Apple Subscriptions

The hot button topic these days is Apple’s “new” subscription service and the conditions they are enforcing on it. Not only are they drawing harsh criticism from publishers for not letting them have all the users data (to be sold to advertisers), they are also catching fire for driving poor Readability out of business (or from the app store).

What’s forgotten in all this commotion is that the truth of the matter is far from all the buzzwords. As usual the lack of actual news from Cupertino is prompting the big tech blogs to bash Apple a bit, citing “sources from the publishing industry”. What the pundits even like better is when developers write something to be linked to, like the Readability guys are doing in an open whining letter to Apple.

Usually I prefer to ignore this link-baiting and attention-deficit-syndrome. If developers think their work gets to little attention then they start ranting publicly hoping to be heard and the major public outcry persuade Apple to give in. I’ve been guilty of that myself at times.

But in this blog post I want to explore why Apple has every right to what they are doing. I fully support their message.

Chris Adamson is calling Apple’s practice rent-seeking. In layman’s terms he is accusing them of seeking income resulting from their monopoly instead of adding value to products. But is this really the case?

We always had Subscriptions with Apple taking 30%

When Apple launched IAP their engineers had come up with three kinds of product types for you to choose from:

• Consumable – you can buy it multiple times, non-transferable to other devices
• Non-Consumable – you buy it once and can use it on all your iOS devices
• Subscription – you can buy it multiple times, but you have to implement the duration and transferability yourself, via your own server

The first two were well understood by developers and so you have many games that allow you to purchase one-use products (like ammunition) and all of my own IAPs are Non-Consumables. At the same time the old-style subscriptions where too cryptic for the majority of developers. What a developer does not understand he cannot recommend to his customer. Such a customer of said developer could be a big publishing house seeking to pay for some reading apps to be built for the iPad.

Implementing Consumable and Non-Consumable IAP products is fairly easy due to StoreKit or wrapping classes like my DTShop. In the least all you have to do is keep the info on the device what products have been purchased. You can also keep this info on your server and use a web-API to validate cryptographically signed store receipts.

So Apple has always been offering Subscriptions via IAP, but developers did not want the hassle of having to build a server-side and at the same time having to go the extra mile of securing the process such that crackers could not break in and get the content for free. The stuff that’s done via Apple’s system is still uncrackable. Us little guys have no resources to build a secure subscription service. Again, what we cannot imagine we cannot recommend to our app contract customers.

You can read up on all of this in the In App Purchase Programming Guide. There a new paragraph has been inserted to explain the new “Auto-Renewable Subscriptions” option.

Auto-renewable subscriptions are delivered to all of a user’s devices in the same way as nonconsumable products. However, auto-renewable subscriptions differ in other ways. When you create an auto-renewable subscription in iTunes Connect, you choose the duration of the subscription. The App Store automatically renews the subscription each time its term expires. If the user chooses to not allow the subscription to be renewed, the user’s access to the subscription is revoked after the subscription expires. Your application is responsible for validating whether a subscription is currently active and can also receive an updated receipt for the most recent transaction.

Another problem with the old-style subscriptions was that for a monthly publication you would have to ask the user every month to make an In-App-Payment thus risking for a user to actually opting out. Generally subscriptions are way more lucrative if you can bank on people not caring about this small monthly fee that gets paid from their credit card automatically every month.

Subscriptions, in other words, are making money from “could not be bothered to unsubscribe” users. This business model did not work with old-style subscriptions. It does work great with new-style ones. So if a publisher would have set his mind on selling subscriptions via the often cited credit cards of iOS users he could have.

Apple has always been charging 30% on all payments made via your iTunes account. For apps and for all of the three original types of IAP products. Apple always was stating clearly what kinds of products you can and cannot sell via IAP: Digital goods which are to be delivered to the app. So no gym membership, no donations. Digital content, extra game levels, extra features, yes.

For all other products you were free to choose any kind of payment you like, be it PayPal or your own CC-payment provider. For the longest time no geeky engineer at Apple saw a problem. Magazine subscriptions would generally not be fitting into the IAP scheme, as you would get paper in the mail. Clearly there was not digital delivery to devices happening. Publishers who experimented with paywalls when not widely successful in charging users for reading content online. Not if most of the interesting information is available for free anyway. (Read “free” as “sponsored by ads”)

In fact, if you would have submitted an app that offered a subscription for a paper-based magazine, you would have gotten your app rejected. Digital delivery to the app only.

Times change. Apple invented the first feasible tablet and now suddenly digital publishing and magazines are all the rage. This market was spearheaded by the likes of Wired Magazine which circumvented the subscription IAP problems by just selling individual copies. And a couple of really smart engineers sat down at Apple to find out why nobody is creating the old-style subscription IAPs.

It dawned on them that for subscriptions to be feasable they needed to be centrally managed (preferable somewhere in iTunes), with server-side authentication (on Apple’s secure system), auto-renewing (to decrease likelyhood of opt-out) and generally be super easy to subscribe to (one click + password). Apple learns, they really do.

The old “digital download to app” rule was amended to read “if you offer a digital good or subscription outside, then you must also offer it inside for the same or better terms”.

