The indefatigable @webwright posted some comments to my previous post Apple Charging Subscription Bounty, Evolution of Platforms, Free vs. Paid, Right vs. Wrong. @webwright brought up Pandora, who has tight margins and can’t give Apple 30% of its normal subscription fee without taking a loss on every subscription it gains through the app, via this new restriction.
I guess that I could naively say that Pandora should just raise its subscription fee to incorporate the 30% over and above its normal margin and just tell its user base that it had to do it because of Apple. But pricing is rarely so cut and dry.
I could also just say that Pandora should just give up the iOS platform and go Android, which is still a pretty big market and theoretically should make the company plenty of money. But giving up any market is a tough decision to make, especially when there are entrenched users.
And especially that Pandora is in the IPO line up for this year. In looking at their S-1, it unfortunately didn’t mention what the breakdown was in terms of iOS users versus other platforms. So I don’t know if punting on iOS would be a big deal for Pandora or a loss they could absorb with the growth of other listening platforms.
Still, all my supposed solutions are just the musings of a guy sitting outside of Pandora and not a guy who is in the trenches at a company trying to do its best to make money and ultimately go IPO.
I think my point, though, is this. Let’s say a company was singly dependent on iOS as a platform. I am sure we can point a number of companies like that. To me, this is a problem. That’s because when you build a business solely on one platform, you incur the risk of having that platform ultimately be able to jerk you around or even sink you.
Let’s go back to my example of the electric company in my preceding post. The platform on which that electric company depends is fuel. How much it charges for electricity is highly dependent on fuel costs. If oil prices go up, so does our electricity bill. But yet we all roll with the fact that this is true and we may grumble but we don’t go on Twitter and rage about how my heating bill is up a few bucks because those damn oil cartels in the Middle East raised prices again.
Still, at some point, oil prices might rise so much that we might do something. We might even refuse to use electricity from that company and get it elsewhere: home solar cells, energy from one of those other green utilities, etc. That company could go out of business because it was dependent on oil prices with which it has zero control.
Take a look at Facebook apps and the ecosystem it first created, which allowed a myriad of businesses to flourish. Then, they went and started closing down the viral mechanisms that allowed so many games and apps to gain users. Yes, it did do so to clamp down on bad practices, but it also affected legitimate companies and stifled their ability to grow. Many startups either left the app ecosystem or just outright died.
Nowhere else did dozens of companies feel the pain and death as a result of their dependence on a single platform.
Last year, Zynga almost left Facebook but had built enough value and power against the platform to leverage a 5 year deal. It also realized that its future could not depend on this platform, so it started to break away in a variety of ways, forging a partnership with Yahoo!, MSN Games, and also working on Zynga Live.
Zynga was fortunate enough to have grown so large and so quickly before the platform could entirely sink the company. They had gotten enough users who loved their games that they could now just take those users somewhere else. So Zynga shows that you can use a single platform as an early growth mechanism, but it also shows that you better hedge your bets against the day when the platform turns against you.
Apple’s iOS is a platform which has spawned a ton of new businesses. Many of these are thriving in the iOS platform. However, Apple did not create the platform so that other businesses could just flourish out of the goodness of their hearts; they created it so they could make a ton of money and benefit its users who would in turn buy more Apple products and services. It is easy to forget that and just feel entitled that the platform should just exist for the benefit of those working in it.
Therefore, businesses whose livelihood are dependent on one platform as at extreme risk of that livelihood being screwed with by the platform owner and as history has shown, they could even die by the machinations of the platform owner. Companies should be acutely aware of this and work to make their businesses immune to the manipulations of any one platform. If they can, they should strive to create their own platform and jerk other people around instead being jerked around themselves.
So if you were developing on iOS and dependent on subscription revenue, and then Apple comes in and says you gotta pay up 30% or we’ll drop you, you better have a back up plan and execute it fast if you can’t absorb the 30% cost somehow.
On the other hand, if the 30% bounty either kills off enough businesses or makes them leave, such that their users become dissatisfied enough to revolt and leave, then Apple will have to make changes because it needs those users. Facebook doesn’t have this problem – pretty much every user in the world is on Facebook. Users can leave, but where would they go? If they leave, their social graph is still back on Facebook…

My buddy, @LDrogen, tweeted recently:
@LDrogen: There’s nothing unfair about this arangement, it’s like complaining that a store owner on 5th ave has to pay rent, complete bull $AAPL
in reference to recent news about Apple formally announcing they were going to take a 30% cut of any content subscribed to through one of their iOS apps. I retweeted it, because I agreed with him.
