newsstand

Apple’s Antitrust Problem

(First in a series)

Will Apple face the type of antitrust issues Microsoft had to contend with in the 90′s? Possibly, but not with the same magnitude. Apple is by no means locking up its market the way Microsoft controlled the personal computer field with Windows. Still, the question arises for the iTunes Store, the App Store and their tightly controlled transaction and subscription systems.

Today, we’ll take a look at the issue from a news business perspective.

The fact that scores of publishers are flocking to the iTunes system doesn’t mean they are happy with it. For any publisher willing to access the burgeoning tablet market currently dominated by the iPad, a presence in the AppStore is mandatory. But I never met a publisher happy with his relationship with Apple. For most, what started as an enthralling partnership is slowly morphing into a feeling of servitude.

That perception is tinged with schizophrenia. Media people are usually fond of Apple products. From top bosses to tech reporters, they cherish their iPads and their iPhones. Then, each time Apple introduces a well-polished new device, it gets glowing coverage worth hundreds of million dollars if converted in media space.
Enjoying great products and admiring Apple for its many achievements does not prevent anyone from taking a stern look at the way the Cupertino folks do business. In a nutshell, publishers feel increasingly locked-in, and sometimes abused by Apple’s tight ecosystem.

As always, there are excesses on both sides. Difficult as it might be, let’s try and take a balanced view of three majors issues:
#1 the Application ecosystem
#2 the validity of a business model build on a 30% commission
#3 the issue of the customer data.
(We’ll start with #1 today, and address #2 and 3 next week)

The following is based on my ongoing contacts with publishers and conversations I had with lawyers specialized in antitrust and intellectual property. They spoke anonymously as they are quietly loading their guns for a possible legal action before the European Commission.

#1 The App Ecosystem

The context. Apple set up a huge technical and human infrastructure in order to provide tools to anyone, large of small, willing to build an application and yearning to make it available to any market. Amazingly, from the outset, Apple decided to provide all this machinery (software development kit, tracking system, testing) for free (let alone the symbolic cost of a $99 developer account).
Entrepreneurs voted with their keyboards and mice: there are 500,000 applications in the AppStore today, and counting. It created a huge new business. As Apple gives back 70% of the revenue for paid-for applications, by June 2011, the company had paid over $2.5B to developers, many of them individuals or very small companies.
Well, is there really a matter to complain about here?
Surely not for the developer working from a high rise in Seoul or a barge in Amsterdam. But for the large publishing company, it’s another story. Once it enters the system, two keywords begin flashing : “discretionary power” and “locked-in”.

Let’s face it, Apple has life and death power over the apps it harbors in its store. Its approval system it completely opaque, left at the discretion of an elusive army of people working at “undisclosed locations”. Welcome to the kingdom of the arbitrary. The same set of features that once raised a red flag triggering a rejection will be accepted the next time around — without explanation. Approval delays vary widely, making it difficult to plan the roll-out of a critical product. What is acceptable for a mom and pop operation becomes anxiogenic for large organizations.

The question of “choice”. To those who criticized its “black box” system, Apple’s retorts we evolve in a free market: if a publisher is not happy with its App Store it can: (a) go to the Android market, or (b) build its own web-app, i.e. an app that will live and function independently of the iTunes Store.

Antitrust lawyers don’t see things that way. Their argument: for someone controlling 75 % of the tablet market, invoking such a marginal alternative isn’t relevant. A publisher willing to join the tablet business has no choice but being available on the iPad. In practical terms, this means investing serious money to join a platform operated in a discretionary and opaque way, with unclear and changing rules.

As for the web app, antitrust attorneys suggest they represent a degraded and dangerously uncertain alternative to the iTunes Store. Degraded because a web app such as the Financial Times’ — the poster child of the “resistance” to Apple — doesn’t work as well as a native app. And this notion of “slightly less good” is absolutely critical. Given the sate of HTML5 (the programming language used for independent apps) and whatever the skills of its developers, a web-app will never be as fast, as fluid, as features-rich as a native application. As for the uncertainty, it lies in the fact that a web-app depends on features Apple can change without warning, such as the ability to use its browser (no choice here, it’s Safari) to store content. Put another way, web-apps are likely to work — no more than OK — until Apple decides otherwise. Again, it’s difficult to build a sound business upon such quick sand.

Evidently,  Apple is entitled to defend the integrity of its operating system by not giving independent applications access to critical layers of its iOS. This precaution provides better security against rogue code such as viruses and other malware; it is an indisputable justification for tight control. Agreed, said the antitrust lawyers, but: (a) for the native apps, rules could be more transparent and stable, (b) as for web apps, such rules should evolve within a framework of well-documented Application Programming Interfaces (APIs), a set of coding conventions used by programs to communicate with each other and with the underlying operating system. These APIs would be controlled by Apple on the sole basis of technical concern in order to protect the integrity its OS while creating a clear and well-defined framework for publishers.

Evidently, these suggestions sound a bit naïve. Apple has no business interest whatsoever in easing its allowance for independent web-apps. Most likely, it will carefully adjust the cursor to appear reasonably open while, at the same time, protecting its own ecosystem.

Things are likely to get worse before they get better: Apple is likely to unleash features that will benefit only applications and services of its choice in order to preserve its position. The best example is its Newsstand’s background downloading for publications (your iPad automatically wakes up to download the publications you subscribed to in the Newsstand, see a previous Monday Note on the matter). Lawyers says this is the perfect example of a feature that creates an unfair advantage favoring Apple’s own distribution channel.

Apple’s attitude towards competition epitomizes a often-seen scenario of the technological evolution: a company acquires a dominant position in a given market (in today’s case, several ones) thanks to superior products and services. As the company further gains ground over its competitors, the admiration for its quick success morphs into growing suspicion. Features that once were lauded as innovative market boosters begin to be seen as instruments of a market lock-down. At the same time, competition tries to imitate the leader as fast as it can. As it feels both unfairly copied and threatened, the market leader reacts by further tightening its grip on its business, using whatever it takes to buy time. In doing so, it triggers more hostility, etc. A vicious spiral begins.

Next week, considering market domination, we’ll see why Apple takes a different approach from the one Microsoft once used. Unless it becomes completely intoxicated by its own success, a clever “cursor adjustment” could preserve Apple’s lead and, at the same time, favor healthy competition.

frederic.filloux@mondaynote.com

Apple’s Newsstand: Wait for 2.0

Can Apple crack the digital news market the way it did with music? The comparison might not be relevant. Here is why:
– Today, in the new business, imperfect as it is, the transition from print to digital is much more advanced than the music industry’s similar transformation was when, in 2001, Apple launched the iPod. There are thousands of web sites now. They come in all shapes, from powerful pure players to paid-for legacy media. Many already make serious money, showing evidence of strong strategic thought.
– The two industries are structured in different ways. In the news business, there is plenty of players; the market is more scattered than ever, unlike the music business in which securing one of the few key distributors is the only way to a sizable market share.
– Technically, when compared to the news business, the music market was easy to standardize: very few digital formats as opposed to many and complex web sites and applications.
– The foray in the music business was driven by Steve Jobs himself. From the outset, he was really fond of music. By and large, he was not a news freak (nor did he liked journalists very much). For Apple, digital news was meant to be a second class business.

For all of these reasons, Apple had no hope to succeed organizing the news business the way it did with music. That’s why it came up with an ultra-simplistic approach for its Newsstand: aggregating pre-existing news applications while taking advantage of its control of the server side (iTunes) and on the device side (iOS).

In its first iteration, Apple Newsstand is no more than a super-shortcut for news related applications. Once a publisher offers subscriptions in iTunes and selects to go for the Newsstand, its app automatically migrates to there. First you get a  push message such as this one….

