The Orange View (on hiatus) Because Apple is great but it isn't perfect

7Mar/11Off

Apple’s iPad vulnerability? Hollywood pulls an Apple

The announcement of the iPad 2 last week, following what I've described as the trail of tears and broken dreams for Android tablets, has certainly put Apple in the cat bird's seat as we move into the post-PC age of personal computing.

The iPad has like 90% market share and there seems to be little chance that any of the misbegotten and overpriced offerings from competitors will catch on anytime soon. Microsoft is said to be years away from even introducing a competitive tablet operating system. All of this has prompted folks like Dan Frommer to declare "game over."

But the tech world has been here before and there's a growing vulnerability for Apple at the intersection of its bad behavior around subscriptions and the power of the copyright holders aka Hollywood studios, big record labels, TV networks and other content publishers.

Two quick lesson from recent history.

When Apple's iTunes store had already built up a hefty market share a few years ago, record labels wanted a price increase. Unsatisfied with a measly 99 cents a track, they wanted $1.29. Sure, it was a recession and, sure, digital sales were not even rising fast enough to offset the decline in CD sales, but, hey, they wanted more dough. Apple balked.

So what did the record labels do? Give up in the face of Apple's seemingly dominant position? No way. They went to the fingerling online music stores, primarily Amazon, and they offered them a deal -- music tracks recorded at a higher-quality 256 kbps and without hated digital rights management imposed. Apple was stuck with 128 kbps quality and the hated DRM from all but one of the labels. Amazon's digital music share started growing fast and guess what happened? Apple caved and agreed to the 30% price hike despite the recession. Sales of digital music slowed a lot but revenue increased slightly.

Then there was the case of electronic books. Amazon got way out in front with the Kindle. Until last year, it was coming down to a two horse race between Amazon and Barnes & Noble. The big six publishers, or at least five of them, started to freak out as they feared print sales would be cannibalized by the cheaper ebooks. Amazon and Barnes & Noble priced new best sellers at $9.99, though many, many new ebooks were priced between $10 and $15.

So despite the seemingly dominant position of Amazon and B&N, the big publishers went looking for someone to offset that power and found a peevish Steve Jobs, fresh off the record label humiliation, a ready partner. They got together and ginned up a wholly new business model for ebooks dubbed the "agency model." Publishers would control the retail price consumers' paid and ebook sellers would get a fixed 30% cut. Destroying much of the basis for retail competition, they reined in Amazon and B&N and let Apple's high-priced iBookstore into the game.

Now it appears that Apple may be the one overplaying hand. The iOS app subscription rules it unveiled last month stink of anti-competitiveness, excessive greed (even in a business context) and hubris. The rules only apply to subscription services but I'm sure Hollywood and other big content makers are watching, too.

Perhaps Steve Jobs & Co. think their monopoly position is unassailable.

But what if fearful content makers started offering magazines, music, movies and TV shows at much more favorable terms only off the iPad. Like that content locker in the sky we all want -- access to all the content you've purchased downloadable whenever you want on any of your devices. The key is they keep selling to Apple on the old terms, so they're not risking much loss of revenue from iOS world. But they're putting the screws to Apple just like they did over music and just like they did to Amazon and Barnes & Noble over ebooks.

The worse Apple behaves, the bigger the risk.

Posted by Aaron Pressman

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  1. Good piece. I see a greater danger to the subscription policy than to Apple itself. If the market “tells” Apple to change, they will eventually. And I doubt their bottom line will suffer TOO much in the process. Let’s sit back and see where supply and demand lead us.

  2. I don’t understand how people view Apple as newly greedy and arrogant over subscription pricing.

    That facts are this: Apple’s model is the same across the board for all content be it apps, music, movies, books, or content subscriptions. It’s called the agency model. The content provider sets the price and Apple takes a 30% cut to cover the cost of maintaining the on-line store and content delivery system. It is Apple’s position that is runs it’s content stores at a near break-even. In other words, 30% is the cut required to cover actual costs.

    Apple has been totally consistent in it’s pricing. There is nothing new about how Apple is handling subscriptions. Why doesn’t anyone in the blogosphere recognize this simple truth?

  3. “The content provider sets the price and Apple takes a 30% cut to cover the cost of maintaining the on-line store and content delivery system. […] There is nothing new about how Apple is handling subscriptions. Why doesn’t anyone in the blogosphere recognize this simple truth?”

    See, here’s the difference. Apple is requiring content suppliers to use their store and Apple takes 30%.

    I like the mall analogy–Apple owns the mall (iOS). Apple has a bookstore in the mall. Amazon has a bookstore in the mall. Apple is basically telling Amazon that if you want to be in our mall, you have to let our bookstore sell all the same books that your bookstore sells and we’ll take 30% of any of your books that get sold through our bookstore. Don’t like it? Get the hell out of our mall.

    There’s the problem.

  4. @Peter
    To extend your analogy – I think it’s more like Amazon building their store onto the side of Apple’s Mall but with the main access through Apple’s Mall. In other words, they’re using the popularity of Apple’s Mall to syphon off traffic and expecting not to have to pay any ground rent for the access. Yes, there is another door into Amazon’s store, but it’s way down the street where there is no foot traffic.I know of no other store where they would allow free advertising for a competing business.


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