Apple Apps: Biting off more than it should chew?

08 March 2011

by Eamonn Forde

Apple’s plans to take a 30% cut of all third-party subscriptions sold in-app have been met with outrage by the nascent streaming music industry. Rhapsody has said the new terms make its business model “economically unsustainable” and others are calling for regulatory investigation. Just what happened and what does it actually mean for music?

A change to the T&Cs within its App Store will see Apple taking a 30% cut of all subscription services served within the app, with the caveat that “legacy apps” (i.e. apps that are already live) have until the end of June to comply. That means for anyone who subscribes to any subscription service, from newspapers and magazines to video and audio, within the service’s iOS app (for iPhone and iPad), 30% of their recurring fee will go direct to Apple. Apple was at pains to stress that this does not cover all subscriptions – only those served within the app environment itself. If the customer has a billing relationship with the supplier outside of the App Store environment, they do not have to surrender any commission to Apple.

In a press statement, Apple CEO Steve Jobs said, “Our philosophy is simple. When Apple brings a new subscriber to the app, Apple earns a 30% share; when the publisher brings an existing or new subscriber to the app, the publisher keeps 100% and Apple earns nothing. All we require is that, if a publisher is making a subscription offer outside of the app, the same (or better) offer be made inside the app, so that customers can easily subscribe with one-click right in the app.”

Essentially, any subscription music service, such as Spotify in Europe or MOG, Rdio and Rhapsody in the US, with an app that lets subscribers cache music on their handsets will be affected. And given that all of them are burning through start-up capital until they hit an inflection point, it could mean life or death for those having to share out any of their income. Immediately after Apple’s statement

was issued, Rhapsody president Jon Irwin windmilled in. He said: “Our philosophy is simple too, an Apple- imposed arrangement that requires us to pay 30% 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% monthly fee vs. a typical 2.5% credit card fee.”

And this was the kind of noise being made by the biggest subscription service in the US, with three-quarters of a million subscribers. Those further down the pecking order will be feeling the burn more acutely. While the US services are all subscription-only, the situation for Spotify is more precarious. It has 10 million users in Europe, but only 750,000 paying subscribers. It is commonly believed that Spotify loses money on every user accessing it through the ad-supported tier and needs at least double-digital conversion to the premium tier to make economic sense. While it has apps for Android and Symbian, its iPhone app has been key in driving subscriber uptake. To share 30% of any of its £9.99/€9.99 monthly subscriptions would seriously damage its long-term survival.

Indeed, Ben Drury, the CEO of 7digital which powers the à la carte track download service within Spotify, says this move could be disastrous for the company, especially as it gears up for a US launch later this year (with possible international expansion after that). That’s despite it raising a rumoured $100 million [A$99.8m] in new investment that gives it a market valuation of $1 billion [A$1bn].

“If Apple forces this change onto Spotify, it would become loss-making as it, and other digital music subscription services, cannot afford to pay Apple 30% of their revenues,” Drury told UK broadsheet The Telegraph. “The big question is whether Apple will actually force this through [...] As it stands, if Apple does force this upon services like Spotify, it makes it impossible for subscription music services to stay on the Apple platform.”

Axel Dauchez is the CEO of Deezer, the biggest streaming service in France with 20 million users and over 800,000 paying subscribers, partly achieved through a bundled deal with mobile operator Orange in the country. Simply put, Apple’s moves here spell disaster to him. “It’s really going to cause a storm if it happens,” he told The Music Network. “Specifically in the paid music service sector, this is definitely a disaster.”

For him, the stakes are enormous. He told TMN that before Apple made this announcement, Deezer was on course to break even this year, a significant triumph in a market where margins are wafer-thin and the odds are heavily stacked against success. “I hope that Apple does not break my momentum,” he wearily says. Outside of the major markets, the situation is very different and Apple’s perceived land grab might not affect those digital music companies with a different economic and marketing strategy.

Dániel Molnár is in charge of business development at 3G Multimedia in Hungary. His company offers white label streaming music solutions to others in Central and Eastern Europe. Away from the high-pressure gold rush in more developed markets, a different economy and a different set of opportunities are unfolding. “We are looking for big telco deals,” he told TMN, saying he is in advanced discussions with T-Mobile to power its music service in Hungary. “We believe [this telco approach] helps to ease the pain. We are a B2B white label company so we are looking for partners who can do the payments, the billing and have a big enough customer base to do B2C marketing.”

Alongside the telcos, he says that banks and FMCGs (fast-moving consumer goods) companies are looking to offer digital music solutions. But because they are paying upfront for the music and offering it as ‘free’ to consumers, they would be unaffected by Apple’s moves here.

“That is why we are not so worried about Apple’s moves with in-app subscriptions,” he tells TMN. Returning to the US, where the music subscription market is most advanced, the topic was hotly debated at the Digital Music Forum East in New York on February 24, and a sense of optimism seemed to emerge. Anu Kirk, the VP of mobile at MOG, said that it was all “a little bit vague” and explained how it was “very difficult to get specific, straight answers” out of Apple on what, precisely, this would mean for subscription music services. However, Carter Adamson, COO of Rdio, was optimistic and suggested that Apple would back down a little. “I think we will be able to work it out,” he said.

For those focused on the major markets, beyond hoping for regulatory intervention or Apple possible capitulating, what can be done? The immediate answer is to pull their apps from the Apple App Store and focus on other mobile platforms such as Android, BlackBerry and Windows Phone 7. The simple fact is that services would be far worse off not being on Apple at all than they would be in a situation where it takes 30% of monthly subscriptions.

With Juniper forecasting that global revenues from mobile music will grow from $2.4 billion last year to $5.5 billion by 2015, there is an awful lot at stake. Subscription services are only going to be part of that $5.5 billion, but they represent the new stage of digital evolution as the ownership model of downloads gives way to access- based services. Yes, Apple arguably made this market possible for subscription services, so they should enjoy a share of the market spoils. The problems come when its cut drives others out of business. But maybe, if we listen to the extreme end of the conspiracy theories that have sprung up around this issue, that is exactly what Apple wants to happen.

The (twisted) logic goes a little like this: Apple bought Lala in 2009 and is about to turn the ‘on’ switch at its $1 billion data farm in North Carolina to power its own music and video cloud- based subscription service, meshing iTunes and MobileMe. So, if you follow this argument to its natural conclusion, Apple is using this app subscription move to blow the competition out of the water as it has been focused so much on track downloads with iTunes to date that it is now years behind the market in streaming. Everything here is subject to change and Apple may yet make concessions before the regulators get involved. At the moment, it’s too early to call any of this. As with all things Apple, truth, fantasy and conspiracy all combine to the point where perspective gets trampled into misleading new shapes.