But then, my buddy @bmull replied back:
@bmull: @LDrogen do you feel like apple should take 30% of anything (pandora, netflix) subscribed to on a MacBook? How is that different? @dshen
to which, @LDrogen replied:
@LDrogen: @bmull no, only content that is exclusively delivered through their platform and paid for in the store $AAPL
and @bmull then replied:
@bmull: @LDrogen so apps in the Mac app store? If pandora had an app in the Mac app store, they should be required to pay apple 30%? / cc @dshen
Apple’s announcement of the subscription bounty recently sparked some strong emotions and opinions on the net. Many were opposed to Apple charging 30% and felt it was unfair that Apple should force this on everyone. But yet, I was OK with it. I promised @LDrogen and @bmull a blog post on this topic and here it is!
Why I think this is OK crosses many dimensions. I’ll do my best to cover them here:
Evolution of Platforms
If you look throughout history at any kind of platform, there is a starting point from which things evolve. Picking that starting point is critical as it sets the evolution from that point onward.
When people got electricity delivered to their homes, a company was formed to create a big generator and maintain it, wire up the neighborhood and maintain that, and then bring that wire to the home. Somebody had to pay for that so that people could create all this and then continue this service to everyone. Since the dawning of electricity service to our homes, this hasn’t changed. They began charging and so we’re used to that and OK with it.
Had the service been provided by the government, then we might have perceived this service as “free” and then developed a sense of entitlement that the government should provide us with these services along with other services. I quote the word “free” because we really don’t get governmental services for free; we still pay taxes and that pays for these services which are seemingly for free (ie. police, fire, elected officials). But changing from that to making the people pay at some point would probably result in some uproar as all of a sudden, people were paying for these services out of some other part of their bank account at a different time, when they were paying for it all along (whether the government would lower taxes in response to this change would be a whole other discussion).
When Microsoft developed DOS and then Windows, they didn’t charge for the presence of software products and services which used their operating system. Not charging here set the tone for software on operating systems for decades to come. Because they did not charge in the beginning, I argue no other operating system could either or else they could not compete against the proliferation of Windows. However, their only two real competitors were Mac OS and versions of UNIX, and of those two, only Mac OS *could* have had the mission of charging as UNIX was a community driven product who probably never would have considered charging anyone to put software on it in the first place.
It’s pretty obvious, I think, that if Apple had charged a bounty to place products and services on their operating system, their ability to gain any kind of share relative to Microsoft over the years would have been hampered severely. Hence, their decision competitively was to not charge or else they would have died years ago.
But platforms evolve over time from their beginning points based on competitive forces and what people are willing to pay for.
Free vs. Paid
This is where free versus paid comes in, as an element for competition and a general desire of the people to not want to pay for anything.
The internet is infamous for taking something we paid for and giving it away for free, disrupting and pissing off older established businesses and creating a ton of new ones. For years, we paid for news in newspapers and magazines on newsstands and then all of a sudden we could get the same stuff for free (to the consumer)!! Wow!
Free then became a competitive tool for new startups and businesses to enter the market, forcing those before them who charged for products and services to go free or die…or at least find a new way to monetize. After all, who could survive by just giving everything away for free in perpetuity? Born was the word ‘freemium’ and strategies of using free to get customers, destroy your competitors (and potentially themselves in a nuclear fury of mutual free destruction), and maybe…just maybe monetizing your customers later., assuming you survived that long. This is the inherent problem of free, which is people who provide the product/service must eventually get paid to support themselves; very rare is the group of people who can provide time/effort into providing a product/service for free indefinitely.
Despite that, free is pretty effective at getting customers. This is because I believe that people in general are pretty darn cheap. Nobody wants to pay for anything. In a choice between getting something for free or paying for it, I would bet that free would be chosen near unanimously no matter what the consequences. We are indeed a selfish bunch; welcome to capitalism!
Coming back now to the exchange between @LDrogen and @bmull and Apple charging for subscription fees on its iOS platform:
Can Apple charge?
Yes, of course, they can. They have full control over the platform since they built it and have built controls into software/services which enter into the platform.
Am I OK with them charging?
