Apple has finally brought some clarity to its plans to require publishers who offer subscriptions on the iPad and iPhone to make them available through the iTunes Store. The problem with the Apple announcement is that it imposes a single policy on a variety of business models, and it is not going to work well for some of them.
Apple’s position is simple: As of June 30, if an app offers subscription content, publishers are free to go on selling subscription through their own channels. But the subscriptions must also be offered through the iTunes store at the same price the publisher offers elsewhere or lower. Apple takes 30% off the top on iTunes store revenues.
That 30% sounds like a lot, but it’s hardly extortionate by retailing standards. Online retailers typically have a gross margin of 25% or more and gross margins for brick-and-mortar retailers often top 50%. (Gross margin is simply the difference between the cost of goods purchased and their selling price.) But not all goods are equal.
Magazine publishers, while they have other quarrels with Apple, probably won’t mind the 30% too much. They are used to paying a lot to acquire subscriptions, whether through direct marketing, advertising, group sales, or newsstand sales. The much bigger issue for them had been Apple’s unwillingness to share any information about subscribers with publishers, information on which the publishers’ business model depends.
A subscription service like Netflix faces a very different problem. The company sell subscriptions only on its web site, It doesn’t seem to have any desire to sell subscriptions on the iPad or iPhone, but Apple’s rules seem to say that it has to. Netflix pricing is certainly designed on the assumption that it gets to keep all the revenues and 30% off the top to Apple would almost certainly turn each iPad subscription into a money-losing proposition. But Apple’s rules don’t let Netflix charge more to recoup the cost. Hulu+ faces a very similar situation.
It’s still not clear how the rules apply book readers, such as Amazon’s Kindle app. There are some periodical subscriptions sold for Kindle (and Nook and other e-readers), but mostly the business is books. Because the apple statement refers only to subscriptions, book sales still seem to be in limbo. Amazon’s problem is that it, like Apple, is a retailer. It’s generally believed that Amazon’s gross margin on many Kindle books is significantly less that 30%, so it would likely lose money on every book it sold through iTunes. There just isn’t enough margin in the business for two retailers to each take a cut.
Apple’s flat 30% cut was originally designed as a model for developers to sell apps and for them it was a simple an a fair one. But it needs rethinking as goods with varying business models are sold through the store. This is especially true for those who, like Amazon, are selling products they have purchased from third parties, or who, like Netflix, are paying hefty fees to studios.