Is the App Store Hamstrung by Its Billing System?

Posted: March 7, 2011 in CRM
Tags: , , , ,

A subscription service provider’s offering has three parts — the actual service-product, an infrastructure for delivering it and, for lack of a better word, value-add.  A provider may deliver all three as a single service but that’s not necessary.

A common form of subscription is a car lease in which a customer buys the use of a car measured in miles per year for a fixed term such as three years.  The infrastructure and service are the actual car, which remains in the possession of the lessee as long as the monthly payment stream is maintained.  Finally, the value add can be rather minimal ranging from nothing more than the standard warranty to scheduled maintenance at no additional charge.

More commonly, many subscriptions today are in the form of a pure service.  You could argue that a car lease is really a service.  But the fact that a tangible product changes hands, at least temporarily for the duration of the lease, places a car lease in a different category than software as a service for example or a subscription to content — delivered increasingly in digital form.

In a service subscription, the service-product is the actual content or use of an application and it can change frequently.  The value added is often substantial and may include telephone support and the right to modify the subscription as needed.  SaaS software vendors tout their ability and willingness to modify customer usage profiles almost at will up to and including terminating coverage at any time, hence support for the value add needs to be as encompassing and robust as the service-product itself.

In a subscription service the infrastructure is the smallest part of the delivered whole product and while the service-product cannot be delivered without infrastructure, it is a relative commodity in comparison to the content and the value-add.

This presents an interesting situation for the subscription industry because it shows concretely that subscription services have evolved to a point of differentiation, a point where all subscription providers are not the same, if indeed they ever were.  This also brings into sharp relief the situation that Apple finds itself in with an App Store selling software and songs plus content — fundamentally different products — that has only one way of selling.

Many of the applications that Apple sells through its store are uniquely tuned to its products and operating environments.  Moreover, the companies that develop the applications have little or no other access to the market — they have skeleton sales and marketing — and the price points for their applications are so low that they could not market their applications any other way.

An iPhone application, for example, that sells for two dollars could not make money for its developers in the open market and might possibly never exist if not for the App Store’s power to aggregate demand.  This is especially true if you consider that no transaction takes place between the vendor/developer and Apple until a customer buys the application.  This model frees the software developer from bearing the cost of a non-sale, the cost of general sales and marketing operations.

In the above situation Apple’s policy of taking thirty percent of the revenue from the sale makes reasonable sense.  The developer avoids the ruinously high costs normally associated with sales and marketing and has a reasonably secure path to market.  In this scenario, Apple participates in all three tiers of subscription services — infrastructure, content (owned by the developer) and value add in the form of marketing, sales and service associated with delivery.  The developer may still wish to offer additional support services, but that’s an individual call.

A content publisher — specifically of newspapers or magazines — will present a very different profile as an App Store partner by virtue of its product type and legacy business.  Like the software company, the publisher comes to market with unique content, in this case journalism.  The publisher has an established brand and a customer base and the publisher already participates in activities that build the brand and service customers (through a circulation department).

The part of the App Store of greatest interest to the publisher is the infrastructure which supplies delivery and billing from which Apple takes its thirty percent.  The question is whether the publisher receives enough value from the association given that the primary use of the store is the infrastructure component.  Opinions will vary and this is a contentious issue in some quarters today but capturing thirty percent of the transaction, while worthwhile for the software developer, might be a bad deal for the content publisher.

Software is a product, regardless of how it is delivered, that is made once and improved sporadically over time.  Content is ephemeral and a publication, by definition, needs to be rebuilt as often as it is published, typically daily for a newspaper and perhaps monthly for a periodical.

So, for at least two reasons including lower demands — primarily infrastructure (and specifically NOT branding or customer outreach) — and higher overhead to produce a product, the one size fits all approach to subscriptions appears to be doomed if Apple continues down its path of charging thirty percent.

Rather than a simple reconstruction of the publishing model through a digital store, Apple might be better off considering how it can expand readership and innovate around product and truly add value.  Since all of the content is in digital form, it would be trivial to reconfigure it by branding the components and then selling new combinations.

Sports, Op-Ed, National and Business sections of various papers can all be branded.  Suppose a transplanted New Yorker living in San Francisco wishes to follow the Yankees in the New York Times through the baseball season.  That same person might prefer the front section of the Wall Street Journal and the Op-Ed section of the Washington Post.  Today that consumer would need to buy or subscribe to three papers plus the San Francisco Chronicle if s/he wanted local coverage.  But with a little innovation a consolidator like Apple could provide the value add of bundling the discrete elements into a single deliverable expanding the papers market reach in the process.

Bundling like this requires a very flexible billing system that can slice and dice products and support the whims of subscribers who want to take up and cancel content subscriptions at any time.  Such a billing system is not usually found in an organization that sells products in one-time transactions such as for software licenses and songs.

Apple’s approach to the content subscription market may be dictated by its approach to billing and not any other business concern.  The company may be selling content as if it were software simply because its billing system won’t let it do anything else.

The alternatives are to partner with emerging companies like Aria or Zuora or to build a new billing system from scratch.  But it’s late in the game to be building something.  Some publishers have already embarked on projects of their own and the billing vendors are very active at this point.  So Apple’s options appear to be limited, team up with or buy a subscription billing provider or continue stumbling through this new market — a very un-Apple thing to do.

Comments
  1. emschles says:

    Great post …. have a question though. How about subscription services like salesforce.com or other SaaS products that are more complex than those usually found in the App Store. They have their own ‘utility’ and add value to users in other ways. Less point solution and more platform.

    Perhaps products such as these can focus on partnering with Apple rather than just ‘posting’ their product on the marketplace for a fee. As an example – having the SaaS loaded as an App for certain types of users (sales, marketing, etc.).

    Seems to me both the SaaS provider AND Apple have something to gain here so negotiations might be more amenable and less – 30%; take it or leave it !!

    Just food for thought !!

  2. mahtavajon says:

    How do you know Apple’s current billing system at won’t do exactly what you describe? Perhaps Apple doesn’t want to do this.

    Why should they? The are a powerhouse in this market, and if companies dont’ want to distribute through iTunes, they can hit the road.

    70% of something is better than 100% of nothing.

    • Denis Pombriant says:

      As you can see the title puts it in the form of a question. We don’t know but we surmise. Why else would an otherwise 21st century company adopt a 19th century business model complete with a robber baron hit the road attitude? In the 21st century we all know or should know that the only acceptable outcome is a win/win. 70% take it or leave it, ain’t that.

So, what did you think?

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s