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March 1, 2011, 7 p.m.

John Gruber on Apple’s 30% cut: To the victor goes the pricing power

John Gruber at Daring Fireball has an extended take on the justice or injustice of Apple’s 30-percent cut of all iPhone/iPad subscriptions. (He comes down on the side of justice. Or at least a kind of it’s-fair-because-we-can justice.) If you, like many publishers, are still cranky about Apple’s decision, give it a read to get a reasoned argument for the other side. (One that’ll probably still leave you cranky — but reasoned nonetheless.)

Here are a few thoughts on some of Gruber’s arguments:

Apple doesn’t give a damn about companies with business models that can’t afford a 70/30 split. Apple’s running a competitive business; competition is cold and hard. And who exactly can’t afford a 70/30 split? Middlemen. It’s not that Apple is opposed to middlemen — it’s that Apple wants to be the middleman. It’s difficult to expect them to be sympathetic to the plights of other middlemen.

To the broad category of “middlemen” I’d add “companies whose economics are built for other platforms.”

For all the developers who’ve built native apps for the iPhone or iPad from scratch — say, game developers or productivity app developers — they’ve been able to build their business strategy from a known cost base and a known revenue scheme. If you know that you’re going to be selling 99-cent apps, you can build a business around the expectation of revenue coming in 99-cent chunks. (Or, more accurately, 70-cent chunks, after Apple’s cut.)

But if you’re a business that already exists, with its own native pre-iOS economic basis, you’re laden with a bunch of preset economic variables. If you’re a newspaper, you’ve already got a newsroom with X number of reporters and Y number of photographers and Z number of editors. (Which were probably around 2X, 2Y, and 2Z ten years ago.) You’re coming to a new platform, but it’s not an entirely new product you’re creating — you were already paying those reporters. And when you’re calculating something like pricing, you’re doing that with an understanding that you’re also navigating the economic space between what you’re already charging for your website (likely $0 now, although you’re planning on changing that later this year) and what you’re already charging for a print subscription (whether that’s $12, $20, or $30 a month). You’re already scared to death about trying to convince people they should pay for your website — and then all of a sudden, the monthly number you’d been planning to charge for your iPhone app needs to go up 30 percent to make the math work.

Now, that’s not Apple’s problem. Gruber’s right: Apple doesn’t give a damn about newspapers. The financial difficulties of American newspapers are not Apple’s fault and they’re not Apple’s to solve. And unlike Google — which has put a lot of energy into making newspaper-friendly noises to try to repair a relationship that bottomed out a couple of years ago — Apple doesn’t throw the industry any bone bigger than showing off nytimes.com in product demos.

But regardless of whether you think newspapers deserve any sympathy for their plight (good arguments on both sides!), it’s not just middlemen who are disadvantaged by Apple’s large take.

Kindle, and e-book platforms in general, are a different case. For one thing, Kindle doesn’t use subscriptions. Kindle offers purchases.

The Kindle does actually offer subscriptions, both to newspapers and blogs, like Daring Fireball itself. (Given where DF ranks in the Kindle Store, he probably has about 5-8 people paying $1.99 a month to read the site on their Kindles. We have 16! That’s likely to be the only traffic-related number where we edge Gruber.)

I don’t think any publisher would consider Amazon’s Kindle subscription model an improvement over Apple’s, though, for a host of reasons — not least that it’s Amazon who controls pricing, not the publisher, not to mention Amazon takes an even steeper cut than Apple does.

Second, the problem facing traditional publishers today is that circulation is falling. Newsstand sales and subscriptions are falling, under pressure from free-of-charge websites and other forms of digital content. The idea with Apple’s 70-30 revenue split is that developers and publishers can make it up in volume — that people aren’t just somewhat more willing to pay for content through iTunes than other online content stores, they are far more willing. The idea is that that Apple has cracked a nut no one else has — they’ve created an ecosystem where hundreds of millions of people are willing to pay for digital content. Thus, potentially, publishers won’t just make more money keeping only 70 percent of subscription fees generated through iOS apps than they are now with 96 percent (or whatever they’re left with after payment processing fees) of subscription fees they’re selling on their own — they stand to make a lot more money.

There’s no doubt that Apple’s built a great payment system. Although I’d also point out that it benefits from the natural market segmentation that comes whenever you sell expensive devices. Does the iPad make people more likely to buy digital goods? Or does the fact that someone has paid $499 or $829 for an iPad serve as a pretty good marker that they’re already the kind of person more likely to pay for digital goods? I think there’s truth in both.

