Recently I wrote a couple of posts about Apple’s plan to charge vendors 30% of the transaction price for anything sold through the Apple Store (aka App Store). For many things like software and songs I think this makes a lot of sense. If you consider that the SG&A line of a company’s balance sheet is typically forty to fifty percent and that many of the companies that sell through the App Store have little or no marketing or sales functions, thirty percent sounds very good indeed. In fact, with a price of a few bucks, most of the applications on the App Store would not see the light of day if their developers had to market and sell through more conventional channels. The same is true with songs selling for ninety-nine cents.
But the post was about what happens if content providers like newspapers have to work under the same rules. Unlike a song or software, a newspaper gets rewritten daily — you only sell so many before you need to reload and the overhead associated with active development of a daily product is high. But also, a newspaper brings with it a recognized brand and a readership.
In that situation, it’s not clear that a service like the App Store delivers much more than a different kind of distribution infrastructure and the post questioned the fairness of a one size fits all pricing model. You might argue that a paper with digital distribution loses its printing and transportation overhead so Apple’s offer is a good deal. But no publisher is going to simply flip a switch to the digital world and those legacy costs will be with publishers for a long time. Essentially, the publishers can’t afford to do both. It’s a classic “innovator’s dilemma.”
The post concluded that Apple’s billing system might have something to do with this apparent rigidity. A transaction-based system that works for songs and software appears ill-suited to a relationship like a subscription because it does not have to deal with the rigors of a relationship. For instance, a billing system for subscription services needs to be very flexible and capable of making all sorts of changes to the purchased service, daily if needed.
The post got several comments including the one below, which was surprising.
“How do you know Apple’s current billing system won’t do exactly what you describe? Perhaps Apple doesn’t want to do this.
Why should they? They are a powerhouse in this market, and if companies don’t want to distribute through iTunes, they can hit the road.
70% of something is better than 100% of nothing.
The surprise was the “hit the road” attitude of the writer. Today, competition is so fierce that a hit-the-road attitude seems not only wrong but like an antique from the robber baron era. With a solution (and an attitude) like that it’s just a matter of time before other solutions, with more generous terms or, perhaps, one specialized for publishers, hit the market.
Our simple question is, what could make a company like Apple behave in such an apparently self-destructive way? The post said that the billing system’s inadequacies might be the problem but, on second thought, that seems like giving too much “benefit of the doubt” given the number of emerging companies with billing solutions out in the market. A company like Apple could always buy one of those companies. It’s more likely this is a form of un-strategic overreach stemming from not knowing or understanding the customer.
Knowing the customer, or customer intimacy, has become a strategic necessity as one sector after another reverts to the mean after many years of rapid growth driven by high demand for new products and product categories. Instead of pioneering completely new product categories, many companies today are innovating around established products and bringing out the next version. Typically, they do this by adding features and functionality to existing products, replacing an expensive component with a less expensive one or fusing several components into one at lower cost, and by providing an experiential element to their offerings.
But I must stress that those approaches work for PRODUCTS. Subscriptions are different. If product differentiation thrives on features and functions, subscriptions thrive on experiences. In this example, Apple is set up to provide low cost products, much like the brick and mortar retail giant Walmart. But Apple is poorly suited to mediate third party experiences — notice I said third party experiences.
Apple is a master of orchestrating your experience with an iPhone or iPad or the shopping experience in its stores. But it hasn’t learned the fine art of making itself invisible in transactions where it is only supplying basic infrastructure. Its third party billing policies — encoded in a billing system — don’t help matters.
Beyond the billing issue is a more substantial economic issue as basic as supply and demand. The Apple approach looks like a supply side, build it and they will come model but we’ve crossed over into a demand side era. If you’ve noticed over the last couple of years with credit tight and the consumer tapped out, demand isn’t what it used to be.
The highly leveraged balance sheets of individuals, corporations and governments mean that, absent a return of John Maynard Keynes from the grave, demand will remain slack for a prolonged period. Increasing or maintaining supply without doing something about price is like pushing on a proverbial string in this situation.
If you look at the newspaper industry today you will notice that readership is declining for two fundamental reasons. Younger people don’t read papers as much as older people do and there are many more older people. As Baby boomers give up the daily habit or (yikes!) begin to give up the ghost, there are fewer people demanding papers.
Most papers have already cut their coverage, laid off newsroom staff and wrangled pay cuts from their unions. These actions have not been enough as advertising sales have declined and many have cheapened their products by printing fewer pages and covering less news.
Back to Apple.
Charging a high price for using its infrastructure for a third party subscription transaction is not going to excite publishers or make lots of money for Apple. Publishers (and SaaS software companies) will go elsewhere. There is a fundamental difference between selling products and selling subscriptions. For all of Apple’s hip twenty-first century marketing and customer service prowess, its approach to subscriptions says loud and clear that it is still a twentieth century manufacturer and supply side fan.
