Beyond the politicking, the 30% “Apple Tax” is good for subscription publishers

February 16, 2011 § 4 Comments

In a story picked up by the Wall Street Journal and many other media outlets today, Apple clarified the new ground rules that publishers who wish to offer subscription services through its iTunes interface must abide by.  Starting this summer, publishers who promote subscription services via link-outs from their iPhone or iPad apps will be required to integrate the sign-up within the app itself, using Apple’s new payment platform.  Apple will levy a 30% fee for each sign-up.  Other details include:

  • Companies can continue to sell through their own Sites, but must then offer the same service and pricing within the Apple application
  • Companies can continue to link to their own subscription registration pages from the app, but must then offer the in-app registration option as well
  • Apple won’t automatically forward new customer name and email information to the publisher; the customer must opt-in for this to occur.  Apple claims this is to protect customer privacy
  • Compliance is expected no later than June 30

Predictably, the initial reaction from publishers is that the sky has fallen.  One publisher, representing the sentiment of many, I’m sure, was quoted as saying that the Apple Tax is “economically untenable” with its business model.  Another has said that the customer data opt-in provision gets in the way of its ability to forge a relationship with its users.  But let’s look at this issue from a different perspective.

As Apple is acting as a performance based channel (publishers pay no fees for listing their apps in the iTunes Store), the “tax”, as it’s been called, is no different from an affiliate commission.  Sales affiliates routinely command fees of 30% or more.   I’ve seen as high as 70%.  With benchmarks like these, 30% seems rather fair.  Until now, publishers have been getting a free ride.

Another important factor is customer lifetime value (CLV).  Any company publishing content worth its weight in salt is going to (1) be able to charge a premium relative to its cost to produce, and (2) retain the subscriber beyond the initial subscription period.  Its fully-loaded monthly margin, multiplied by its average subscriber months, is its CLV, which is offset by its initial Customer Acquisition Cost (CAC).  Assuming the Apple charge is one-time only, many publishers will more than recover the fee over the lifetime of the subscriber.  And let’s not forget that had it not been for Apple, the publisher would have incurred a CAC through its other channels.  And the cost to acquire a new sub – we’re talking about for paid services now – is typically non-trivial.  If your service commands a $100 annual subscription price, resulting in a $30 fee to Apple, you’re probably pretty happy.  Many publishers invest $100 or more to acquire a new sub.

I also expect that savvy publishers will identify ways to circumvent the system.  Apple seems to be saying that pricing (and let’s assume special offers as well) inside the app must mirror those available on linked pages outside the app.  But what about pricing and offers on marketing pages that aren’t linked to the app?  If the rules don’t apply there, publishers will be able to craft strategies that make it advantageous for customers to register outside the app, then download the app only for consumption purposes.  If, on the other hand, Apple has already closed this loophole, the fair-payment-for-services-performed and CLV arguments still apply.

Lastly, while this will certainly burden publishers, and especially those whose analog businesses are in heavy decline, as well as those who were 100% digital from the get-go, these new terms don’t amount to Armageddon for most.  Consider that for the time being, digital is a smaller segment than offline for traditional businesses, and within digital, Apple commands only one, albeit important, channel.  The magnitude will obviously vary by publisher.  But consider the example of the Financial Times, which reports that only 10% of its subs come through the iPad.

The bigger issue than the tax, I think, is that Apple has said that publishers will not receive customer names or email addresses unless opted-in by the new subs.  If they don’t, as will often be the case, it will make renewal marketing a bit more challenging (see the CLV argument), but not nearly impossible.  For instance, publishers could promote renewals through their service interfaces directly – as users log-in to access their content, the publishers will know who they are and the status of their billing relationships, even if not by specific name.  I suspect that smart, customer-minded publishers will make it worthwhile for users to opt-in, perhaps by offering something of incremental value, such as additional subscription months, exclusive content, or entry into a prize drawing.

Understandably, publishers need to make a lot of noise up front, and to vocalize their discontent with the new Apple terms.  After all, any charge that didn’t exist before is now going to negatively impact their margins.  But in the end, Apple is entitled to receive a commission for the channel it provides, and the more integrated purchasing experience is good for the consumer.  And a new channel with a relatively low customer acquisition cost is certainly good for the publisher.

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§ 4 Responses to Beyond the politicking, the 30% “Apple Tax” is good for subscription publishers

  • [...] colleague from Bridgevine.com, Andrew Goldberg, offers a contrarian position on the Apple fee. Andrew’s well reasoned point is that; digital is a smaller segment than offline for [...]

  • Ed Hill says:

    Andrew,
    Of course Apple will charge a toll at the gate, just like Google did for the paid search market.
    I think Apple has totally defined this market niche of pay content for portable devices. The iPod, iPhone and iPad immediately created a market for paid content that defines the usefulness of each device. How useful is the iPod without iTunes? You can make the case that Android tablet devices would not have a popular market without the antecedent iPad.
    The whole brand focus on simplicity and ease of use is expressed through deliberate alignment from the product design through the packaging and ads. I can’t begrudge Apple their 30%, when they created this whole market eco-system.

  • You hit it on the head with the concern that the publisher might not get the name and address of the subscriber. If the acquisition cost for the first product is, say $30, the next one upsold or cross-sold is always a lot less, assuming the publisher is smart about their segmentation and modeling.

    Without that name, every RGU has the same acquisition cost, making the overall economics less palatable.

    The analog from my days in publishing would have been to see the Apple-generated subs as kind of like agent-sold subs, e.g. the ones you got from Publisher’s Clearinghouse and other decidedly less savory sources, only without getting the names. You did agent-sold to hit your rate base and stomached the bad renewal rate and pay-up from those subs because at least you had the names to work later.

    The smart publishers will see this as a win (hey, they won’t have to bill, etc.) and figure out a way to get the opt-in from the customers via other means. Life will go on, the fittest will survive and everybody will make some money on this.

    And Google is apparently charging 10% now, so competition will emerge. Imagine the market working!

  • Quick Update: Yesterday, Robert Andrews, of PaidContent.org, wrote that Apple will take 30% of all renewal subscriptions as well, as long as the renewals come through the app. Whether this is a bad thing for publishers depends on if Apple is able to more effectively promote renewals than have been the publishers historically. I will say on the publishers’ behalf, however, that a 30% fee on renewals does seem a bit high. Either way, publishers will be motivated to drive renewals on their own, and the better ones will be successful regardless of whether they receive the customer’s name and email address from Apple. The bottom line is still that Apple is free to do and charge what it wants. And if it goes too far, it will drive publishers to invest in competing platforms, like Google’s OnePass, which it conveniently just announced is only charging a comparatively small 10%.

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