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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The streaming media dilemma
In a way, companies such as Netflix and Rhapsody are worst off in Apple' s new scheme. These companies' subscription pricing models assume essentially that distribution is free. Users pay for their own bandwidth, whether to their home TVs and computers or to their iPads. That's not quite right: The streaming providers have to pay Internet backbone providers for the bits they move (that's what the Comcast-Netflix fight last fall was all about). But they didn't foresee also paying Apple.

Ironically, these businesses would have to pay a cable company to carry their streaming "channel" (the cable companies shell out for only the big outlets that draw lots of viewers, such as ESPN and Disney; the smaller channels all pay to be carried). Apple is acting as if it were a cable company, charging access to its subscriber base -- and blindsiding Netflix, Rhapsody, and so on.

The book publishers' dilemma
Finally, there's Amazon.com and Barnes & Noble, which will need to offer in-app e-book purchases under Apple's new rules and thus pay 30 percent to Apple for each sale made via iTunes. Both Amazon and B&N charge book publishers about that amount for each e-book they sell on their websites; Apple's new rule basically takes that commission away from them for e-books sold via iTunes. Either Amazon and B&N must forgo their commissions or take it from the book publishers if they want an iOS presence.

Where the dance is leading
I believe that Apple's policy is shining a bright light on the media industry's dirty secret: Its business model is broken. When the iPad was first announced, media firms hoped it would provide a new vehicle for which they could charge users realistic fees -- basically relying on Apple to give them a platform where they could avoid their old mistakes. Book retailers thought they could get a free ride on iOS devices to build their sales base; the same goes for streaming media providers. Why they all thought Apple wouldn't change for that privilege escapes me.

Still, it's true that Apple is overreaching. A one-size-fits-all pricing policy of 30 percent for any digital content ignores the reality on the ground. The economics of different media segments vary. Charging developers 30 percent of an app's price was reasonable -- it costs far more to establish a presence in a retail store. The music and video industries swallowed Apple's charge because their retail sales were declining (and they pay more to retailers than Apple wanted) in favor of unpaid pirate downloads -- but they did persuade Apple to raise its initial prices, so both they and Apple netted more per sale. However, the music and video industries continue to feel ripped off.

For sales of a single-copy book, magazine issue, video rental, and the like, a 30 percent commission is probably fair. A book publisher gives a retail bookstore 50 percent or so for a physical book, after all, as do magazine publishers for their newsstand sales.

You can argue it both ways on magazine and newspaper subscriptions. Thirty percent is a huge portion relative to the usual new-subscriber bounties, and it's a much higher rate than what the printing and mailing typically costs (10 to 20 percent, based on audience size) for a print subscription. Plus, the digital production is not cheap -- it's costlier than print design and layout because of all the custom coding required -- and Apple's model doesn't account for that.

On the other hand, smaller publishers in particular face daunting costs to attract and service readers, so the Apple model likely skews in their favor -- just as the app store model favors small developers over large ones. And for publishers of all sizes, the iPad represents its best hope for new revenue.

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