I am watching a trend emerge. I don’t know if it has a name yet so I will offer this — re-intermediation. Most of us have been around the technology world in general and the Internet specifically to understand and remember its opposite, disintermediation. Re-intermediation is a reversal of disintermediation — in many cases formulated by the same forces that caused the original disintermediation.
The Internet did a great job of disintermediation — weeding out the middleman in a huge number of transactions in every day commerce. Disintermediation is one way of saying that customers now have more power than ever before because we have information. Middlemen were often the holders of information and their control gave them power — to set prices, allocate inventory and more.
There was nothing illegal about how the middlemen did their jobs and some economists might argue that they facilitated an efficient market. Suppose you wanted a car in a specific color with a five-speed transmission. In the old days if a dealer had the right car but in a different color or trim package, that dealer could have easily told you that your selection didn’t exist this side of the Mississippi River. That information — which might not have been right — would hopefully influence your decision to buy what was on the lot. The dealer controlled your access to information about availability of other models at other dealerships but today you can go on-line and find an exact match taking the dealer out of the picture almost entirely.
It’s not a fun way to be a vendor these days. Smart buyers can do most of their research online long before meeting a vendor representative and at that meeting the discussion is often over price. Middlemen used to make money on their superior knowledge and the Internet made that a lot harder, changing whole industries. The holy sales cycle has been replaced in many circumstances by the buying process with many different rules. Worst of all is the realization that a vendor can be locked out of a process and not even be aware of it.
In some ways the Internet has been turned into a later day Prometheus, the Greek god who legend tells us stole fire — the highest technology of that day — from Zeus and gave it to humans. As punishment Zeus sentenced Prometheus to being chained to a boulder for eternity. By day a great eagle would eat his liver, by night he would heal and at dawn the cycle would renew.
Watching the emergence of re-intermediation tells me that Zeus is no longer happy with the arrangement. He’s walking around with a fire hose trying to extinguish all memory of fire. But the incredible irony is that the re-intermediators are, in some cases the very technology companies that started and benefitted from the original disintermediation.
For instance, in my industry I have never seen so much competition from some of the outlets that I write for as there is today (ok, not this one). Publishers with their own, very different, business models are staking a claim to what has historically been analyst work — white papers, reports and webinars for example. But I am not here to dwell on that part of re-intermediation, simply to note that it is a spreading phenomenon and goes beyond simple commerce.
The more interesting re-intermediator is Apple. The company that bought a 1984 Super Bowl ad to define a market dominating IBM as Big Brother seems now to be grasping for the same kind of market dominance. Exhibit A is Apple’s announced thirty percent cut of everything sold through the App Store.
The App Store is a marvelous thing, it consolidates demand for all kinds of products that run on an Apple platform. Truth be told, many of the things the App Store sells could not be sold at all, let alone at prices that make impulse buying possible, if the companies that developed them also marketed them. The overhead would simply be too great. So in this, the App Store adds great value; however, this aspect of the App Store might also be its Achilles Heel.
What if a vendor doesn’t actually need the market consolidating power of the App Store? What if a vendor already has a high quality brand and a customer base eager for its product? Does the App Store’s market consolidating power actually add any value? Or is the App Store simply a low cost conduit for a commerce stream that already exists and is simply moving from, say, a brick and mortar delivery model to a digital one? What is the value add of Apple’s infrastructure stripped of its market consolidating power? Thirty percent? Really?
Such is the case of the publishing industry. Publishers of printed materials for daily or monthly consumption have been battered by market forces for years, even decades by unions, high costs of raw materials including transportation, paper, ink, real estate and professional labor. Some of these costs can’t be helped and publishers that have tried to lower costs by firing half of their newsrooms have simply succeeded in cheapening their products and abetting the stampede to other content formats.
So it seems like publishers have arrived on the digital doorstep exhausted and bled dry by forces beyond their control as the marketplace continues a secular shift. Many are ready to trade in their eighteenth and nineteenth century business models for something shiny, new and digital and to hand over thirty pieces, er I mean points, of their revenue to do it.
But thirty points is too much for what they would get — which is basically distribution — and on top of all that, the publishers would forfeit their relationship with their customers. The primary relationship henceforth would be between Apple and the reader which is like saying my relationship with my paper is primarily with the guy who throws it in the general direction of my neighbor’s garage seven days a week.
Publishers have an alternative. They already have circulation departments that manage subscriber lists, truck routes, stores and home delivery. Newspapers already have websites too. Surely a circulation department is the right place from which to handle digital distribution and billing for a fraction of the re-intermediator’s fee.
Publishers — especially the newspapers — generally have waited too long to adjust their business models to the digital age. They have watched in silence as nimble webmeisters stole their classified and display ads and they’ve glumly tried to play the bloggers’ game even as they cheapened the art of professional news reporting. But now is not the time for the ultimate surrender to a business model that will likely complete a process of making vassals of the once proud and independent fifth estate.
There are better solutions out there than Apple’s rather arrogant demand of thirty points and publishers owe it to their readers and shareholders to investigate them.
A subscription service provider’s offering has three parts — the actual service-product, an infrastructure for delivering it and, for lack of a better word, value-add. A provider may deliver all three as a single service but that’s not necessary.
