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, leading to less choice for iOS customers,¬†unsatisfied customer experience which inevitably will lead to softening iOS device’s 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”:http://www.appleinsider.com/articles/11/01/18/apple_has_sold_160m_ios_devices_average_iphone_price_grows_to_625.html

2 – “Newspaper Circulation Falls Nearly 9%”:http://www.nytimes.com/2010/04/27/business/media/27audit.html

3 thoughts on “Apple’s 30% vig is bad for innovation

  1. Agreed. My iOS devices can go away. I will follow the content wherever it goes – if that means Android, then so be it. Apple needs to realize what makes a compelling platform actually compelling. It’s the content that keeps me engaged, not the $0.99 throw-away fart apps.

  2. Flipboard is an example of an innovative company whose options are now limited because of Apple’s aggressive commission structure. I have about 16 “tiles” in my Flipboard app that I use every day. I’m fully aware that they don’t charge and don’t plan to, but my overarching point isn’t so much Flipboard, but other innovative companies who might want to charge a subscription fee.

    Let’s say — purely hypothetically — that Flipboard decides they’re going to package up their content specification and viewer to sell to publishers just like Adobe does for companies like Wired. There are several models under which this can be accomplished. One is to simply sell the software to publishers and let them build the books. That’s unlikely, as these publishers have a tendency to lean toward outsourcing this type of work. So, that means publishers want someone who is going to handle the foot work of converting their content and making it available on the App Store. This pushes companies like Flipboard in to a facilitator role.

    I know this because I’ve done work in the space. My biggest customer for 8 years was a children’s book publisher. Their business is creating content, not web development, and not iOS development. With Apple in the game at 30%, that doesn’t leave a lot of room for facilitators. This doesn’t mean facilitators can’t get in the game, it means there isn’t as much room for them. That’s called a disincentive, and that’s bad for business. When fewer business models are available, fewer businesses will come to the table, and you’ll see less innovation.

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