Apple's iPad subscriptions: Troubles all around

The 30 percent cut on digital content sold through iTunes is freaking out some publishers and media developers, but it may ultimately be a healthy move

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Of course, nearly everyone is afraid to start charging for online content, fearing that a world of readers used to free won't pay up. But the iPad could change that; thanks to the success of paid apps and games, publishers figured they could charge for content on the device. Apple figured the same, so it wants a cut for making all that possible. What surprised publishers is that Apple wants the same cut it gets for everything else -- and won't let publishers circumvent Apple's share by linking to their own websites rather than using iTunes as the payment system.

Apple has made it clear that publishers can sell subscriptions outside of iTunes and thus not pay Apple, but they must also sell through iTunes, where Apple does get a cut. Thus, publishers fear that most users will subscribe or renew on the iPad, where they're accessing the content. As a result, iTunes will become the default subscription vehicle, making Apple's 30 percent cut the norm. Publishers already cough up cash to firms such as Publishers Clearinghouse to bring new subscribers, but these are one-time payments, while subscription commissions to Apple would be permanent and ongoing.

Publishers that charge realistic fees for print and online content are thrown off by the potential loss of revenue. Take the Economist, for example. The weekly costs about $125 per year for a print subscription that includes free access on the Web and via the iPad. (The Economist's iPad app is one of the best.) The electronic subscription costs $110. My estimate is that it costs the Economist about $50 per year per subscriber to print and mail its issues, so the net income for the print subscription is about $75.

Compare that figure to the net income on the online subscription if sold via iTunes: $77. It's a wash, even after Apple's 30 percent cut. But the Economist's classified ads aren't in the iPad or Web versions, so that revenue is lost. The $33 that Apple would get as its cut from an iTunes sale is money that the Economist is surely counting on keeping. And from the data I've seen, it would cost $10 to $30 -- but just once -- for the Economist to get a new subscriber through other channels. The economics for the New York Times and the Wall Street Journal are similar.

Granted, few magazines cost as much as the Economist, which charges a high price in return for high-quality content and is much less reliant on ads. A more typical magazine is Martha Stewart Living, which charges $24 for 12 monthly issues. The typical new-subscriber bounty for it would be about the same as its first-year subscription income, whereas if it accepted Apple's model, it would pay $8 per year and keep $16. MSL would lose money only on subscribers who subscribe via iTunes and renew three times via iTunes. So the get-'em-in-with-a-low-price publishers may actually prefer Apple's approach. (Interestingly, MSL charges iPad users $4 per issue and newsstand customers $5; after commissions, they each net out to about $2.75 in revenue.)

There's also the pesky issue that Apple doesn't acknowledge: When a publisher does its own direct marketing or hires a firm to which it pays a bounty, that's active marketing. Apple's not actually going out and getting subscribers; it's just processing the subscriptions of those who have already found the publisher's iOS app. In that case, Apple doesn't deserve anywhere near the reward of a direct marketing firm for each subscriber.

Still, once you get past the definition of a fair price, the fact remains that the underlying issue is that you have an industry that has devalued its own product for years by emphazing low- or no-cost subscriptions but now needs subscription revenues to fill in the ongoing advertising shortfalls. And you have Apple saying it wants a cut of those revenues for distribution on the platform it owns -- and which happens to be where publishers think they have the best shot at picking up paid subscriptions.

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