Yes, I am. I am in the minority on this issue, but I believe that people should get paid for the products/services they provide, whether its software, news, music, or videos or whatever. If I enjoy these services, then I want them to get compensated for it to the level that they can survive and feel motivated and incentivized to produce the best of whatever it is that they are working on. I am totally OK with watching TV shows which I purchase through iTunes. I pay for music all the time. I still subscribe to physical magazines and also read news online that I do not pay out of my own pocket for.
But, I also want Apple to be motivated and incentivized to provide the best platform they can provide. To date, iOS and the hardware it runs on are clearly superior to that of any other platforms out there. Granted, if someone never encountered an iOS device, they would be totally OK with Android or some other similar touch based, app economy platform. They still get the majority of the benefits that was pioneered by iOS. But if you have the ability to experience both platforms side by side, you’ll notice that iOS is just better, sometimes so subtly superior that you may not be able to articulate why. That is the magic of Apple’s user experience and the care and attention they put into making their products not just good enough, but insanely great. And I want the people who create these insanely great products to keep doing it, and so I want to them to be paid and happy.
As long as Apple keeps putting out superior products, I’m OK with them charging.
If they falter, then I believe that people will vote with their feet and their wallets. Faltering can simply mean, “I don’t think you should charge so I’m going to Android, et al.” which is a choice and an opinion. Or someday, Apple will start to build mediocre or crappy products and then we’ll all bolt to someone else who is better. Or if the world evens up on its superiority until everyone is at some new baseline of mediocrity, then we’ll all choose on price since when all else is held equal, the only differentiator is price.
So if you disagree with Apple on this issue, it’s easy; vote with your feet and your wallet and go somewhere else. If enough people vote to go elsewhere, Apple will be forced to change. This also goes for businesses who want users to subscribe. If they don’t want to pay the bounty, then don’t be on the platform. Go somewhere else. You may add to the pressure put on Apple to charge or not charge.
What will the future bring on the charging on a platform issue?
If Apple decided never to charge a subscription bounty, I believe they will never be able to in the future. People get used to whatever cost environment they operate in and hate change, especially ones that impact their wallet negatively. That is why going from free to paid can be painful when you’ve trained a whole bunch of users to enjoy your products and services for free.
If the world votes with their feet and wallets to go somewhere else, whether through better products elsewhere or simply by their opinion, then Apple will be forced to change their strategy. It’s that simple.
To reverse the decision on apps through the Mac App Store will be a difficult one, given that Windows still dominates. While Mac OS is gaining on Windows and everyone universally hates Windows, I think the competitive landscape is still very unsure and Apple won’t be able to do that for a long time if they want to continue gaining share on Windows.
Perhaps at some point in the future, if they dominate, they may be able to impose a bounty on subscriptions. But that is far in the future. Or they may never be able to. Or they just might not. We’ll have to wait and see.
Right versus Wrong
So much in the commentary on the net is regarding right versus wrong. To me, being religious on this issue sparks of the entitlement that people feel, but also their bias on the issue relative to their own position in the ecosystem.
As I said before, people are basically cheap. They don’t want to pay more for anything. If Apple charges a bounty, this could raise prices.
A lot of people who oppose this issue are also are those trying to build businesses on top of Apple’s iOS. They want to make as money as possible and don’t want to pay bounties at all.
Everyone complains, but again the answer is easy. You don’t like this, then go somewhere else. There are other platforms to build for like Android. By some metrics, Android even leads iOS in sold devices.
There is no right or wrong; the shades of grey in business (and in life) permeate everywhere. Our own self interest and biases may be hidden but we have only our self gain to blame on whether we are OK with Apple charging or not.
Still the reality is that workers need to get paid and support themselves and I, for one, want to keep motivating them to do great work. I want to buy music so artists will continue to make awesome music. I want to buy TV shows to download so that I can enjoy the next great show. I am OK with paying for content because I want content creators to keep doing it. And I want Apple’s employees to stay motivated on making the best platform out there, even if prices are higher on Apple platforms than on others.
And by the way, today’s press release on Apple’s subscription bounty says:
“…when Apple brings a new subscriber to the app, Apple earns a 30 percent share; when the publisher brings an existing or new subscriber to the app, the publisher keeps 100 percent and Apple earns nothing.” – “Apple Launches Subscriptions on the App Store” – Business Wire
This little nuance is important – they do not take 30% on ALL subscriptions, only those they create. If the publisher does a better job than Apple at gaining subscribers, then they pay no bounty.
How do we feel about the subscription bounty now?