It’s not greed, it’s narcissism

The folks over at Readability published an open letter to Apple today, explaining their dissatisfaction with the rejection of the Readability app for reasons related to Apple’s new subscription content policy. I’ll leave aside for a moment the interesting study of whether or not Readability is a content app or a utility and focus on something more abstract. In their letter, Readability accuses Apple of being greedy. I believe it’s far more insidious than that. Apple has stepped beyond greed and wholly in to corporate narcissism.

Let’s step back for a moment and look at iOS apps and the iTunes App Store business structure. If I decide to develop an iOS app, I know that Apple is going to want a 30% cut. I structure my business around this model, and it works out well for a few reasons. Many iOS developers are independent developers that would normally have to rely on typical publisher distribution channels, which actually makes Apple’s 30% plan look attractive. Big players have been forced to re-adjust a little bit. For example, in the game market, EA has been forced to lower their price, but you’ll notice that many EA titles only dip in to the indie price-point realm of $0.99 when they’re on sale. Traditional big-name titles retain their higher price point. The distinguishing factor is that Apple has not placed any price constraints on app publishers’ price points outside iOS and the App Store. The developers of Angry Birds are able to offer their app on Android for free. The contrasts are less apparent in other app categories, because iOS software has a natural tendency to be iOS exclusive. This is owed to other constraints, such as the requirement that apps remain authored in Objective-C and Cocoa Touch from their inception. Apple has written their rules in such a way that cross-platform apps are discouraged. This is by design, and arguably, developers and users have benefited by having access to well-written applications at a reasonable price.

The rules of the “app” game are set up in Apple’s favor, but native apps were Apple’s first step in to the broader development pool. Moving in to more current events, we can see how Apple is taking the lessons learned — well, some of them anyway — and applying them to their new “content” fee scheme. I use the word content, rather than subscription, explicitly because of the Readability case. Readability is not a publisher. They’re strictly a facilitator. I was called a little bit crazy for bringing up Flipboard in my last example, but I believe it is now more relevant than ever. Flipboard may not have any plans to build a subscription model, but anyone eyeballing their platform as a possible candidate for subscription content now has to accommodate Apple’s 30% cut.

Back on topic, I posit that Apple doesn’t really care about traditional media at large. A lot of the outcry is centered around the fact that Apple’s rules make it hard to structure a business that crosses boundaries. If I build a subscription content model that sells to iOS users, as well as the internet and traditional print media, I have to account for Apple’s 30% cut of my subscriptions that sell through the iOS ecosystem. This dilutes my margins outside the iOS world, effectively forcing me to “subsidize” my iOS users at the expense of everyone else. In simple terms, I will be forced to charge everyone more, because I can’t pass the Apple content tax on to iOS users alone thanks to Apple’s price consistency stipulations. Apple doesn’t care about that because they’re not in the business of helping you sell content. They’re in the business of building the iOS ecosystem

Apple’s goal is to fill their App Store with exclusive content; content designed specifically for iOS, and available nowhere else. “The Daily” is a prime example. “The Daily” is a new media property. Take in to account that Rupert Murdoch’s company, News Corp, is the third-largest media conglomerate in the world, yet they did not select an existing property to bring to the iPad. This is not a coincidence. Apple wanted an exclusive property, and News Corp is willing to try anything to save their struggling model. Don’t get me wrong, there are good reasons to make this a new property. By doing so, News Corp side-steps any pre-conceived notions users might have about what the content should cost, how it should be purchased, and with what frequency it should arrive. When you make something new, you get to set the rules. Sound familiar? Yes, News Corp took a page right out of Apple’s playbook, and I’d be willing to bet that Steve Jobs handed them an annotated copy.

As the picture forms, you realize a couple of things. First is that Apple is acting without regard for the larger market. That’s pretty typical for Apple. When given the opportunity, most companies target a small slice of the bigger pie. Something about “capturing just 2% of the market” makes the job sound easier, even if 2% represents millions of users. Apple eschews this thinking and attacks the small pie viciously. Have a look at Apple’s laptop strategy. Apple doesn’t sell to the low-end laptop market, but they dominate the high-end. Small pie, huge chunk. Based on that business philosophy, it would stand to reason that Apple doesn’t place a high priority on enabling apps like Readability, because they offer no iOS exclusivity. Apple would rather incentivize content like “The Daily”.