A common form of subscription is a car lease in which a customer buys the use of a car measured in miles per year for a fixed term such as three years. The infrastructure and service are the actual car, which remains in the possession of the lessee as long as the monthly payment stream is maintained. Finally, the value add can be rather minimal ranging from nothing more than the standard warranty to scheduled maintenance at no additional charge.
More commonly, many subscriptions today are in the form of a pure service. You could argue that a car lease is really a service. But the fact that a tangible product changes hands, at least temporarily for the duration of the lease, places a car lease in a different category than software as a service for example or a subscription to content — delivered increasingly in digital form.
In a service subscription, the service-product is the actual content or use of an application and it can change frequently. The value added is often substantial and may include telephone support and the right to modify the subscription as needed. SaaS software vendors tout their ability and willingness to modify customer usage profiles almost at will up to and including terminating coverage at any time, hence support for the value add needs to be as encompassing and robust as the service-product itself.
In a subscription service the infrastructure is the smallest part of the delivered whole product and while the service-product cannot be delivered without infrastructure, it is a relative commodity in comparison to the content and the value-add.
This presents an interesting situation for the subscription industry because it shows concretely that subscription services have evolved to a point of differentiation, a point where all subscription providers are not the same, if indeed they ever were. This also brings into sharp relief the situation that Apple finds itself in with an App Store selling software and songs plus content — fundamentally different products — that has only one way of selling.
Many of the applications that Apple sells through its store are uniquely tuned to its products and operating environments. Moreover, the companies that develop the applications have little or no other access to the market — they have skeleton sales and marketing — and the price points for their applications are so low that they could not market their applications any other way.
An iPhone application, for example, that sells for two dollars could not make money for its developers in the open market and might possibly never exist if not for the App Store’s power to aggregate demand. This is especially true if you consider that no transaction takes place between the vendor/developer and Apple until a customer buys the application. This model frees the software developer from bearing the cost of a non-sale, the cost of general sales and marketing operations.
In the above situation Apple’s policy of taking thirty percent of the revenue from the sale makes reasonable sense. The developer avoids the ruinously high costs normally associated with sales and marketing and has a reasonably secure path to market. In this scenario, Apple participates in all three tiers of subscription services — infrastructure, content (owned by the developer) and value add in the form of marketing, sales and service associated with delivery. The developer may still wish to offer additional support services, but that’s an individual call.
A content publisher — specifically of newspapers or magazines — will present a very different profile as an App Store partner by virtue of its product type and legacy business. Like the software company, the publisher comes to market with unique content, in this case journalism. The publisher has an established brand and a customer base and the publisher already participates in activities that build the brand and service customers (through a circulation department).
The part of the App Store of greatest interest to the publisher is the infrastructure which supplies delivery and billing from which Apple takes its thirty percent. The question is whether the publisher receives enough value from the association given that the primary use of the store is the infrastructure component. Opinions will vary and this is a contentious issue in some quarters today but capturing thirty percent of the transaction, while worthwhile for the software developer, might be a bad deal for the content publisher.
Software is a product, regardless of how it is delivered, that is made once and improved sporadically over time. Content is ephemeral and a publication, by definition, needs to be rebuilt as often as it is published, typically daily for a newspaper and perhaps monthly for a periodical.
So, for at least two reasons including lower demands — primarily infrastructure (and specifically NOT branding or customer outreach) — and higher overhead to produce a product, the one size fits all approach to subscriptions appears to be doomed if Apple continues down its path of charging thirty percent.
Rather than a simple reconstruction of the publishing model through a digital store, Apple might be better off considering how it can expand readership and innovate around product and truly add value. Since all of the content is in digital form, it would be trivial to reconfigure it by branding the components and then selling new combinations.
Sports, Op-Ed, National and Business sections of various papers can all be branded. Suppose a transplanted New Yorker living in San Francisco wishes to follow the Yankees in the New York Times through the baseball season. That same person might prefer the front section of the Wall Street Journal and the Op-Ed section of the Washington Post. Today that consumer would need to buy or subscribe to three papers plus the San Francisco Chronicle if s/he wanted local coverage. But with a little innovation a consolidator like Apple could provide the value add of bundling the discrete elements into a single deliverable expanding the papers market reach in the process.
Bundling like this requires a very flexible billing system that can slice and dice products and support the whims of subscribers who want to take up and cancel content subscriptions at any time. Such a billing system is not usually found in an organization that sells products in one-time transactions such as for software licenses and songs.
Apple’s approach to the content subscription market may be dictated by its approach to billing and not any other business concern. The company may be selling content as if it were software simply because its billing system won’t let it do anything else.
The alternatives are to partner with emerging companies like Aria or Zuora or to build a new billing system from scratch. But it’s late in the game to be building something. Some publishers have already embarked on projects of their own and the billing vendors are very active at this point. So Apple’s options appear to be limited, team up with or buy a subscription billing provider or continue stumbling through this new market — a very un-Apple thing to do.