Apple Subscription Surcharge

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Apple Subscription Surcharge

Unread postby Azmodan Kijur » Thu Feb 17, 2011 1:28 pm

Apple is to begin charging companies that have subscription services (magazines, music) 30% on the subscription for acquiring it through the Apple store. Big deal at first, but they are also putting a little clause into their contracts with these subscription providers that require them to charge the same price outside the Apple market as they charge within. Got a nice argument over at Fark about it, with some stating that this will have an inflationary effect on the cost of subscription services and others vehemently disagreeing. But let's take a look at the economics of the matter.

Say you sell a magazine subscription online. You do this at your website and you publish a free app that people use on their I-whatevers to use with the subscription. For a single issue, you charge a dollar (for arguments sake). Apple tells you that they will make it so that people can buy your subscription on demand through the store. Sounds good, right? More sales from that and all. But they tell you the privilege is not free - you have to give them 30% of anything sold via the store. You $1.00 becomes $0.70 in a heartbeat. Say your margin on the item is 20% - of a dollar charged, you make $0.20. That's bad. What do you do? Well, you cannot operate the service at a loss - that would be less than stupid. Reasonably , assume that the $0.20 profit is what you need to survive. Conclusion? You mark up the price of the product and charge the customer enough to offset the new cost imposed by Apple. So to make this, you need to charge ~1.43 for the same item. So the price has inflated for the Apple users. That must suck for them, right?

And the rest of the customers. The agreement, once signed, means you have to charge people that come to your site outside of the Apple store the same for the subscription. So if you charge 1.43 on the Apple Store, you have to charge that to people that come to the site themselves for a subscription. For the company, that means the margin for in-site sales becomes more lucrative - $0.63 profit versus $0.20. In either case, the customer is the one that feels the brunt of the price increase, even those that do not use the Apple store to buy. So they are increasing the cost of products for all individuals.

Am I missing something here or does that just sound boneheaded?
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Re: Apple Subscription Surcharge

Unread postby DarthRavanger » Thu Feb 17, 2011 2:05 pm

IF I were apple, the only reason I'd give that rotten deal is if I was trying to get everyone else to raise the price on their service before putting out my own subscription service that did the same thing only without the price increase caused by my odd contract terms. All the profits are better than a portion of them. Though this is a good move for apple, especially since whatever subscription services use the apple store probably don't want to lose that customer base. Though I would like to see what terms and conditions there are for leaving the contract and going back to people having buy the subscription from the company's website or by mail.
Last edited by DarthRavanger on Thu Feb 17, 2011 2:11 pm, edited 1 time in total.
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Re: Apple Subscription Surcharge

Unread postby Azmodan Kijur » Thu Feb 17, 2011 2:35 pm

I agree, Darth, on both counts. It could just be a way of souring the market for other subscription services so that people will buy the Apple one alone. 100% of the profit is better than a share.

On the other hand, it does remain to be seen how this will go. Backlash? Quiet acceptance? A wait and see attitude is a good outlook for it.

That said, the idea is not very tasteful to me. I don't mind paying for things online (I've been using Steam to buy and directly download games), but I do take offense to companies attempting to milk money out of me with cheesy plans like this. It is almost like charging me to use one of the abilities of a piece of hardware AFTER I bought it. Just seems so ... wrong.
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Re: Apple Subscription Surcharge

Unread postby UnwantedSunbeam » Thu Feb 17, 2011 2:44 pm

I don't agree that the price would rise Azmo, the number units sold would via apple may be more that sufficient to cover the 30% subsidy. Unless the apple terms meant that you have to only sell via apple market place then any additional sales are a bonus. If apple gets only 1 extra sale and you lose 30% of that $0.20 then you are still up by $0.14.
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Re: Apple Subscription Surcharge

Unread postby DarthRavanger » Thu Feb 17, 2011 3:54 pm

Azmodan Kijur wrote:I agree, Darth, on both counts. It could just be a way of souring the market for other subscription services so that people will buy the Apple one alone. 100% of the profit is better than a share.