What’s striking about all of this is that there is only one benefactor in this strategy: Apple. There is one other possible benefit: that indie content creators will be empowered, much like indie app developers. Unfortunately, I’m not sure the same rules apply. Apps and games often go deep, but rarely wide. For example, look at Delicious Library. An excellent app developed by an independent developer. The problem of cataloging and organizing your personal media was thought about very deeply by its author, but where the problem gets wide, Delicious goes elsewhere. It relies on Amazon.com to provide details about the content. App developers have no problem going deep because they can simply work on the problem linearly, but going wide is difficult to serialize. Media is a “wide” problem. You can build a fantastic content publishing system that thinks of every conceivable angle and still have a commercial flop if you lack content that is high quality and diverse in interest. You need a lot of good content to make a media publication work, and that content needs to be current. Tools for creating content have never been more within reach, but there is still the question of editorial talent. Blogging, for example, still occupies a different space in my media view than a publication like The Economist. One is unfiltered, while the other is streamlined and concise. The latter takes far more resources.

For these reasons, I believe Apple stands alone in reaping the benefits of their business model. This steps across the lines of greed and into corporate narcissism. When it comes to corporations, being narcissistic might not be unethical, but it doesn’t win you a lot of friends, and ultimately hurts you over the long haul. Apple views the value of their platform from one direction only. iOS and the App Store are Apple’s gift to developers, content creators, and users. Nevermind the fact that an iPad devoid of applications is completely interchangeable with products from competitors. No value there. Apple would do well to strike a balance here.

Apple’s 30% vig is bad for innovation

Let me start out by saying that I believe Apple is well within its rights to enforce these policies as they are. This isn’t a question of “right” or “wrong” in my mind. People framing it in this fashion are living in a false dichotomy. Apple’s actions fall on the continuum of incentive, just like everything else. The assertion I’m making is that Apple’s decision to apply a 30% commission across the board for in-app subscriptions is too aggressive and will stifle innovation, ultimately leading to less choice for iOS customers and softening iOS device attractiveness to consumers.

Let’s back up for a moment and address what is probably the most defensible position for Apple’s 30% cut. Apple has hit one out of the park with iOS and all the associated devices. Between the iPhone, iPod Touch, and iPad, Apple has sold over 160 million iOS devices [1]. Even if a large part of that number are users replacing old devices, the number of iOS users remains not insignificant, to say the least. Apple has cultivated an audience who expects a seamless purchasing experience. iOS users expect to click a button and purchase content without going through any checkout procedures or creating new accounts. Along these lines, Apple wants to accomplish two things:

  • Preserve that experience throughout iOS
  • Be compensated for cultivating an engaged and free-spending user base

Stated simply, publishing an app or content on the iOS platform puts you in front of millions of users who buy content frequently. That puts Apple in a position not dissimilar to a publisher with a huge readership. If half of those 160 million devices are still active, that gives Apple 80 million eyes. The NY Times circulation is 1.4 million on a Sunday. That number is less than 1 million on weekdays [2].

So, we clearly have a situation where Apple deserves compensation for what it has built. But what should that number be, and how is a 30% cut bad for innovation?

In the publishing world today, there are content creators who have their own “go to market” (to borrow from Steve Jobs) strategies, and there are content creators who rely on delivery facilitators. These two classes are not mutually exclusive. Popular Mechanics, for example, is available in the iTunes App Store as an app, as well as through Zinio. Popular Mechanics is a publisher, and Zinio is a facilitator. Zinio doesn’t create any of their own content, but they have solved a problem, and publishers (a.k.a. content creators) want to make use of this solution without reinventing the wheel, so to speak.

Zinio is a pretty weak example of innovation, but you don’t have to go far to find a much more interesting example. Have a look at Flipboard. Unlike Zinio, who simply converts magazine pages to images and text, Flipboard brings a lot of new ideas to the table, but eventually, they’re going to have to carve out a piece of the compensation model. With Apple in the equation at 30%, that doesn’t leave much room for Flipboard. What about the user base that they have cultivated? What about the value they bring to to iOS as an exclusive application?

By capturing 30% of all subscription revenues, Apple is squeezing companies like Flipboard out of the equation. By consequence, Apple is moving customers “closer” to the creators of content. This sounds like a good thing, but when you look at innovators like Flipboard, you really have to question the value of this closeness. Publishers are frequently monolithic organizations that don’t adapt well to change. Their business is developing content, not mobile technology. If Flipboard is any evidence, pushing the delivery facilitator role out to smaller, more agile companies is a good thing. Apple would clearly prefer to work directly with publishers, as we can see by looking at “The Daily”.

By pursuing 30% of all in-app subscription revenues, Apple is creating a strong disincentive for facilitators. Even if you assume that publishers will hop on board with applications like “The Daily”, consumers still lose when companies like Flipboard never come in to existence, and that is how Apple’s mandatory 30% take stifles innovation.

1 – Apple sells 160 millionth iOS device as average iPhone price grows to $625

2 – Newspaper Circulation Falls Nearly 9%