Daniel Eran Dilger
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Does Apple deserve a 30% cut of iTunes in app subscriptions?

Daniel Eran Dilger

Get ready for the iPhone Crisis-Gate of February 2010: Apple is evil for demanding a 30% cut of subscription sales. But is this issue of the month really a legitimate outrage?

¿Apple se merece un 30% del valor de las suscripciones hechas desde dentro de las aplicaciones? (en español)
Apple has just released new App Store policies for titles that involve subscription content, in concert with the coming release of iOS 4.3, which will support in app subscription sales.

What’s not new is the idea that Apple wants in app subscriptions to pay a 30% fee just like other in app purchases. What is sort of new is that any titles that involve subscriptions or content purchases will have to offer an in app option, and that option can’t be priced higher than elsewhere.

That’s only sort of new because Apple has never supported non-in-app purchases in most cases, only allowing a few companies, like Netflex and Amazon, to sell subscription-based or atomic content elsewhere that could be called up from within their app. That loophole has now been closed.

It’s also forbidden to expressly link to an external market for things that can be purchased within the app, although developers can incorporate their own subscription sales independent of Apple’s store. That means I can’t sell an app that directs users to my own website to buy a subscription to my content, although I can sell direct subscriptions to customers I have found on my own. And if I sell subscriptions, in order to put my app in iTunes i have to make it possible for users to buy subscriptions through iTunes without trying to make it more expensive to entice customers away from using iTunes.

Critics are generating some hysterical responses to this, with at least one <em>CNET</em> blogger announcing that he’s going to sell his iPad because this is just too much to take. I wonder if he’s also going to sell his kid’s Nintendo Wii, Xbox 360, and PlayStation, all of which demand a far larger cut from game developers just to sell games for those platforms.

Aren’t subscriptions different?

There’s little controversy left about whether Apple “ought” to charge developers a cut for selling their apps. But some have noted that selling a subscription is different. One analogy is that Apple is acting like a newsstand, selling magazines but refusing to allow publishers to digitally insert those subscription cards that fall out as you read them.

The difference between iTunes and the real world of paper periodicals is that when Apple sells a subscription within iTunes (or within the app), Apple must also service the subscription, managing the delivery of new content and acting as a toll booth. So rather than acting as a virtual retail newsstand, Apple is acting more like FedEx, charging for each delivery, whether it’s a one time purchase of “War and Peace” or a regular delivery of “Readers Digest” or the beer of the month club.

But Apple isn’t just shipping; it’s also servicing the subscription, from handing the sale to fulfilling the order throughout its duration. Amazon is certainly familiar with shipping costs. Imagine the tech media getting unbuttoned about UPS, USPS, and FedEx “charging for each and every time” you get a book or magazine, even when you order the same book more than once (!!). Oh the humanity.

Who’s minding the mint?

What about sustainability? It is improper for Apple to charge a set percentage of revenue when a media source might not even be making much per sale? Again, let’s ask Amazon or the New York Times or Netflix about how much of their profits are eaten up by postage. I know I’ve bought items from Amazon that were less expensive than their shipping, and Amazon didn’t make any money on the shipping charges.

Boo hoo. Send in the profit police. Nobody should make money on delivery if the shipper isn’t also getting rich! Isn’t that a law somewhere? I bet there are also developers who make apps, who end up going out of business even though Apple makes money off their failed endeavor. But you know what? Apple also makes no money on free apps, or podcasts, or iTunes U, even though it spends some significant resources supporting all those millions of transactions on its servers, even in cases when the content is hosted elsewhere.

Not everyone makes money all the time. Apple certainly makes very little on a computer it sells to people who bring it back three times in a row after breaking various things that are fixed under warranty even when they needn’t be. That kind of thing is an expense that occurs when you do business.

Getting what you pay for

The alternative to iTunes’ content market which individual vendors must pay a revenue cut to support is the Google Way, which makes content free when it’s placed next to ads. The downside to this business model is that instead of getting 70 percent of retail proceeds, the content generator gets a tiny fraction of the minimal ad revenue generated. That’s why periodicals are currently imploding.

The long term result is also different; rather than creating value in establishing branded periodicals with earned reputations, you end up with a lot of content from unknown sources all pretending to be equally legitimate and important. You also lose any sense of who is behind a given article, because in the Google world, everything is a search result rather than something you select from a known source.

There’s a big difference between searching for “Volkswagen” and consulting Car and Driver. One gives you all manner of results crafted by SEO experts, who only care about ad revenue, while the other gives you organized reports written by professional writers and managed by editors, who care more about their own reputations and professional standing.

That has a profound impact on the kind of content each model produces. In a periodical market, users are courted as customers, treated to engaging, informative and important content. In a search results market, users are not the customer, advertisers are. Users are fed garbage as that is as cheap to produce as possible, and it’s the advertisers who are courted with service and innovation. That’s why ads load first on web pages. You’re just along for the free ride. You’re not selecting products in a market; you are the product being sold to advertisers.

Another analogy: a periodical market works like television, where you pick a channel you want to watch and change the channel if the content isn’t up to your standards. Google’s search market is like YouTube, where you browse through lots of garbage looking for things that might be worth a fleeting chuckle. Of course, Apple’s video market actually is actually iTunes, where you can find a la carte TV, Podcasts and iTunes U, something I prefer over ad-based TV, which like the web or YouTube, caters to advertisers over viewers.


1 Alan { 02.23.11 at 2:17 pm }

Supposedly SJ sent the following message:
“We created subscriptions for publishing apps, not SaaS apps.

Sent from my iPhone”

If I understand that correctly, apps like Netflix would be safe, but Kindle would be charged a fee. I am no fan of Amazon, I know without any competition they would get away with charging the absolute maximum possible. As an Amazon seller it galls me that they take a 9% cut on every sale I make, but smaller sellers have no real choice but to sell on Amazon. Some profit is better than none. They also have a bad habit of undercutting sellers which is very easy since they don’t charge their 9% commission on themselves which makes it hard to even compete with them on products they choose to carry.

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