Apple's News Platform Battle

An interesting battle is looming over Apple’s newspaper and magazines subscription pricing for iOS devices (notably the iPad). Apple’s offer to publishers is simple. They can offer an app that allows consumers to buy individual issues of their content or to subscribe to it from within the app; the publisher sets the pricing. But Apple will take a 30 percent cut of the revenues and it will also require the publisher not to undercut the price offered to iPad app users.

A publisher could grab a customer directly on their own site and avoid the 30 percent sharing rule, but publishers could not simultaneously offer the customer a discount to bypass Apple. That is, they could choose not to share revenues with Apple but could not do a side-deal with customers. Apple appears to have relaxed that rule, but others — for instance, Amazon — maintain it.

Not surprisingly, publishers would prefer not to share revenues in this way. And, of course, they needn’t — if they attract paying customers “off pad,” so to speak. But Apple has some real advantages in grabbing customers. Purchases made from an iPad are easy and can use Apple’s iTunes accounts, so there’s no extra adding of credit card information. That may not give Apple an advantage if publishers can sell their customers subscriptions who otherwise would not have been bothered. But if that ease is cannibalizing customers who otherwise would have purchased directly from a publisher, then that publisher will lose out. In fact, they may be better off not having an iPad app at all.

On one level, that seems to be a fair choice. Publishers can get to customers who have iPads without dealing with Apple. So if Apple imposes onerous terms on publishers, Apple will take a hit.This is why I have argued elsewhere that Apple’s terms are unlikely to raise antitrust concerns despite some investigations by government authorities around the world. On another level, there may be a deal that would prevent publishers from having to make a stark in-or-out choice.

The posturing over this has begun. The Financial Times — which launched a successful iPad app last year — has just launched a new “web app” built with HTML5. The move to HTML5 has made them very similar to installed apps on devices, something the FT has exploited. If you open the FT’s web app, it looks almost identical to its installed app. The FT also intends to add functionality to that app including a “read later” option. It is an important signal that perhaps the FT doesn’t need Apple after all.

Apple, for its part, can offer some better things in installed apps. For starters, they run more smoothly. In addition, its new iOS 5 operating system will include a Newsstand feature that will allow FT subscribers to have their news downloaded overnight, so when you rush to the airport to get on a plane, you don’t have to remember to have previously started up the app to receive the news. But with a 30 percent margin, the FT is demonstrating that the “out” option for them might look pretty good.

Perhaps this isn’t a problem for Apple. Either way, people still want iPads. But there is a subtler issue. As iPads become popular, publishers are going to realize that they will be able to charge more for digital content. After all, once many people have tablets, you don’t have to worry that your higher subscription price will cause them to abandon the medium — they’re locked in. And if you think that is not really a concern, consider the New York Times‘ late entry into digital subscriptions and its very high pricing point.

That possibility may not deter a passionate iPad lover from buying the device, but consumers on the margin are going to want to see how these issues play out. They might not buy — and then the margin will shift to consumers who would otherwise feel more predisposed toward iPads. For Apple, it may become increasingly hard to price iPads themselves if the consumer’s main rationale was to read newspapers. And this issue plagues dedicated eBook device sellers like Amazon even more. At least with iPads, Apple provides lots of products that make it valuable for consumers who don’t subscribe to other content. Not so for your Kindle user.

In my own research, I have mapped out how this will lead device makers like Apple and Amazon to impose and stick to more restrictions on app providers to ensure that they get their cut or that the prices of digital content do not rise. But the battle right now will be fought between large publishers such as FT and Apple over terms. I wonder if it is a battle the FT really should want to win if it makes it harder for device sellers to innovate and earn some revenue.

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