June 5, 2015 6:27 pm

Apple rewrites app economics for media

By Tim Bradshaw and Shannon Bond in San Francisco

‘I can’t pretend that it won’t impact our business,’ said Tim Westergren, co-founder of Pandora, the music streaming service

While record labels and artists are looking for a financial saviour, Apple’s priority is to use content to sell its hardware

Apple is planning a departure from the pricing formula that has defined the economics of digital media for a decade in a change that would cut the 30 per cent fee that media companies pay on subscriptions.

The iPhone maker is discussing new commercial terms with media companies, people familiar with the matter said, to alter the 70/30 “Apple tax” pioneered by Steve Jobs when its late founder launched the iTunes music store in 2003.

The improved terms being discussed with media companies would apply to revamped Apple platforms such as its long-anticipated TV update and forthcoming changes to Newsstand, its gateway to digital newspapers and magazines, rather than to its existing App Store terms, which will remain the same for developers, according to people close to the discussions.*

Changing Apple’s terms of trade could improve the economics of online content businesses and reassure regulators that the company is not abusing its position as gatekeeper to one of the most lucrative digital marketplaces.

Apple paid out $10bn to app developers last year, from in-app payments and subscriptions, and has hundreds of millions of iTunes accounts. Its 70/30 split has been mimicked by digital content platforms run by Google and Amazon.

Improving Apple’s terms would make its devices more attractive to content creators at a time when it faces a threat from Google. By some estimates, Android’s app store now generates more revenues for developers than Apple’s, eroding a longstanding advantage that ensured apps often launched first on iPhones.

The mooted change comes as competitors including Google, Facebook and Snapchat are making fresh attempts to incorporate professional content, from news articles to videos, more deeply into their apps and services, and as Apple itself readies a renewed push into music and television.

Apple is expected to announce a subscription music service that will offer unlimited listening and artist-curated internet radio for $10 a month at Monday’s annual developer conference in San Francisco, using technology from its $3bn Beats acquisition. It declined to comment on its plans.

While the Apple Music launch will be the focus of Monday’s event, its ambitions in media reach much further.

Today, rival music services such as Spotify, Deezer and Rdio that charge the same $10 monthly fee must pay out a 30 per cent share when subscriptions are bought through Apple’s in-app payment system on iPhones and iPads.

That looks set to change for Apple’s new media services, according to people briefed on the plans, including video subscription services such as Netflix, Hulu and HBO Now, and publishers on its Newsstand portal, including Condé Nast, Time Inc, and the New York Times. The Financial Times operates outside the App Store using a browser-based app.

Music companies in particular have struggled with the burden of paying out such a large portion of their revenues to Apple when customers sign up through the App Store.

Ben Drury, strategy chief at 7Digital, which provides technology to music streaming services, said the "Apple tax" made it "completely unviable" for such services to take advantage of Apple's payment system.

"If Apple does move to more viable economics, it would massively benefit the music industry," he said. "Many of our clients are desperate to tap into the Apple payment system, but at the moment they can't make the numbers work."

However, he cautioned that to make a difference to music subscription services, most of which lose money or operate on wafer-thin margins, Apple would need to move to a 95/5 revenue split.

Some app developers have also begun to complain about the rigidity of Apple’s model, at a time when a small number of app makers generate a huge portion of App Store revenues.

Jeff Hunter, a former Apple software developer who co-founded the AnyList shopping list app, wrote an open letter in February asking for a tiered system that would see Apple’s take increase as a developer's revenue rose.

"This change would be a shot in the arm for Apple’s independent developers, and would allow more people to work full-time on creating software for Apple platforms," Mr Hunter wrote.

Apple has already begun to test a more generous split for some premium content services on its Apple TV box, Recode, reported in April.

It remains locked in negotiations with US broadcasters over an internet TV service of its own, to be accompanied by a revamped set-top box that incorporates the App Store, people close to the discussions have said. However, Apple’s previous hopes to launch both the TV hardware and service next week have been pushed back until later in the year, they say.

While the new deal could mean Apple forfeits hundreds of millions of dollars in revenues from in-app payments every year, it could also assuage regulators anxious about its power over content companies.

The change comes as mobile phones become consumers’ primary source of information and entertainment. More than two-thirds of the world’s population will be using smartphones and data usage will increase tenfold in five years, according to a report this week from Ericsson.

Growth is being driven by the prevalence of mobile video in news, advertisements and social media.

The Worldwide Developer Conference next week is expected to include updates to its iOS and Mac operating systems, alongside improvements to apps for its new Watch device.

Additional reporting by Robert Cookson in London

Copyright The Financial Times Limited 2015


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