Apple goes too far with subscription money grab 4

You have to give Apple credit for chutzpah. Last week they announced a new subscription system for content available on iOS devices and they are trying to grab revenues that they have no legitimate claim too.  I love Apple design and I prefer to use Apple computers and iPods over any competing brands. However, I have avoided being drawn into the iOS ecosystem which includes iPhone and iPad. Apple simply exerts far too much control over these devices for my liking.

When Apple introduced the App Store for the iPhone and iPod Touch several years ago they set up a system that allowed both paid and free apps. Aside from a one-time $99 to join the developer program, developers could create and distribute apps through the store at no additional cost such as hosting fees. Developers that opted to charge for their apps would split the revenues 70/30 with Apple. This wasn’t an entirely unreasonable split since Apple provided the distribution servers and credit card processing. It’s generally been acknowledged that Apple makes little or no profit on this deal since its costs were roughly comparable to its 30% of the take. A fair deal all around.

The new subscription system allows publishers to distribute apps such as News Corp’s “The Daily” and charge a recurring subscription fee for content, just like a newspaper or magazine sub. Apple insists on take a 30% cut of this revenue which is OK if it is handling data distribution and credit card processing. However at the same time that the subscription payment system was announced, it declared that any and all purchases through apps must be handled through its in-app payment system and the subsequent 70/30 split.

This is actually very problematic for many companies. For example, Amazon offers a free Kindle e-reader app for iOS devices (and Android and Blackberry as well). Kindle users can buy books directly on their devices but on other machines, the app sends users to a mobile browser to search for books and make purchases on the Amazon web site. The books can then be downloaded through the app from their library.  Nowhere in this process is Apple facilitating anything. They are not serving data or handling financial transactions, Amazon is bearing all the costs of distribution. So why does Apple deserve any payment.

This actually started when Sony submitted a reader app similar to the Kindle App that also tried to bypass the in-app purchase system and Apple rejected it. Apple subsequently told Amazon, Barnes and Noble and other distributors that they could no longer get away without paying Cupertino its due. The situation gets even worse for streaming media providers like Pandora, Rhapsody, Netlfix and Hulu.

Those companies spend a lot of money on licenses and a distribution backbone independent of Apple.  Apple provides no service to them other than then customers that bought its products and want to use a variety of services. However, Apple already profited handsomely when it sold the devices. If Apple wants an ongoing revenue stream from media streaming it needs to get off the pot and open its own service.

Being forced to pay Apple 30% of gross revenue for the privilege of access to its huge customer base is just outright extortion on Apple’s part. Most of these companies are money losers already losing such a large chunk for no reason would make then totally unviable. If they raise prices to pay off Apple they will also have to raise the price charged to users on other platforms like Android and Blackberry because Apple also mandates that media distributors cannot charge its users more than any other platform.

The Federal Trade Commission and Department of Justice have apparently opened a preliminary anti-trust investigation into the new Apple practices.  Unfortunately it seems unlikely that the feds will end up doing anything of significance to Apple. Given that, people should stop buying iOS devices until Apple backs down on this issue. The money grab needs to stop.  Apple should not be paid for doing nothing.

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4 thoughts on “Apple goes too far with subscription money grab

  • C Getto

    I disagree, Sam. There is nothing anticompetitive about this. This is the free market at work. Apple made the iPad to make money, not provide a free means to content providers ofndelivering content. They already have that in the Internet. If content providers don’t want to pay or can’t pay, they have other means, like the zoom, galaxy tab, etc. Amazon has it’s own Kindle.

    I agree this might not be good for consumers, but Apple is entitled to impose it’s free structure and take it’s chances. As it stands, a lot of users will never iPads because of Apple’s philosophy.

    In my profession, I charge an awful lot to provide services to my clients. They could make the same argument you are making, that they can’t afford me. Because of my and my firm’s success, I can charge more than others, and some cannot afford me. That’s how it works.

