Hello everyone and welcome to Digital Music Trends. This week on the show an interview with Carl Costa, director of Songhi, a social music gaming start-up (www.songhi.com). We talk about the company’s development, its business model, online gaming & music, relationships with the labels and much more!
And now as a second part of the show let’s talk Apple. Many of you will have heard by now of the new Subscription rules that have been announced by the company. Basically from June the 30th all content distributors that allow access to their subscription services via an iOS app will be required to offer their users the option to subscribe directly from the App – which means that Apple would keep 30% of the revenue from the subscription. On top of this it looks like they would not be able to provide any direct links within the app that potential subscribers could use to circumvent the in-app purchase.
I must stress that publishers will still be able to bring in subscribers that signed up through their online channels but that this second in-app option will also have to be in place. This is an interesting turn of events that many have labeled as greedy on Apple’s part. Music start-ups like We7, Spotify, MOG and Pandora still operate on very low profit margins because of the costs involved in paying the rights-holders and developing/maintaining the technology required to provide a good service to their subscribers. A 30% cut in their earnings would certainly compromise the profitability of these companies. But in the end it all boils down to how many users would end up subscribing directly from the app – which I can imagine will be painfully easy compared to having to go through the company’s site, entering your billing information etc etc.
The success of in-app subscriptions also depends on how prominent the option will have to be within the app itself – meaning that companies could provide this option but bury it fairly deep within the app itself so that users would not be able to readily find it. Obviously though this would cut into their conversion rates as Apple will specifically prohibit in-app links to lead to the subscription page for the service.
Steve Jobs apparently – because we never know if it’s actually him or not – replied to a note by a worried Apple customer saying that this new subscription charges will only apply to publishers, in other words content owners and distributors and not to Software as a Service companies. Thanks Steve. So basically if you are Dropbox or Salesforce then you’re safe but if you’re a Spotify that’s where things start to get problematic. I understand that Apple wants to avoid seeing the content industry as a whole, with its big chunky numbers slipping away from the iOS net but at the same time – for example in the music industry – the margins just aren’t there to justify such a high percentage to Apple. A Neflix for example may be able to sustain losing 30% of the income from part of their subscribers to Apple but this charge may throw a smaller, less profitable company off balance. Google – in what looked like either a direct response or incredibly good timing – announced its One Pass subscription facility which will charge publishers only 10% – which according to Google goes to cover their costs. At the moment the One Pass service caters for written content only but there’s no reason why Google should not be able to extend it to Music as well.
Naturally there have been a number of reactions to this announcement in the music technology world. Steve Purdham the CEO of We7 said that: “Thirty percent makes music subscriptions economically unviable in the current form” but he also maintains that once the dust settles there may be different approaches to this new charge. Rdio CEO Drew Larner told paidContent.org that: “From a financial standpoint, that fee is certainly untenable for us, that’s obvious.” Deezer issued a statement saying that: “It is very unlikely that Apple could legally apply these rules on the paid digital music services. It would be a leverage of its dominant position on the mobile applications market to reinforce its already over?dominant position in the paid digital music market”. The BBC quotes Forrester Analyst James McQuivey saying that: ”Taking a 30% toll amounts to a massive increase in the cost basis of a content business that will kill it.” Also the CEO of Forrester has chipped in with a blog post on the Company’s website where he states that Apple has wildly overestimated the pricing of content on mobile devices. He reckons that a realistic fee level for subscription-based applications should be around 5%.
Also a number of news outlets from PC World to the New York Post have commented on the impact that this decision will have on a service like Pandora that counts on the App Store as one of the main driving forces for its subscription service. Some are saying that this could even delay Pandora’s plans to go public with an IPO.
The New York Post also quotes Ted Cohen from TAG Strategic as saying that: “Apple, in this instance, and in a few other instances, is being more anti-competitive than Microsoft ever was.”
At this stage there is really no saying as to whether Apple is just testing the waters or whether it’s really going to implement these new rules starting June the 30th. If the company shows no signs of budging anti-trust regulators on both sides of the Atlantic, the European Commission over here and the Justice Department and the Federal Trade Commission in the US, will start investigating its new policy seriously. In fact apparently they are already doing preliminary studies to understand whether apple is using its dominant position to impose this charge. Either way I’m sure we’ll be hearing more on this in the next few weeks and as the deadline approaches!
Wall Street Journal Article: