Apple’s Subscription Morass

Watching a sure-footed product company like Apple grope its way through the subscriptions morass, you would think that we were on completely uncharted territory. But what makes Apple’s moves to generate revenue from the platform it has created so interesting is watching the way that it ignores all other experience with the internet and retailing.

Apple seems very jealous of the value it brings to the marketplace. Steve Jobs’s statement this week underscores that. In the mind of Jobs, Apple users inhabit a sui generis Apple universe where they emerge ab nihilo from the iPhone and iPad platforms. How else to explain this point of view:

Our philosophy is simple—when Apple brings a new subscriber to the app, Apple earns a 30 percent share; when the publisher brings an existing or new subscriber to the app, the publisher keeps 100 percent and Apple earns nothing.

Of course, in the real world there is no such thing as an existing subscriber or bringing a new subscriber to the app. Or, I should say, that distinction can only apply to new companies with new apps where the discovery might take place in one venue or another but not both.

With any sort of existing media or service, the consumer’s relationship with that media is too complex to give one side or the other “origination” rights. If I sign up with Netflix because I finally have an iPad app to watch on, does that make me Apple’s customer or Netflix’s customer, especially if my knowledge of and comfort with Netflix is based upon my friends and their experience with the service.

Now, don’t get me wrong, Apple deserves to be able to generate continuing revenue from having built the iOS platform, maintaining and expanding it. The question is whether 30% is a realistic rent for that platform.

A good comparison might be the luxury mall. Apple thinks of itself–because it is–as a premium brand. Unlike Android, it deserves a premium for access to its platform. The mall business is similar. There’s a lot that goes into building a mall that appeals to bigger-ticket buyer. You acquire the land, get anchor tenants, build the amenities and so on. It’s as capital intensive–more so–as building a platform like iOS. The more foot traffic the mall attracts, the better it is for the tenants and the more the mall deserves a cut of store revenue.

Mall developers generally charge their tenants a fixed fee plus a percentage of sales as rent. So Apple is following the same model.  But the rents malls charge are under 10% of revenue.

That’s the great mystery of Apple’s subscription plan. The 30% figure makes sense for books but it hardly promotes the use of Apple’s platform for subscription-based businesses. We’ve already heard some wailing from Michael Arrington that Netflix, MOG and Rhapsody will be sunk by the 30% charge.

The story of content on the internet is one where distribution margins have collapsed. Apple, whether it wants to accept it or not, is a distributor when it comes to operating iTunes and iOS. Charging 30% for that is yearning for a lost world where retailers could mark up merchandise to generate a 50% gross margin.

Apple will inevitably wake up to this reality. The forces at work are just too big–bigger than Steve Jobs, in fact. Google has already countered with their own plan to push subscriptions at 10%. That should win out not because Apple worries about Google but because 10% makes much more sense as a fee for the distribution platform.

While we’re waiting, however, media’s transition to apps will be slowed. If porting content over to apps were a simple solution to the problems with the media’s business model, there wouldn’t be much complaint about Apple’s trading terms. But apps will require more than just a plug-and-play format change.

Media will have to be reconstructed for app distribution. Margins will be squeezed, losses incurred. Apple would be better off allowing more access to media companies that want to experiment with new products and boil the frog–slowly raise fees–later on as these develop traction.

It would be more efficient to raise rates on profitable businesses than to impose high fees that limit anyone’s ability to find out how those new profitable businesses should be structured. But Apple doesn’t seem to see it that way.