Apple today introduced the ability to let app developers charge for in-app content on a subscription basis. While this development is a major boon for developers looking for new ways to monetize their products, it could have devastating affects on the fledgling music-subscription market.
The new rules let app developers charge for content on a subscription basis, such as for a daily digital newspaper or magazine. The way it works is that content providers can set a price and length of the subscription and let Apple handle all payment processing. Apple takes a 30% cut.
For those concerned that this will affect subscription music services like Rhapsody, Spotify or MOG -- there's a good reason to be afraid. It's pretty clear that Apple will only take 30% of the subscription if it is the one handling the billing process as set up through the app itself. Here's the key line of Jobs' statement:
"Our philosophy is simple. When Apple brings a new subscriber to the app, Apple earns a 30 percent share. When the publisher brings an existing or new subscriber to the app, the publisher keeps 100 percent and Apple earns nothing."
What will change things up, however, is Apple's requirement that app developers signing up subscribers outside of the app also offer the ability to subscribe from within the app as well.
"However, Apple does require that if a publisher chooses to sell a digital subscription separately outside of the app, that same subscription offer must be made available, at the same price or less, to customers who wish to subscribe from within the app."
So let's say someone downloads the MOG app on the iPhone and isn't yet a subscriber. Today, that person would have to go online and subscribe via the MOG website, and then login to the app to access full song streams. Apple has confimed that these new rules would mean MOG would have to offer app users the ability to sign up for MOG from within the app, and if they do so Apple then gets a 30% cut of the subscription.
Now consider these important facts:
- Mobile subscription services already cost twice as much as online-only subscriptions ($10 vs. $5) because the labels charge more in licensing fees for mobile streaming versus desktop streaming.
- Mobile music app providers say up to half of their subscriber base join as a result of their iPhone app.
If Apple starts taking a 30% cut on every music service subscription gained as a result of its discovery through the app, expect to see one of two things: either the subscription services kill their iPhone app or they raise prices again for the mobile app. Either case will severely stunt growth.
Which is why subscription music services are already looking to the labels for relief.
"The labels are going to have to absorb this," says one music service exec who agreed to comment only on condition of anonymity. "Otherwise nobody is going to be able to have an app. The margins that all of us make are smaller than 30%. We can't lose money every time somebody signs up. It's impossible. Everyone's going to have to raise their prices. We need to speak with one voice to the labels and say 'If you don't absorb this we're all shutting our apps off.' They need all of us in the marketplace. They're betting a big part of their future on subscription businesses."
Remember, Apple requires that the subscription offer in the app be as good or better than that made outside the app. So music services will have to change their entire pricing structure unless some other workaround is found.
"Our philosophy is simple too," says Rhapsody president Jon Irwin, "an Apple-imposed arrangement that requires us to pay 30 percent of our revenue to Apple, in addition to content fees that we pay to the music labels, publishers and artists, is economically untenable. The bottom line is we would not be able to offer our service through the iTunes store if subjected to Apple's 30 percent monthly fee vs. a typical 2.5 percent credit card fee. We will continue to allow consumers to sign up at www.rhapsody.com from a smartphone or any other Internet access point, including the Safari browser on the iPhone and iPad. In the meantime, we will be collaborating with our market peers in determining an appropriate legal and business response to this latest development."
The bigger question now is whether this is just Apple's way of taking a cut of a business it helps create by virtue of the iPhone platform's popularity, or is Apple knowingly kneecapping other streaming music services in preparation to launch its own streaming music service for the iPhone in the coming months?
Think about it: Competing music services have for years now been free to offer streaming music to iPhone users, basically giving Apple free market research data and at the same time priming the market by getting early adopters hooked on the experience. Then it comes along and changes the rules of the game, offers its own competing service, and cleans up on both ends -- either stealing away users of competing service by offering a cheaper and more integrated music service itself, or profiting off its competitors subscribers without having to pay the music licensing fees they are.
This seems like just the beginning of the debate. It's likely at least one lawsuit will come from a publisher (either in print or from a music service) contesting Apple's right to dictate how they price their subscription. Or perhaps a regulatory agency either here or in Europe will step in. But it's certainly going to be an issue to watch closely in the months ahead.