TightWind is written by Kyle Baxter. Stay Hungry. Stay Foolish.

In response to Apple’s rejection of Sony’s ereader application earlier this month, Kontra wrote an article that’s quite insightful into the subscription rules controversy.

He wrote:

Just as I can’t see how Apple could have become a $300+ billion company by making iTunes an “open for all” playground of its competitors’ commercial interests — given Google, Microsoft, Adobe, RIM, Samsung, Nokia, TimeWarner, NBC, Universal, Amazon and a host of other competitors suing or attacking Apple on a daily basis — I can’t see a way for the App Store to prosper by turning itself into a “neutral zone” app and media hosting platform.

Why then should Apple subsidize companies like Sony to park a free app in the App Store as a simple conduit to sell their own properties outside of the App Store? Some would argue that the mere presence of such apps enhances the value of the App Store which then sells more iOS hardware devices where most of Apple’s profit comes from. By that logic, unfortunately, Time Warner could also give away and heavily promote a free app in the App Store that whisks away iOS users to various Time Warner properties to purchase music, videos, movies, books and magazines. Apple gets nothing for footing the App Store platform expenses while Time Warner gets to leech on the huge Apple ecosystem for free. Now multiply this by thousands of other companies bypassing Apple’s cut, and see how attractive App Store becomes for Apple.

That’s exactly right; by building the iOS platform, and gathering tens of millions of users who are more than willing to pay for good applications, Apple has created incredible business opportunities, and they deserve to share in the money generated from their platform.

There’s a trade-off here, though; as that share increases, the platform becomes decreasingly profitable for third-parties. Set that share low enough, and everyone wins; Apple gets a revenue stream from third-parties that they helped create, third-parties get an entirely new business, and users enjoy a better platform. This creates a positive process; more users join the platform, which is good for Apple, and is good for third-parties, too.

Set that share too high, though, and no one wins; the platform is no longer viable for those third-parties, Apple doesn’t receive that revenue (and their platform loses value as it loses third-party services), and users are offered a less compelling platform (and maybe even switch to a different one as a result). That’s bad for all parties involved. The exact opposite happens here. As third-parties leave the platform, users likely will, too, which decreases Apple’s revenues and third-party revenue, which makes it a less attractive platform, and…

Kontra acknowledges this, but points out it hasn’t been an issue thus far:

Of course, there is a balance. Without sufficient and competitive content, the App Store would fail to ignite iOS device sales. Strategically, however, all the App Store controversy to date has not dampened the enthusiasm of app submissions or iOS device sales, which Apple can’t manufacture enough of. Digiterati teeth gnashing hasn’t been reflected in actual sales figures appreciably.

He’s right, but the controversies so far haven’t resulted in the App Store losing a serious content provider. What I’m arguing is Apple’s new subscription rules tip the balance too far, and they may end up losing one, or a new budding service, and the positive feedback loop described above will transform into the negative one.

That’s the danger Apple is in. I am not arguing that the App Store should be a neutral market where Apple takes no part in revenue generated by third-parties; that’s ridiculous. I’m arguing that the terms they have set for it, 30 percent of all subscription and in-app purchase revenue, and requiring all applications to include the same offers in the app as they do outside, may cause a current large service to leave or a future new service to not bother with the platform.

I have a feeling Apple will adjust the rules before Amazon, Netflix or another similarly large service abandons the platform, but as they stand, this is very much possible. And that’s a poor position for Apple to be in.