable levels, relying on a core of customers who won’t shop around for better prices. It’s unclear at this point whether it hopes for the same thing to happen with subscription and other App Store content, but the answer is probably “yes.”
Regardless of whether it was rescinded before it went into full effect, Apple’s policy had some decidedly negative consequences. At a time when the iPad was surging, seemingly without boundaries other than the company’s hardware production capacity, it created unnecessary ambiguity as to whether the device would ever dominate the digital newspaper and magazine business—and scared away both publishers and other content providers who otherwise would have been busy making Apple’s newest device completely ubiquitous. Even when its mistake was obvious to most observers, Apple moved slowly to correct it, and then only after lengthy and completely avoidable grumbling from publishers. As a direct consequence of Apple’s subscription plans, the venerable Financial Times scrapped its iPad newspaper app, developing a brand new web-based alternative and recommending that its customers subscribe to that, instead. Rhapsody and others began to explore their legal and business options; competing tablets, including ones based on Google’s Android, suddenly began to look attractive to the publishers and developers Apple had been wooing.
It’s unclear whether media, legal, or business pressure was ultimately responsible for Apple’s change in policy, but regardless of why it happened, here are some of the lessons that Apple, developers, and consumers should learn from this experience.
* For Apple: Big new cash grabs aren’t just bad ideas; they’re unseemly for a company that’s doing as well as this one. Apple sells books, music, and videos, so it knows exactly what its 30% demand would mean to existing developers—huge, unpopular price increases, or leaving the App Store. Any demand that risks locking out well-known apps over money is probably not a good idea. Killing previously permitted competitors using tricks rather than innovation isn’t cool, either. Apple could easily have formulated a more smaller and more narrowly-tailored revenue-sharing scheme for recurring newspaper and magazine subscriptions, and not tried to soak book and other media vendors in the process.
* For Developers: While the initial $99 developer agreement is cheap, Apple is not running the App Store as a charity—and doesn’t feel any responsibility to developers who give away iOS apps, sell content outside the store, and pocket all the cash without sharing it. Annual fee aside, Apple seems to view those developers as freeloaders, and it wants a cut, somehow. And yes, Apple is willing to risk losing those apps over money. Moreover, in the unlikely event that you’re a big enough developer to bring new customers into the App Store on your own, they’ve become Apple’s customers, too. Apple may well leverage their subsequent love for the iOS device—and the threat that you might lose that customer to a competitor (perhaps even Apple) if you leave—to try and push you towards terms you would otherwise find unacceptable.
Also, despite Apple’s claims that it doesn’t like dealing with developers who complain to the press, if no one had protested loudly and publicly, this policy—and others—would have gone into effect, and made life worse for a lot of people. It’s bad enough that App Store customers would have been charged more for their subscriptions and content, but even worse that the price increases wrought by the “same (or better)” requirement would have affected non-Apple customers, too.
* For Consumers: As great as Apple’s devices are, and indeed they get better every year, there are still some dark potential consequences to putting all your chips in the iOS basket. Right now, prices in the App Store are addictively low, putting software and content in the hands of more people than ever before. Apple has maintained that it works on behalf of consumers to try and keep prices reasonable, and in some cases it does, while in others, it clearly doesn’t. Here, Apple was running a dominant, locked-in software store, and exerting the pricing pressure entirely on its own. Unless you think that the aforementioned content providers are freeloaders, or that you’re not paying enough for the books and other subscription services you’re buying, it’s hard to see what happened here as anything other than a thankfully averted catastrophe.
Will Apple try something like this again in the future? Are we about to see subscription prices in the App Store jump 30% higher than they are outside of it? It’s impossible to say for sure, but Apple’s assumption appears to be that people come into its stores expecting to pay a premium, and don’t seem to care that they are. We’ll leave it to you to determine whether that’s true, but in any case, the company should use this as an opportunity to realize that long-term iOS growth and improvement are more important than short-term wallet padding. Everybody loses when publications and other content providers threaten to leave the App Store based on cash grabs and myopic policies, even if the bad ideas are withdrawn at the last moment. Apple’s supposed to be bigger and better than that; in the future, hopefully it will be.