Demand Side Economics

Posted: March 10, 2011 in CRM, Economics, Technology
Tags: , , , ,

Recently I wrote a couple of posts about Apple’s plan to charge vendors 30% of the transaction price for anything sold through the Apple Store (aka App Store).  For many things like software and songs I think this makes a lot of sense.  If you consider that the SG&A line of a company’s balance sheet is typically forty to fifty percent and that many of the companies that sell through the App Store have little or no marketing or sales functions, thirty percent sounds very good indeed.  In fact, with a price of a few bucks, most of the applications on the App Store would not see the light of day if their developers had to market and sell through more conventional channels.  The same is true with songs selling for ninety-nine cents.

But the post was about what happens if content providers like newspapers have to work under the same rules.  Unlike a song or software, a newspaper gets rewritten daily — you only sell so many before you need to reload and the overhead associated with active development of a daily product is high.  But also, a newspaper brings with it a recognized brand and a readership.

In that situation, it’s not clear that a service like the App Store delivers much more than a different kind of distribution infrastructure and the post questioned the fairness of a one size fits all pricing model.  You might argue that a paper with digital distribution loses its printing and transportation overhead so Apple’s offer is a good deal.  But no publisher is going to simply flip a switch to the digital world and those legacy costs will be with publishers for a long time.  Essentially, the publishers can’t afford to do both.  It’s a classic “innovator’s dilemma.”

The post concluded that Apple’s billing system might have something to do with this apparent rigidity.  A transaction-based system that works for songs and software appears ill-suited to a relationship like a subscription because it does not have to deal with the rigors of a relationship.  For instance, a billing system for subscription services needs to be very flexible and capable of making all sorts of changes to the purchased service, daily if needed.

The post got several comments including the one below, which was surprising.

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

Why should they?  They are a powerhouse in this market, and if companies don’t want to distribute through iTunes, they can hit the road.

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

The surprise was the “hit the road” attitude of the writer.  Today, competition is so fierce that a hit-the-road attitude seems not only wrong but like an antique from the robber baron era.  With a solution (and an attitude) like that it’s just a matter of time before other solutions, with more generous terms or, perhaps, one specialized for publishers, hit the market.

Our simple question is, what could make a company like Apple behave in such an apparently self-destructive way?  The post said that the billing system’s inadequacies might be the problem but, on second thought, that seems like giving too much “benefit of the doubt” given the number of emerging companies with billing solutions out in the market.  A company like Apple could always buy one of those companies.  It’s more likely this is a form of un-strategic overreach stemming from not knowing or understanding the customer.

Knowing the customer, or customer intimacy, has become a strategic necessity as one sector after another reverts to the mean after many years of rapid growth driven by high demand for new products and product categories.  Instead of pioneering completely new product categories, many companies today are innovating around established products and bringing out the next version.  Typically, they do this by adding features and functionality to existing products, replacing an expensive component with a less expensive one or fusing several components into one at lower cost, and by providing an experiential element to their offerings.

But I must stress that those approaches work for PRODUCTS.  Subscriptions are different.  If product differentiation thrives on features and functions, subscriptions thrive on experiences.  In this example, Apple is set up to provide low cost products, much like the brick and mortar retail giant Walmart.  But Apple is poorly suited to mediate third party experiences — notice I said third party experiences.

Apple is a master of orchestrating your experience with an iPhone or iPad or the shopping experience in its stores.  But it hasn’t learned the fine art of making itself invisible in transactions where it is only supplying basic infrastructure.  Its third party billing policies — encoded in a billing system — don’t help matters.

Beyond the billing issue is a more substantial economic issue as basic as supply and demand.  The Apple approach looks like a supply side, build it and they will come model but we’ve crossed over into a demand side era.  If you’ve noticed over the last couple of years with credit tight and the consumer tapped out, demand isn’t what it used to be.

The highly leveraged balance sheets of individuals, corporations and governments mean that, absent a return of John Maynard Keynes from the grave, demand will remain slack for a prolonged period.  Increasing or maintaining supply without doing something about price is like pushing on a proverbial string in this situation.

If you look at the newspaper industry today you will notice that readership is declining for two fundamental reasons.  Younger people don’t read papers as much as older people do and there are many more older people.  As Baby boomers give up the daily habit or (yikes!) begin to give up the ghost, there are fewer people demanding papers.

Most papers have already cut their coverage, laid off newsroom staff and wrangled pay cuts from their unions.  These actions have not been enough as advertising sales have declined and many have cheapened their products by printing fewer pages and covering less news.

Back to Apple.

Charging a high price for using its infrastructure for a third party subscription transaction is not going to excite publishers or make lots of money for Apple.  Publishers (and SaaS software companies) will go elsewhere.  There is a fundamental difference between selling products and selling subscriptions.  For all of Apple’s hip twenty-first century marketing and customer service prowess, its approach to subscriptions says loud and clear that it is still a twentieth century manufacturer and supply side fan.

 

So, what did you think?

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