Monday Note

Last’week’s Part 1 column about Apple’s dominant’s position in the tablet market triggered an abundance of comments and emails, both on the Note’s blog and on the Guardian. All interesting, most well reasoned. But, for some people, it’s always funny to see how an Apple topic can turn religious. Question a few basic facts and you’re automatically labeled as a foe, as a member of the anti-innovation camp.

At the risk of repeating myself, here’s my perspective: my day job is to try and find sustainable news media business models in the digital world. No more no less. I set aside the fact that I’ve been a big fan of Apple products since 1986 and that I’ve always admired Steve Jobs. I don’t let such feelings impair my judgement or my ability to question Apple’s ways in the digital world…
And I’ll begin by reviewing the latest statistics documenting Apple’s dominance over the tablet market. The numbers are compelling: according to hosting provider Pingdom, which monitors global traffic, the iPad controls 88% of the tablet-based internet traffic worldwide; in the US, it’s 95.5%. For a device that represent only 1.2% of the worldwide web usage (desktop + tablets), that’s not bad. Then, setting aside the hectoring of zealots, we’ll examine what this position means for content providers and end-users.

Today, we’ll take a closer look at  two issues:
#1 Apple’s publishing business models
#2 Customer data

The 30% Fee

Let’s settle this one quickly: according to a lawyer I spoke with, regulatory bodies have nothing to say about how much a company charges its partners. Apple can charge whatever it wants to media providers willing to be on its platform, the market is supposed to regulate this, and judging by the number of apps and books in the iTunes Store, it has voted.

Ok, then, it’s legal. But is it fair and, more importantly, sustainable for Apple?

The 30% fee is part of Apple’s simplicity obsession. It undoubtedly played a key role in  the iTunes Store’s success. But this system essentially favors the vast market of small to medium-size companies unencumbered by legacy products and unwilling to bother with the tasks of distributing, marketing, and invoicing their customers. As for the news business, I keep telling my journalism school students who consider an e-publication based pay-for model: ‘Go for it! In your case, 30% is fair and convenient’.

It’s a very different story for large established companies. When probed about the 30% for online media, Apple cinder-block answer is: don’t complain fellows, we charge much less than you’re used to spend in the physical world.

Wrong answer, for three reasons: ad-related ARPU, retail price and distribution costs. On the Average Revenue per User side, we know that advertising revenue, as calculated per digital user, fall to a fifth or a tenth from what it is (soon: was) for print. Two, ask a twenty-something how much s/he’ll be ready to pay for the convenience of a digital edition landing on her iPad. I did it with my Sciences-Po students as I was showing a variety of digital products ranging from the precambrian PDF to brand new iPad design-for publications. They’d accept to pay no more 30-50 Euro cents per copy. Take 30% of this — actually, 39% with taxes — and you end up with 18 or 30 cents — again with a largely depleted advertising revenue. Plus, still worth mentioning, the cost of distributing a file is negligible compared to printing and shipping physical product to users’ doorsteps.

What about market trends? A good agency-model deal (in which the publisher sets the price) can land around a 20% commission fee and Google will be more like 10%.At some point, my take is Apple will have to adjust its fees to market conditions. Again, while 30% is fair for a startup with no marketing and distribution system whatsoever, it remains quite high for big companies who already have large infrastructures.

The same goes for its applications review system. $99 for a developer account wether you are the Wall Street Journal or some students e-zine makes little sense. Large companies should be asked to pay way more and to get different services, such as an interoperable transaction system instead of iTunes passage obligé. As long as it pays Apple for its apps-related service, the publisher should have the right to use the transaction system of its own choosing. If Google, PayPal, or some local system is cheaper, the content provider should be entitled to direct its customer to it — at least antitrust lawyers believe so. For Apple, the problem is it won’t collect precious customer data, which brings us to the next point.

Accessing the Customer

The genesis of this hot issue between Apple and the publishers is to be found in Walter Isaacson’s biography of Steve Jobs. The author recounts the meeting with Time Warner CEO’s Jeff Bewkes. The discussion focused on publishing Time Inc.’s magazines on the iPad. Bewkes had agreed on the 30% (this was early 2010, Jobs was not ready to yield anyway), then the main subject arose:

“I have only one question,” Bewkes continued. “If you sell a subscription to my magazine, and I give you the 30%, who has the subscription—you or me?”

“I can’t give away all the subscriber info because of Apple’s privacy policy,” Jobs replied.

“Well, then, we have to figure something else out, because I don’t want my whole subscription base to become subscribers of yours, for you to then aggregate at the Apple store,” said Bewkes. “And the next thing you’ll do, once you have a monopoly, is come back and tell me that my magazine shouldn’t be $4 a copy but instead should be $1. If someone subscribes to our magazine, we need to know who it is, we need to be able to create online communities of those people, and we need the right to pitch them directly about renewing.”

In fact, access to the customer could be another antitrust issue. Specialized attorneys I spoke with say Apple has no right to retain customer data the way it does and it should make the transfer customer information much easier. Today, you can’t engage into a direct relationship with a customer via the application. Furthermore, the opt-in system Apple sets up for apps-subscribers yields meager results and, when it comes to use the info, “some restrictions apply”. That’s a double jeopardy.

Some readers of the Monday Note liked to refer to Wal-Mart in defense of Apple’s position. First of all, I don’t see the comparison as particularly flattering. To me, Wal-Mart is one of the worst companies on Earth, built on below-poverty-level wages and third-world enslavement (I encourage the reading of this 2003 Pulitzer Prize winning series in the Los Angeles Times). Compared to Wal-Mart’s founder Sam Walton, Steve Jobs was Mother Teresa.

Except for one thing. Wal-Mart allows a box of corn-flakes sitting in its shelf, to be loaded with everything needed by the brand to engage a relationship directly with its customer: coupons, games, toll-free numbers, emails and web addresses, samples, all sorts of incentives designed to further tie the customer to the products whether or not they are sold in Wal-Mart stores. On the contrary, in the app-world, you can’t even have a link sending the user to a customer-relation pages. On this specific matter, Apple is doing worse than the worst retailer in the physical world.

Elusive Attitude

What’s next for Apple regarding the anti-competitive issue? Not very much. First of all because Apple is cornering only one segment of the digital devices. And, unlike Microsoft in the nineties, Apple is playing a clever chess game. “They have a well-defined elusive strategy”, said a European antitrust lawyer, “their goal is avoid the European Commission opening the case. They are closely monitoring the other players’ moves, and they will budge accordingly, one inch at a time. In doing so, they are buying time. And six months here and there is a big deal in the digital business.” On the publishing side and the customer relationships irritant, I bet the Cupertino guys will calm everyone down with minor adjustments in the coming few months.

—frederic.filloux@mondaynote.com

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