Monday Note

Apple’s upcoming subscription plan is making large publishing companies hysterical. Rightfully so. Some of them built a complete business model for the iPad based on a commercial agreement that is now being revoked. Apple is not only changing the rules, but it does so in the worst possible way — in their usual cold My Way Or The Highway manner. But one of the most interesting aspects of the maddening change is the strategic thought behind Apple’s move.

Let’s rewind the tape.

When publishers began to create content applications for the iPhone and the iPad, they found the in-app purchase feature was the perfect monetization tool: one click on the “buy for $0.99″ button… another on “confirm”… Done. Simple, seamless, friction free. And a 30% cut for Apple’s content delivery and payments services.

Weirdly enough, breaking its well-known controlling habit, Apple left open the possibility for the publisher to sell subscriptions directly to the reader. From the app, the user who wanted to buy a subscription was redirected to the publisher’s website. There, bypassing the iTunes payment system, the publisher collected the required personal and billing data. This direct connection to the reader was so attractive it drove many publishers to build their own subscribers recruiting machine on it (some even take inspiration from wireless carriers and  subsidize iPads in exchange for a two years subscription).

In the treacherous transition to digital, retaining control over subscriptions is crucial. Magazines, whose historic readership is mostly based on subscriptions, insist on preserving this model in the digital world. To get an idea of the subscriber’s importance, consider the following: a newsweekly will spend $150-200 to recruit a print subscriber through tons of direct mail, gifts, special offers and incentives. For a yearlong subscription, all bonuses included, the per-copy price could go as low as 30 cents, while the newsstand price will be around $4.00 or $5.00. The explanation for the gap: advertising money, which represents the bulk of the industry’s revenue. A subscriber is, by definition, a regular consumer; it is part of a well-defined readership that won’t require a complex supply chain able to adjust the number of copies shipped to European airport kiosks or Chicago newsstands.

For daily newspapers, the equation is more complicated. With a few exceptions, their subscription base is not as strong as the magazines’s. This makes dailies more sensitive to copy sales fluctuations influenced by the news cycle, the look of a front page or even the weather. And, above all, the advertising market likes regularity. In the digital world, those who choose the paid-for model therefore want to gather as many subscriptions as possible. Forget the clever the single copy micropayment system, for digital publishers, subscriptions are the Holy Grail. A strong subscriber base will provide: a) a recurring revenue stream, b) a more attractive delivery medium for advertisers who like the subscription’s predictability and, c) cash “float” because subscription fees are paid upfront. In addition, the smartest publishers use CRM to increase the per-subscriber yield and sell ancillary products.

For publishers, regardless of price consideration, subscribers and their related data are critically important.

The bad news hardly came as a surprise to many of us who found strange that Apple allowed content providers to bypass its transaction system for the most promising part of their revenue stream. In the long run, how could Apple limit itself to its 30% cut on a $0.99 purchase, and leave a $100 or $150 yearly subscription unmolested? It was just a matter of time before Apple decided to plug this revenue leak. The grace period was probably the time needed to build a subscription system able to match the App Store’s global scale.

Apple could have acted nicely and notified publishers that, sometime in the first half of 2011, it intended to deploy a new version of its App Store along with its own subscription system — with the unpleasant effect of closing down the direct subscription loophole. Publishers would have bitched and moaned, but the parties would have negotiated a deal in which the Cupertino guys would have yielded one sixteenth of an inch to frustrated but resigned contents providers (come on guys… we all know it had to end that way). This is just a matter of balance of power. Apple will soon be a $100 bn/year company and the combined revenue of the US publishing industry both for magazine and dailies is less than $60bn.

No kid gloves in Apple’s secretive world. Three months ago, without explanation, Apple began withholding approval of new apps using the subscription loophole. Wondering publishers were left without answers.

