Scott Herskowitz Marketing

I have great respect for Apple.  The company knows how to make intuitive products that consumers want.  And when it comes to business, they are extremely tough negotiators. In the case of the recently announced deal for magazine publishers, I believe Apple gave the publishers everything they wanted and could have been even tougher.  Overall, I think this is a good deal for Apple, but the real winners are the content producers and consumers.

Under the deal, Apple will collect 30% of revenues for subscriptions originating from the iTunes store or from in-App purchases.   Revenues from subscriptions made outside of the App store are entirely kept by the publisher.  There are other stipulations in the deal.  In-App purchases need to be quick and easy.  The price of subscriptions need to be the same (or cheaper) from within the App as they are outside it.  There is a restriction on links directing customers to the publisher’s website to subscribe.  Also, Apple will not share customer data with the publishers unless customers opt-in.  On the plus side for publishers, it is still permitted to provide free access to users with print subscriptions.  On the surface, this seems like an onerous deal for publishers.  30% seems like a large cut for Apple.  This is particularly the case in a troubled industry with relatively low margins.  There are some other factors, though.

Printing and distribution costs are eliminated in this model.  That doesn’t necessarily make up 30%, but it is something.  Presumably, another variable cost – (non-Apple) sales will be lower for this distribution channel.  Most of the remaining costs are fixed, so the more subscribers the magazine has, the lower the per customer cost.  What that means is from a customer who would not have subscribed to the magazine without Apple’s help, the magazine is essentially getting 70% of the sale for free.  The issue, then (aside from data), is with customers who would have subscribed directly but who will now subscribe through Apple.

It is also important to remember the majority of revenue for publishers comes from advertising – not subscriptions.  Advertising revenue is not an issue there, but the lack of customer data (which allows targeting) is more of a problem for publishers.

It comes down to this:  Either 30% is fair or it is not.

If it is not fair, publishers are going to get creative and fight back.  From an economic standpoint, if someone is told a company is going to take 30 cents for every dollar they earn unless they do X, they are going to spend at least 29 cents to make sure they do X.  In this case, publishers will make sure customers subscribe from them directly.  I haven’t seen the exact text of the new arrangement, but there are undoubtedly many loopholes in it.  I can think of a number of possible ways after just a few minutes of brainstorming.  Publishers have a larger incentive and more time and resources to direct towards this.

One thing publishers can do is advertising.  This could take two forms.  They can either make an emotional case or try simple education.  Apple’s cut might be fair, but the publishers can undoubtedly make a compelling argument against it.  This would most likely result in free PR, so it is likely to be effective.   If they don’t want to “go negative,” publishers can just use ads to educate consumers how to sign up for subscriptions from their websites instead of signing up with Apple and explain that they need the revenue to continue to produce quality content.  I can also easily envision a cancel and resubscribe campaign around this concept.

Publishers could also choose to give their 29 cents back to the consumers directly by bundling promotional items with directly purchased subscriptions.  Examples might include a print yearbook edition, wine glasses, a blanket, or any number of things. They could even reverse their current practice and bundle the print addition of the magazine with an iPad subscription.  For those who do not want to deal with recycling, publishers could also allow customers to donate their print edition to charity for a tax break.  This skirts the rule requiring parity for the direct and App purchasing options, but it’s unreasonable to expect content producers to ship items to Apple’s customers.  Not only is it unreasonable, but fulfillment would be impossible.  Apple is not sharing customer data with them.

Another option is to circumvent the “no links to the website” rule.  While an App might not be approved if it has a link back to the publisher’s website, there is nothing Apple can do about content.  A link and a plea could be couched in an editorial on the first page of the free sample edition of the magazine bundled with the App.  I’m pretty sure Apple doesn’t want to be accused of censorship, so there is not much they could do about it.

The other possibility is that Apple’s deal is fair to publishers.  That means Apple is adding value equal or greater than the amount they are charging for it.  For the sake of argument, let’s assume subscriptions double as a result of a publisher’s App.  The publisher still gets to keep 100% of revenue from its existing customers.  Revenues then increase by an additional 70% from the new subscriptions.  Since most of the costs are fixed, this is mostly profit.  That sounds pretty good.

There’s more, though.  Because advertisers pay by CPM, ad revenue essentially doubles.  The number might be a little lower, because targeting is not quite as good (less customer data), but this is still a good thing for publishers.

Whether the new rules announced by Apple may or may not appear fair to content producers, they accomplish something very important.  Electronic subscriptions are now possible on a device and in a format consumers want.  This can only be a good thing for the industry.  Both Apple and publishers will make some money.