On the other hand, it does remain to be seen how this will go. Backlash? Quiet acceptance? A wait and see attitude is a good outlook for it.

That said, the idea is not very tasteful to me. I don't mind paying for things online (I've been using Steam to buy and directly download games), but I do take offense to companies attempting to milk money out of me with cheesy plans like this. It is almost like charging me to use one of the abilities of a piece of hardware AFTER I bought it. Just seems so ... wrong.

I think end users won't respond too much. They'll probably quietly cancel or buy less subscriptions. I'm more interested in how the companies will react, since if they decide it's not worth it Apple would have to backtrack on the policy.

@sunbeam, the 30% fine in order to distribute would result in a price raise, but it would be dependent upon the reliance on the apple marketplace. Companies that aren't very reliant on it might only raise prices a little, but very reliant companies would raise their prices by a lot to maintain profit margins.
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Re: Apple Subscription Surcharge

Unread postby Azmodan Kijur » Fri Feb 18, 2011 7:50 pm

UnwantedSunbeam wrote:I don't agree that the price would rise Azmo, the number units sold would via apple may be more that sufficient to cover the 30% subsidy. Unless the apple terms meant that you have to only sell via apple market place then any additional sales are a bonus. If apple gets only 1 extra sale and you lose 30% of that $0.20 then you are still up by $0.14.


Not sure if that is the case. Of course, I need to hedge this discussion with the notion (as implied in my OP) that each unit is costing the company $0.80 to produce / distribute. There are valid arguments against that idea (digital distribution), but my discussion uses that as an assumption to be granted. Charging $1.00 for the service results in a net loss of 0.10 per unit. The volume of transactions would be irrelevant in that case. Each one would lose the $0.10 on the sale. The assumption is that the price needs to increase to at least account for the loss factor. At breakeven, you can operate, but with zero profit, there is no real growth factor to the business. Profit is one of the prime reasons to conduct business, else you are getting found alone for your work. Depending on your outlook, that might be what you want to see.
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Re: Apple Subscription Surcharge

Unread postby dr210077 » Fri Feb 18, 2011 8:30 pm

Surely Apple's new contract breaches anti-competition laws the world over as it means that potential customers, (in this case distributors), are forced to pay the same as Apple, even if they have a more cost-effective business model than Apple? Effectively Apple are using their market position to eliminate competition amongst its own competitors.
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Re: Apple Subscription Surcharge

Unread postby Azmodan Kijur » Tue Feb 22, 2011 1:39 pm

That does appear to be the way that they have been trying to angle things over the last number of years. It's one thing to build a very popular product that becomes the defacto standard for a given area - Ipod for example. But it is quite another to kill off competition by using that popularity to bully companies into acting how you want them to. Making the Ipad more accessible is fine, but they are effectively trying to strangle off competitors by making it so that they cannot possess an "innovative" product over and above anything on the pad.

I have a Tablet, but i have an android one. Part of the reason for that is the more open-source nature of the platform. Yes, I know, there are potential problems with hackers and the like, but these problems are actually quite minor. I will take an open source product over mass proprietary bullshit any day.
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Re: Apple Subscription Surcharge

Unread postby UnwantedSunbeam » Tue Feb 22, 2011 10:52 pm

I find usually the opposite is true, if you look at DR's post on the PS3. It was not until Sony removed the linux support and a few other features that people went off to hack it. Whilst PS3 was more open there was no necisity to break the security.

Although as I type I have just realisted there are punks,usually not hackers, out there that have no ethics and can use hacks and exploits to rip of honest users.
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Re: Apple Subscription Surcharge

Unread postby Azmodan Kijur » Wed Feb 23, 2011 1:22 pm

Sadly true, I'm afraid. There are always people that are out there to screw with others, regardless of whether it fair or whatever. But I have found that the assholes that are out there tend to leave the open source stuff alone to a certain extent - no money to be made in hacking / cracking the stuff or bothering to harm it. Most early viruses were just malicious - intending to cause harm. Most modern ones are to make $$$ by screwing people over. Seems that open source = free = no money to be had. They are generally right, in many regards.
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