Stupid, or Brilliantly Stupid

February 16th, 2011

In response to the iOS subscription furor that’s been playing out across the web, John Gruber tweeted this last night:

App Store : Apple :: Disney World : Disney They make money on everything you buy in the park.

And Gruber’s right, of course. Apple deserves to have some part of the money made through their App Store.

But most people don’t disagree with that. The issue here is that the rate may very well be too high for many kinds of businesses, and they are daring developers and content providers to ditch their platform. Apple’s basically saying, go ahead, leave. But where are you going to go? Android? Best of luck, there. You’ll be back.

And maybe they will. But being a dick because you can isn’t a good way to get people to build for your platform. It’s just a good way of making sure they’re looking for the next opportunity to get the hell off the train. It’s not just rude. It’s bad business.

Brilliantly Stupid, or Just Stupid

Apple’s right that they deserve to share in revenue generated from their App Store, but their terms could make their platform economically not viable for a number of services that a lot of people use. Netflix is one of them; their $7.99 subscription rate is already incredibly small and is under increasing pressure as they renegotiate content prices. It’s hard to see how they could offer that same $7.99 price to iOS users through their Netflix application and lose 30 percent of it every month. Smaller companies face the same problem, too.

37signals partner David Heinemeier Hansson said this on Twitter:

FYI, if Apple comes hunting for 30% of software subscription revenues through iOS, we’re dropping Campfire/Highrise apps in a Chicago second

Unless I’m misunderstanding Apple’s terms, I don’t think they’ll have a choice. Since they’re offering a subscription to their service elsewhere, to have a Campfire or Highrise application in the App Store, they’ll need to offer a subscription to their service—at the same price—inside the application, too. If Apple’s going to enforce it, it sounds like they’ll lose 37signals as a result.

Apple would probably shrug at losing them, because they’re a small company, but what they should be concerned about is that they could very well end up losing large content companies, too. I can’t imagine they didn’t consult companies impacted by this before announcing the policy, but I also can’t see how Netflix and others can afford to receive 30 percent less from all iOS subscribers. “Making it up in volume” doesn’t mean much of anything when you’re losing money with each new subscriber.

I think Apple’s view is that developers and content providers can’t afford not to be available on iOS. The platform is too large, growing too well, and filled with too many customers willing to pay money for them to skip it. So, Apple figures they can take a large cut from every subscription, because they’re the kingmaker here.

Apple’s confidence tends to be justified. And to some extent, it is here, too, but not nearly as much as usual. Apple is not in the position to dictate to developers and content providers. They need them. For the iOS platform to succeed, it needs as many content sources as it can get, because mobile devices are increasingly a primary source of content consumption—the web, books, movies, TV shows, news, and at some point, magazines. Missing a vital content source will eliminate a platform as a choice for consumers. You mean I can’t watch my Netflix queue on an iPad? Fine. I’ll buy something else.

As of now, this isn’t a choice, even if a content provider leaves the platform. You can’t watch Netflix on Android, for example. But if they decide that iOS is becoming destructive to their business, I can guarantee you they’ll figure out a way to be on Android really, really fast. Oh, and Google will be right there, waiting with open arms. This choice will be very real very soon.

Apple’s in a dominant position now, but things change, and they change quickly. If this is Apple’s line of thinking, they are, uncharacteristically, making very a short-term and very dumb decision.

Brilliantly Stupid

Apple rarely fails to think things through, though. Which is why I think there might be another possibility. This may be a negotiating ploy for setting the percentage. Apple may be trying to set it high now, release it and get customers behind them, so they can re-negotiate the rate down later and still take a substantial portion of the revenue.

In fact, I think that’s what we’ll see happen. I don’t think this rate is sustainable,1 so Apple will stick to it for a while, point to the success of their in-app purchase and subscription mechanism (which would validate the iOS platform as the primary digital platform for content), and then they’ll agree to a lower rate—say, maybe 15 percent—in the future. It’ll feel like a large concession on their part, but in reality, it won’t be; they’ll be taking a significant cut of all money generated on the platform.

This would jive with their partnership with News Corp. on the Daily. With the Daily, Apple apparently provided design help on it and pushed it heavily. That isn’t something Apple does for a third-party application—they want it to succeed. And there’s a good reason: since News Corp. agreed to their subscription plan, a successful launch for the Daily would show it’s a viable means of making a publishing business on digital devices. That would put pressure on other companies to use it as well, and give Apple the high ground in negotiations.

Nonetheless, this isn’t a confidence-inspiring move for companies. It shows that Apple can reverse course, and potentially harm their business, very quickly. While this may be a smart negotiating move, and it will likely settle down as time moves on (time, and revenue, tend to soothe fears and hurt feelings), it’s not a smart decision for a company whose fortunes are now intimately tied to developers and content providers.

  1. I could be wrong, though. Apple’s a smart company; perhaps they’ve consulted companies and investigated different publishing company costs and decided that, actually, 30 percent is a perfectly acceptable take for the potential increase in customers, and it’s a matter of forcing them to adapt to it. That’s possible, and in that case, Apple is more playing hardball than trying to force unfair terms on them. That’s possible, and while that may be the case for publishing companies, I am skeptical it is true for companies like Netflix or Pandora, whose margins aren’t that large to begin with. []