Apple likes to launch improved features with partners, so Rupert Murdoch talked to them just at the right moment. So they became launch partners for something that was not really new, but had an extra layer of polish dealing with the inherent previous flaws. A fourth IAP product type was added, but if you are so inclined the old-style “subscription” product is still available, although the above programming guide discourages its use. They don’t have to, we knew before that it was crap.

Evil Publishers Banking on Mental Loophole

Then there are the publishers. Those are basically in the business of selling demographics to advertisers. The more demographic information you have the more valuable your numbers are. But that was not always the case. There was a time when the price for a newspaper at the newsstand paid for its production, but these times are long gone. Nowadays the price of admission only pays for the distribution. Magazines cannot be free because otherwise brick-and-mortar stores would not sell them as there would be no margin in them for them. If they where totally honest then magazines would actually be given away for free even in physical stores. Publishers would directly pay the stores from ad revenues. But this would cause another problem: if magazines were free (as on the web) then I would be getting a bunch every time I pass by the store, everything would be “sold out” all the time. The price of a magazine in a store is a way to artificially limit demand.

There’s an shorter explanation: greed. Ok, maybe not greed per se, but at least the capitalistic tendency of trying to maximize your profits with the added footnote that you’re only doing that to stay in business. One way to do that is to bundle products where a user feels that he is getting more for his money than be purchasing individual products. This is banking on a flaw in our mind as has been revealed by the author of Predictably Irrational:

When faced with the following choices for magazine subscription: $59 for digital edition, $125 for print edition, and $125 for digital+print edition, 84% opted in for the third option.

Using this loophole publishers are selling more paper editions even though really people would be satisfied with the digital editions alone. Apple, always on the lookout to give users what they really want, designed a way around this trap. If you subscribe to a product via In-App-Purchase then you’ll only get what you want: digital goods. I don’t see any newspaper bundling in a free paper edition with digital subscriptions. Like “Thank you for subscribing to the digital edition of Bla. If you enter your address now, we’re happy to also send you a paper edition of Bla for the duration of your digital subscription”. 🙂

So Apple is basically upending the cart. Publishers want to sell more paper and give away digital content as additional value. Apple is telling the publishers “f.ck your dead trees, our customers only want the digital version”. There you have it, Apple users are tree huggers and Apple only has their users best interests in mind… (again with the capitalistic footnote of having to maximize profits yada yada)

The main difference between Apple and publishers being, that publishers are trying to maximize their profits against the interests of users, while Apple keeps finding ways of maximizing their profits in sync with users’ wishes. I am certain we’ll find Apple abolishing ads in paid magazines as soon as the dust has settled a bit and Apple has gained the de-facto monopoly there as well. Or rather: force publishers to advertise via iAds. Mark my words.

Amazon versus Sony

Part of the maximizing profits plans of enterprises like Amazon is to try to get around the 30% Apple tax wherever possible. At first they tried it with the Kindle but it turned out that the iBookstore primed the users sufficiently to have them want to also READ on their iPads. So Amazon was forced to release an app on the iPad to allow reading of digital books.

But here the fine line was overstepped: digital books are the classic example of purchases that must be made via IAP according to these ancient IAP rules I mentioned above. Amazon thought themselves to be extra smart of allowing Kindle book purchases via web view. And for a very long time Apple did not act upon such infringement. In fact, they cannot do anything about it because the Kindle app serves to bring even more customers into the Apple ecosystem.

One might argue that Apple is just prepping for an evil “bait and switch” trick. People who are hooked on reading on the iPad would have to turn to the iBookstore to get fresh content if Kindle is pulled. Or read via the web. So for the time being Apple is tolerating this stepping over the line.

Sony is less lucky. Not only are they are Japanese company (Apple only trusts the Asians for building hardware cheaply), they are very late to the game (why didn’t they come to Apple last year?) and then they want to copy a business model that is only tolerated by Apple, not expressly permitted. Sony has a smaller market share in eBooks than Amazon by a far margin. So who do these guys think they are?

Apple generally has three ways to deal with apps that are “against their rules”:

• Reject Apps before they can enter the store (that’s the ideal case, deal with it before any damage is done)
• Reject Updates to apps (hoping that the developer will see sense and pull the app himself because he cannot fix problems or add new features)
• Pull Apps once they are in the store (but only do that if the expected shitstorm is smaller then the long term benefit to apple)

Pulling is always just a last resort, mostly used for cases like “Babyshaker” or “I am Rich”. The kindle app is not really harmful for Apple’s image as a squeaky clean family-friendly company. So no reason to pull it, but certainly Apple is talking to Kindle right now as to how they can find an agreement beneficial to both companies.

Now about Sony, they just came at the wrong time. Obviously Apple does not want to negotiate on multiple fronts at the same time. So that’s why they are provisionally rejecting the app to gain leverage for subsequent negotiations. I already mentioned that once an app made it to the store Apple is much more hesitant to enforce policies.