Then came terse emails recalling the §11.1 of the App Store Review Guidelines :

11.2     Apps utilizing a system other than the In App Purchase API (IAP) to purchase content, functionality, or services in an app will be rejected

with the following the punch line :

For existing apps already on the App Store, we are providing a grace period to bring your app into compliance with this guideline. To ensure your app remains on the App Store, please submit an update that uses the In App Purchase API for purchasing content, by June 30, 2011.

Bam! Publishers, consider yourself “served” — as in subpoena, not service…

Needless to say, most media companies went ballistic. On this side of the Atlantic, anti-trust watchdogs have been called in. Last week, the French National Daily Publishers Association (SPQN) — encouraged by the Finance Minister Christine Lagarde(!) — said it will ask the Competition Authority to look into the matter. In Belgium, the Minister of Economy is prompting an inquiry into Apple’s possible breach of the law. The European Commission’s involvement is likely — and should not be overlooked by Apple.

Multiple lawsuits by antitrust bodies or trade associations could be seen as pointless: it will take years — in a market that moves at lightning speed — and it will burn huge sums in attorneys’ fees. On another hand, it could be a way to obtain better conditions in the App Store subscription system: a better rate than the usual 30% and, even more important, access to user data.

Frustrations aside, Apple’s move is not the end of the world. For the App Store, if Cupertino relinquishes control on a minimum of consumer data, the damage is bearable. As for pricing, a well-managed transaction platform with big volumes could cost as low as 15% of revenue, or less. If customers want the comfort and the ease of use of the App Store, fine. It would be foolish to ignore them. Simply, as a rule of good management, a premium platform should be reflected in the retail price: a subscription priced at $99 on the publisher’s platform should be set at $119 on the AppStore — this is similar to the situation where a MacBook is more expensive than a comparable Wintel laptop.

From a broader standpoint, Apple’s move could even result in an opportunity for publishers. Apple’s Apps system is fantastic for software or games, but not necessarily for content applications (see previous Monday Notes on the subject:  iPad publishing: time to switch to v2.0 , Rebooting Web Publishing Design , Key Success Factors for a tablet-only “paper” ). In fact, an HTML5 website, designed for the iPad and the iPhone could be a good solution: it could give access to any kind of store — proprietary or multi-titles such as a kiosk — in which publishers will retain control over every critical dial. For media store development, the technology is on the publisher’s side. Scores of vendors are about to propose one-click payments, from PayPal Mobile Express check-out to… cell phone carriers working on systems where users buy online and are charged on their mobile bill.

In other words, there is life outside Apple.

One of the most interesting questions is Apple’s underlying strategy. In a nutshell, Cupertino is betting on “many small” rather than on “few big ones”. Let me explain. Publishers, such as The New York Times, Condé Nast or Le Monde are good at managing subscribers; they purposely maintain sizable staffs and they want to replicate their know-how online. On the contrary, small publishers can’t come up with the resources required to go after subscribers. The new App Store is designed for them. Suppose a group of 15 good reporters, focusing their work on high value editorial. Monetizing their work is a headache. Now Apple comes and says:

“Guys: our full-feature App Store will take care of all your hassles. For a flat 30% fee of your sales made on iPhone and iPad (and maybe on Macs though the new Mac App Store), we take care of: content delivery, its referencing, the back-office, the payment system, and we wire the money to your bank account every month.  And, Hey!  If by any chance you want to sell ads within your app, we can do that too in return for a 40% fee. All you need to do is to focus of what you are good at –producing a sharp e-publication, whether it is a tech blog, or a nicely designed architecture magazine — and price it wisely (preferably low, forget about the physical newsstand). We take care of the rest. One more thing. Consider what we did with the iPod, the number of iPhone and iPad sold last year [see Jean-Louis' column below],  you get the picture: we are aiming at global domination for content delivery mobile devices.”

Say Apple makes this pitch to a respected blog making a mere ARPU of $2 per visitor and per year from ads. Will it resist?

—frederic.filloux@mondaynote.com

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