Tuesday, February 22, 2011

Apple's New Policies Prove Difficult for Some Developers

Ars Technica recently posted an update regarding Apple's changes to their app store policies.  Basically, "Anyone who sells subscription-based content outside the App Store must also use Apple's system, giving Apple a 30 percent cut."  This might not seem like a very big deal at first, but if you read that newest update from Ars, you can understand why some developers are pissed off.

There's a logistical problem with an app having to offer a subscription 2 ways -- through the app store and through their own transaction/subscription service.  How do you tell the user "hey, you need to choose how you want to pay for the exact same service either way, although one way gives Apple a 30% cut simply for our app being available on iOS."  For some developers, having Apple manage transactions is much easier, but other developers already have a revenue plan in place and Apple scraping 30% off the top can remove their incentive for having the app available on iOS.  Ars mentions two apps in particular, Readability and TinyGrab, two apps that could be very useful to iOS users but that won't be made available due to Apple's new policies.  I wouldn't be surprised to see things getting messy all over again when it comes to apps that allow access to Hulu, Netflix, Kindle, and other large services that many iOS users enjoy every day!

If you're still not sure why this is a big deal, let me offer an analogy to this situation to understand why some people are angry.  Say that a particular real estate company, Orange, owns 25% of the real estate market in a big city.  25% of all houses sold and all apartments/houses rented come from them.  Orange executives are sitting around trying to investigate "alternative revenue opportunities," and they realize that they're really losing out because every unit they sell spends all of this money on electricity, Internet access, and cable/satellite service, but that they never see a dime of that money.  But hey, they deserve some of that money because if they hadn't sold/rented that unit, those utility companies would never have gotten that customer!  Orange is in no way involved with these services aside from selling the house/apartment to the occupants who later purchase those services.  To increase revenues, they tell all of these utility companies that for every customer they got from an Orange real estate property (even houses sold several years ago), the utility company needs to give Orange 30% of all customer feesAnd if they don't comply, then they won't be allowed to offer services to all current and future Orange real estate customers.  Even if Orange couldn't do this with houses, it would be relatively manageable with a lot of their rental properties, which would be devastating to these utility companies.

Some rental properties have setups like this already, but the renter and service provider know that going into the deal.  I lived at an apartment once where I paid for Internet and cable service through the apartment complex, and I'm pretty confident they got a cut of that money rather than just handing it off to the service providers.  As a customer, the convenience was nice, but it also limited my options (for example, I couldn't get an external IP address so that I could easily connect to my computer from outside my apartment).  But some lost opportunities may never have been known to me.  Perhaps the cable company didn't offer certain channels or discounted Internet/cable/phone packages because they lost such a large chunk of their subscriber fees to the apartment people that it just wasn't profitable to offer those services.  What if they hadn't been able to offer me HBO because after HBO's cut and the apartment's cut, it just wasn't worth them getting only $1 per subscription, or because they simply lost money with each new subscriber?

That type of setup might work wonderfully for other services, but not for established services that don't want/need to participate (Internet, electricity, cable, phone, etc.).  It might work great for a smaller, local company that offers catering or laundry services to those occupants because it gives them a larger customer base without them having to establish a transaction service.  Here, Orange is offering them a service by managing transactions and providing customers, and they are by all means entitled to a cut of the profits (maybe not 30%, but whatever).  And with such a large percent of the real estate market cornered, they might still do very well for themselves simply by relying on their revenue from Orange's referrals.

This is very similar to what Apple is doing.  For some developers, this isn't a problem because they don't have or don't want to setup a revenue/transaction/subscription management service.  It's easier, and perhaps even more profitable, for them to use Apple's services and give Apple its cut.  That's fine.  But not every developer is in that situation.  Some of them already have revenue schemes that simply aren't compatible with Apple's new rules, and following Apple's rules will either confuse their customers or put them out of business.

Apple's "simple, one size fits all" philosophy can work very well for many of their customers.  For a lot of their customers, that's the reason they purchase Apple products.  They know that if they get the newest iPhone, they'll get an advanced smartphone that gives them access to thousands of apps that were made specifically for their phone.  That's great.  But what if you're an iOS user who loves to read Amazon's Kindle eBooks on your iPhone?  The books look beautiful on that new Retina display and it's very convenient because you always have your phone with you.  In the coming months, Amazon is going to have a difficult choice to make.
  • For simplicity, offer purchases only through Apple's app store.  Amazon would lose a lot of revenue by doing this.  Publishers already get a lot of the money from eBook purchases, and Apple taking another 30% cut from the sale would have to cut into Amazon's profits very noticeably.  It might even put them in the red; I'm not sure.
  • Confuse customers by offering eBook purchases through both Apple's app store and Amazon's own Kindle service directly.  Customers won't be sure which service to use, and Amazon will still lose a lot of revenue from those who choose to go through Apple's transaction services.  It's the same price and the same service/content, but Apple gets 30% from one of them because the credit card transaction goes through them.
  • Abandon the iOS platform.  This is next to impossible considering how many people read their Amazon Kindle eBooks on their iPod, iPhone, and/or iPad.  Maybe their customers switch to using iBooks, which means they shouldn't count on being able to read their books on any non-Apple device and they're locked into buying Apple devices for the foreseeable future.
Now, I do think Apple has a case in that Amazon is making a lot of money from an app that is being offered for free through Apple's App Store.  Amazon might have still needed to pay for the SDK or to get the app hosted on Apple's service, but I can see how this might agitate Apple.  So for subscription-based services, maybe Apple does deserve some amount of payment up-front or over time.  But that payment should NOT be the same as when Apple manages all of the transactions for these other apps.   The answer is not a 30% cut or a confusing prompt for which service customers want to use when making purchases.  I don't know what the answer should be, but Apple's current solution is unworkable for some of these developers and it will negatively impact iOS users significantly if they don't come to some sort of reasonable agreement soon.

Apple is well within its legal rights to do this; though you might argue it's anti-competitive behavior in that Apple's own iTunes and iBooks apps/stores don't need to pay such hefty fees.  It's easy for iBooks to do well selling eBooks for $10 but for Amazon to do the same, they'd have to pay Apple $3 for each book sold (and don't forget what the publishers take for sales from both companies).  But considering the fact that most people just want to use their phone as simply as possible, this probably won't amount to much fanfare beyond the developer and techie community.  The only way around Apple's BS like this as far as I know is by jailbreaking your iPhone, which <10% of iPhone users actually do.  It's a shame that more people aren't aware of issues like this, because I honestly believe actions such as these by Apple limit the growth of new and interesting apps.  It's already difficult enough to make money with iPhone apps (and to be fair, it's no picnic in the Android Market either).  Nevertheless, when Apple further limits revenue opportunities for already struggling developers, it can really hurt the app community and customer's choices in the long run.

In the meantime, I'm going to keep enjoying my Android-powered Evo with a 100% community-developed, open source ROM: CyanogenMod.

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