    • Sam Abuelsamid

      Sorry Cam but you seem to have completely missed my point here. I have no issues with Apple charging a fee to publishers and content providers in return for a service. Charging News Corp or Conde Naste or Disney to deliver content if Apple is providing the bandwidth and handling the transactions is perfectly legitimate.

      If I go to Safari on an iPad and navigate to the Kindle or Barnes and Noble sites and buy books, Apple has no claim to any of that money. Similarly, if the Kindle or Nook apps send me to the browser to complete precisely the same action Apple also no claim.

      If I pay for Pandora One or Netflix through their own web sites from my computer, Apple isn’t providing any bandwidth or anything else of value to either the provider or customer beyond the device for which they have already been paid. Also just as Whole Foods has no business telling Horizon how much they can charge for milk at Target, Apple has no business making similar demands of publishers. If a publisher has a lower cost structure somewhere else and chooses to charge a lower price while maintaining the same margin it is their right to do so. If Apple’s fees mean a higher cost to users of their products, it’s on Apple to address that cost, not the content providers.

      As to your argument about your rates, you’re free to charge whatever you want, but you have no right to tell the lawyer down the block that she can’t charge $50 per hour less.

      Based on the $60 billion cash horde that Apple is currently sitting on, they also make plenty of money on every iPad, iPod and iPhone they sell. Apple does not sell any of their devices at a loss to get people in the door, theirs is the opposite of the razor and blade model.

      • C Getto

        I am extremely accomplished at “missing the point.” Just ask Meredith.

        I don’t get how you can compare a company selling milk at Target. Target buys the milk at one price and sells it for more to generate its profit, but Apple does not do that. Apple doesn’t buy the content to re-sell it at a markup. So the analogy does not apply in my view.

        I guess my interpretation is that Apple isn’t telling the guy down the street anything other than if you generate revenue due to the use of your app on our device, you have to share a percentage with us. Their position is that their device is so much better than everyone else’s, that new revenue is being generated that would not be generated but for the existence of the device. Whether this is true or not and whether it may remain sustainable remains to be seen. Interestingly, since you think it is oppressive, you have elected to avoid the products. Isn’t that how it is supposed to work? Since Android does not impose these restrictions, won’t this cause more people to switch to other devices that run Android, like the Xoom and Galaxy? Won’t that give Apple pause (assuming it occurs)?

        I use the Kindle app all the time, but if it goes away, I will probably have to buy another Kindle (I gave my old one to my dad). Isn’t that good for Amazon? If others do not go with the Kindle because on balance they prefer the iPad and its crappy iBooks program, isn’t that like the music industry counting illegal downloads as losses even from people who would not have bought the songs anyway?

        What is truly interesting is that this kind of control (or as some think “unfairness”) has been going on forever in other business fields. Movies, music, Wall Street, banks, manufacturing, you-name-it. It is the transparency of the computer age that is bringing these issues into the public consciousness more than ever before. It will be interesting to see where the debate goes, and whether Apple can remain so far ahead that it feels safe dictating these kinds of things to content providers.

        • Sam Abuelsamid

          Maybe the Target milk analogy was a stretch, but the reality is even worse because Apple expects to collect an ongoing markup without contributing any additional value beyond the original sale of the device.

          As using the market approach and avoiding Apple’s iOS devices, that is precisely what I have done. We have three Android phones in the family at this point and the replacement for my original Droid will probably be the Droid Bionic. Apparently most consumers agree since Google activated an average of 300,000 Android phones a day in the 4th quarter of 2010 while Apple sold iPhones at the rate of about 180,000 per day. With the launch of Android 3.0 based tablets like the Moto Xoom, LG G-Slate and Samsung Galaxy 10.1 starting this week, and Blackberry Playbook soon, Apple will likely see its iPad dominance wane as well.

          My whole purpose was too inform people of Apple’s business practices and encourage them to try the increasingly viable alternatives. I am simply taking advantage of that transparency to try and shift the market ever so slightly away from walled gardens to a more open alternative.