Apple Risks Dominant Position in Tablets With New Digital Publishing Model

Published on February 17, 2011

The battle between Apple and Google intensified this week with both companies unveiling long awaited business models for publishers eager to develop recurring revenue sources through sale of tablet based subscriptions.

Apple’s service imposes more onerous terms on publishers compared to Google’s “One Pass” service and severely restricts the information publishers are likely to collect from customers.  For Apple and Google, the stakes in this battle are far higher than developing incremental revenue sources from these digital publications.  The winner is likely to gain dominance in tablet operating systems for the foreseeable future.

Very Different Terms

Apple plans to charge publishers 30 percent of revenue from all sales processed through the App Store which is consistent with the revenue share Apple receives from application developers.  Publishers will be permitted to sell subscriptions to customers through other channels such as the publisher’s website but will be prohibited from offering any discounts to customers who bypass the App Store.  In addition, Apple will not provide any customer data to publishers unless the customer specifically opts in.

Google will take a 10 percent cut of revenues for subscriptions purchased through the “One Pass” service and claims that this revenue is essentially covering its costs for managing the process and not intended to be a profit generator.  Google will also provide customer information to the publisher unless the customer opts out. There is no information to indicate that Google plans to prohibit publishers from offering discounted subscriptions for customers who bypass the One Pass service.

Subscriber Data is Critical for Publishers

While the revenue share is the most obvious difference in terms, the more important restriction imposed by Apple involves the customer data.  There has always been a major distinction between “single copy” sales and subscription sales from a publisher’s perspective.  The customer who picks up a physical copy of The Economist at a news stand is entirely anonymous.  The subscriber to The Economist is always known to the publisher.

Most publishers allow customers to opt out of solicitations for products or services, but the key point is that all publishers use subscriber lists to directly solicit renewals.  By depriving publishers of the customer data, Apple seeks to keep the customer anonymous and increases the probability that future renewals will be processed through the App Store rather than through a direct transaction between the publisher and the subscriber.

Essentially, Apple seeks not only a “finder’s fee” for bringing the subscriber to the publisher in the first place, as is typical with many agency relationships, but aims to develop a recurring revenue stream in which renewals are processed through the App Store.  It is far more likely that this goal is behind Apple’s “opt-in” model for providing customer data to publishers than any idealistic notion of customer privacy.

Window of Opportunity Closing Fast

Apple’s iPad is currently the market leader in terms of market share as well as capabilities but a flood of Android based tablets will appear on the market over the next six months.  If Apple’s current dominance in tablets convinces publishers that they must go along with Apple’s terms, and if Apple can release a competitive iPad 2 this spring, it is very likely that Apple’s dominance can continue.  The main reason is that customers are attracted to the iPad not only because of the hardware and operating system capabilities but because of the content offered by third parties.

Apple must be hoping that enough publishers will agree to make subscription content available within the next few months due to the iPad’s current dominant market share.  When the iPad 2 is released and must compete with newly competitive Android tablets, Apple’s goal should be to not only have the best hardware and software but also the most comprehensive array of publications on the  market.  If this goal is met, Apple’s market share should hold up well because customers will gravitate toward the content.

On the other hand, if Apple has overreached, publishers may decide that it is worth moving forward with Android based tablets in anticipation of much more competitive products coming to market in the near future.  If a larger array of publications are available on Android devices, Apple’s market share will be pressured even if the iPad 2 retains a technological lead over the new generation of Android based tablets.

High Stakes Gamble

Apple may have been better served by offering less onerous terms to publishers particularly related to customer data.  Doing so would virtually guarantee that publishers would gravitate toward the Apple ecosystem due to its current market dominance and would result in the widest possible selection for users.  Apple would still have to retain its technological lead with the iPad 2 given the advances in Android based devices, but it would likely be secure in having a lead in content availability.

The decision to impose harsh business terms on publishers has increased the uncertainty regarding how the tablet wars will play out over the course of 2011 and may help Android based devices gain additional traction.

Disclosure:  No position in Apple or Google.

Apple Risks Dominant Position in Tablets With New Digital Publishing Model
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