…Then the publication is displayed on the store’s wooden shelf…

… where it shows up with a clever updated icon reproducing the publication’s most recent cover or front page.

But the Newsstand’s real killer feature is background downloading. Once you’re subscribed, your issue is automatically downloaded on your iPhone and iPad. This feature was actually sought for by all developers working on news application: everyone dreamed about the iOS device being able to wake up following a request from the iTunes Store and download the latest issue of a newspaper or magazine. At the time, no one knew Apple intended to keep this functionality for itself. As expected, its works fine and proved to be extremely useful.

How did the service perform since its October 12th launch? Magazines are doing well, but newspapers are still absent from the platform. I was expecting to get all the English-speaking publications I’m subscribing to or reading on a regular basis. But the Newsstand is mostly filled with leisure magazines — for now.
Take UK’s Future Publishing: with no less than 50 titles, it went full steam ahead to the Newsstand. Future said it logged two million downloads in four days — but we don’t know how many actual in-app copies purchases it generates. Still, that’s an impressive result for a company that sells 3.2 million magazines every month.

Again for the magazine industry, other data seem similarly compelling. According to Paid Content:

Exact Editions, [an US aggregator of paid-for PDF versions] which says it made about 10 percent of the Newsstand app titles on iTunes Store, says downloads of freemium sample editions jumped by 14x in just a few days, whilst some titles’ actual sales have more than doubled.

And Poynter.org reports the following (emphasis mine):

The week Newsstand launched, the NYTimes for iPad app saw 189,000 new user downloads, up seven times from only 27,000 the week before.

That’s impressive, but it’s nothing compared to the NYTimes iPhone app, which saw 1.8 million new downloads that week, 85 times more than the 21,000 downloads the week before. Nearly one-fifth of the 9.1 million people who have ever downloaded the NYTimes iPhone app did so last week, with the launch of Newsstand.

The NYT’s performance is truly amazing given its subscription system’s weird price structure. It is also surprising considering its iPad application isn’t the best in its class.

Why do magazines take the lion’s share of the Newsstand? Two main reasons. First, when it comes to subscriptions, magazines are extremely inexpensive; for a full year subscription, single issue prices can fall to a symbolic level of 50 cents or less. Second, magazines are best suited to the PDF format that still plagues most of the e-publishing industry. Therefore, without redesign expense, publishers can shovel magazines by the bulk into any newsstand. It limits the reader’s engagement, but no one really seems to care yet. Copies are counted as sold.

By contrast, subscriptions to dailies remain quite expensive since they are expected to contribute a great deal to the bottom line. As for the format, most newspapers can’t be reduced to a zoomable PDF to be read on a tablet (let alone a smartphone).

In order to really take off, daily publications’ digital editions will have to morph into dedicated applications designed for tablets (or smartphones). That is exactly what The Guardian did with is brand new iPad, iOS5-only applications that is by far the best on the market.

This app scores well on many items: navigation is reduced to the basic 10 sections of the newspapers; story layout and readability are optimal; photographs are spectacular (although Apple doesn’t allow The Guardian app to be linked to its photojournalism’s Eyewitness app); pricing is right (£9.99 – $13.99), plus there is a huge incentive with 82 free issues (!!); the app is not autistic as it is tied to the brand’s website and to the social media sphere; finally, it downloads fast (which is appreciable but less of an issue now with background downloading).

From a reader’s perspective, the Apple Newsstand is a first step. There is no decisive momentum — yet.  The real transformation will occur when newspapers and magazines will move to applications really designed for tablets as opposed to unimaginative adaptations of their print editions. This means: approaching the market with new interfaces (such as the Guardian’s or Bloomberg BusinessWeek — our story here); moving to ARPU measurement instead of old-fashioned auditing; and setting up new productions schemes. That’ll be version 2.0. not just for Apple, but for the entire industry.

frederic.filloux@mondaynote.com