To look at it from another angle, any developer will tell you that there are many more Mac users who buy shareware apps than Windows users. (I’m speaking in terms of percentage; obviously there are many more Windows users than Mac users. But a larger percentage of Mac users will download and pay for a $15 app than will Windows users.) Now, pre-Mac App Store, Apple didn’t make paying for software any easier than Microsoft did. But Mac users are, by their self-selected nature, people who were willing to spend a little more to get a better computing experience — in other words, people who are predisposed toward paying.

The other factor here is the idea of who “deserves” credit for bringing a customer to a purchase. As Apple said in its announcement, “when Apple brings a new subscriber to the app, Apple earns a 30 percent share.” And if someone discovers Tiny Wings (great game!) in the App Store rankings and downloads it, I think Apple’s certainly earned its 30 percent.

But if someone searches for and downloads The New York Times app — after the Times has spent more than a century building up its brand, at the cost of billions of dollars — can it really be said that Apple has “brought” that subscriber to the app, and that they deserve 30 percent of the revenue the app generates, forever? (Gruber doesn’t address the eternal nature of Apple’s cut; it’s like paying a New York apartment broker his finder’s fee, every year for the rest of your Manhattan-dwelling life.) It certainly seems like a transaction different in kind from, say, a game that exists only on (and only because) the iPhone platform.

Again, it’s a case of being disadvantaged if you’re bringing over an economic model from outside the platform. There’s a reason Rupert Murdoch said he was fine giving Apple 30 percent of the revenues from The Daily — but why he’s no doubt less thrilled about having to give over 30 percent of the revenue generated by The Wall Street Journal’s app. The Daily’s economics are built around getting 70 cents a subscriber each week. The Wall Street Journal has a host of price points in other media it needs to fit an iPad price into. (Not to mention an annual cost 4x The Daily’s.)

Finally, also note that most App Store developers don’t have such a readily substitutable good available for free over in Safari, the web browser. If you don’t want to pay 99 cents for Angry Birds, you don’t have the option of going to Safari and playing it for free. Again, you can blame newspapers for that state of affairs, and you wouldn’t be wrong. But given the degree to which newspapers are having to balance free and paid in a variety of ways to make digital revenue work, it’s a tough moment to be pushed into a corner by Apple’s decision.

This is what galls some: Apple is doing this because they can, and no other company is in a position to do it. This is not a fear that in-app subscriptions will fail because Apple’s 30 percent slice is too high, but rather that in-app subscriptions will succeed despite Apple’s (in their minds) egregious profiteering. I.e. that charging what the market will bear is somehow unscrupulous. To the charge that Apple Inc. is a for-profit corporation run by staunch capitalists, I say, “Duh”.

Of course. Apple’s not a charity. It has no financial reason to help out any content industry. While those of us who wish the newspaper business well would love to see a different approach, in the end, it’s Apple’s choice and they can do what they please.

And iOS subscriptions won’t fail. I wager that most of the news publishers grumbling about the issue now will come around and give the cut to Apple. They might increase their investment in Android phone and tablet apps a little, but let’s be honest: Apple’s still the big dog here. (Android users have inherited Windows users’ disinterest in paying for software or digital content.)

It’s just galling that the incumbent players in the news business face so many economic disadvantages because of their background, and because of their investment in journalism, that it would have been nice for this to be different.

Yes, the financially sound thing for them to do would be to abandon the old cost structure and instead build a digital-native company that could happily turn over 30 percent of revenues to Apple and reap all the benefits (distribution, scale, payment platform) that Apple provides.

The only problem with that is that, with that model, you end up, well, with something like The Daily — something light and tabloidy, something in nugget form, something that looks for the oldest dog in America. (Actually, I suspect you end up with less than that, because I’m not optimistic that Murdoch will get the subscriber numbers he needs to be profitable. And I say that despite being a great admirer of many of the people working there.)

With all the great innovation that’s gone on in the news space, there are still no for-profit newsrooms with the scale and heft and journalistic weaponry of the nation’s biggest newspapers. They’re still important, and they’ve been looking to the app economy as a big part of their efforts to figure out a place in the digital economy. It would have been nice if Apple might have cut them some slack. Yeah, that’s not Steve Jobs’ problem — I get that. Apple’s earned their pricing power by being innovative and smart. But it still would have been nice.

POSTED     March 1, 2011, 7 p.m.
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