There are several problems that Apple has to deal with which make the situation much less obvious than “Apple is evil”. At present you have to create a product for each IAP and set the price, type, screenshot and description (preferably in multiple languages). While this is fine for 90% of IAPs this process is not scalable. It’s simply impossible with the current tools to create IAPs for 810,000 books and other digital items as Amazon claims they have. Let alone have Apple’s review team review and approve all of these!

The success of the app store and iBookstore have come to Apple way faster than the growth in selling music. Apple’s problem is that they are not very good with Web 3.0 technologies and they constantly worry about some problems that might arrive from allowing free access to their data as well as establishing APIs that would enable publishers to bulk-load thousands of IAPs into their app store system. For two years now I am lobbying for an official sales report API, Apple’s answer was to build an experimental API themselves and package it in an app. Granted, I am no Amazon or Sony, but this is how Apple engineers are dealing with API problems. APIs can be a Pandora’s Box if they are not done right. So let’s avoid tying up too many engineers to investigate how to build APIs that are secure and performing well.

Music Publishers are getting data from Apple by means of a static database extract from the iTunes database. Again, no proper API anywhere in sight that could be built upon. I am sure somebody at Apple has a whiteboard with pro and cons of adding an IAP bulk-loading API. On the con side of that will be that the business has grown at an amazing rate even without getting 30% of Kindle or Sony eBook sales.

History tells us that rejected apps (e.g. Google Voice) will eventually be permitted if the benefits to Apple outweigh the drawbacks, but it might take a long time. Even longer if there’s a problem on Apple’s side. Maybe something will move once they launch their new data center.

Readability versus Evernote

The latest outcry was caused by Apple rejecting Readability. This has long been a wonderful browser plugin that cleans web pages from clutter and ads. Now the makers thought it would be cool to offer this as a paid service.

Readability essentially scrapes content and because users no longer see ads this would have caused a big legal problem for them. Big blogs like Engadget or TUAW would have probably started to sue them out of existence. But some guy at Readability had the genius idea of sending the majority (70%) of subscription fees to the publishers.

At least that’s what they claim they will do. Nowhere on their site can I find a form to sign up as a publisher. How can this work? Will they start contacting all the owners of websites personally whose pages are scraped and filtered through Readability? Maybe my articles are too short to be put on Readability? In any case – for lack of evidence to the contrary – we must assume that Readability’s motto is “better to ask for forgiveness (and offer money) than to ask for permission”.

Apple sees Readability as a publisher which are in fact are, a re-publisher. And since they charge a subscription fee for their service they fall fair and square into the set of rules that we outlined above: Apple needs to get 30% and if they offer something outside of the app store they also need to offer it inside for no less than the same terms.

Timothy Meaney, one of the Readability founders, stated:

We launched the service and submitted our app *before* the new subscription policy was announced by Apple.

He is right about the clarifications and the new auto-renewing IAP type. But as I have shown above the rules have always been like they are right now, only less clear. I bet that Readability arrived at the 30% because Apple has spearheaded this percentage. Before the app store nobody thought that any developer would be willing to share 30% of his profits with Apple.

But when doing due diligence on a business plan involving something on the app store you have to calculate with Apple 30%. So either you set the profit share for publishers at a lower rate or you tell them that their 70% is after expenses and commissions.

Another company that might feel uneasy about this rejection is Evernote. Theoretically they are offering a similar service, as I can also post web snippets in my Evernotes for finding and reading them later. But the situation is the same as with Amazon versus Sony: Evernote has jumped on the bandwagon early enough to be rather safe from prosecution. Readability is too late and thus unlucky.

Although there is a minor distinction. Amazon is important to Apple. Sony might be. Evernote is too (it is one of the top free apps on the Mac App store). Readibility has no successful track record as a subscription service where Apple can be sure that permitting it would gain them more in the long run than not permitting it. And another: Apple has made quite clear what they are thinking about people who write open letters.

Conclusions

We are now aware that there are several – mostly technical – issues at Apple’s end where work is needed on their systems to accommodate large-scale transactions. But we keep hearing that Apple is run like a start-up with engineers often switching between projects and preferring to work on technical challenges rather than legal ones.

Thus the most likely course this will take is that lengthy negotiations will try to find a solution that is achieved by minimum necessary technical changes at Apple’s end with a maximum of giving-in at the end of app developers and publishers.

Fact is that the app store is by far the fastest growing digital store on Earth giving it more and more of a monopoly status every day. Luckily for Apple there are other markets out there with less success, but still sufficient growth to be able to say that they are in no way a monopoly. So any threat of anti-trust action against Apple is only speculation. Apple is rather safe there.

The only dramatic change could come if there’s revolution in the mothership. Apple is a long-lasting and extraordinarily successful experiment in running a hybrid technocracy-monarchy. So successful in fact that it has outgrown Microsoft in market valuation and is quickly catching up to Exxon. Two companies which are structured in the way that “normal” big enterprises are built. It might or might not at some point in the future that this model will fall apart due to market forces.

Right now you have to play under Apple’s rule if you want a piece of the pie that’s up for grabs on the iOS eco system. Stop whining and start building a service/products that Apple cannot be without. Then they’ll either buy your business or find ways to let you breathe on their turf.

Categories: Apple