Apple’s new subscription model is genius, and its sizing offers insight into their strategy. As a sometime poker player, I can only whistle at the size and audacity of the bet they are making. The best framework to analyze their move is game theory, and poker works as well as anything.
Why Apple is making the right bet.
Apple’s new rules are being labeled as subscription rules, but they really are mainly about content sales on Apple hardware, with the subscription model being the red herring. The key provision is that any content you pay for to consume from within an iOS app is available at parity pricing from within the app. If you pay for it from outside of the app, you don’t need to pay a rev share to Apple, but if you pay for it from within an app, Apple keeps 30%. Doesnt matter whether the model is per piece or subscription.
Apple understands that content is king, but UX is queen. (damn, a chess metaphor in my poker framework). Simply put, the user experience of buying content via the App Store is going to be better than the user experience of buying content elsewhere. The UX gap is a straight up tax that guarantees that most content consumed on apps will be purchased through the app store. Without having to be in the content licensing or curating business, Apple is demanding that they get a cut of all media consumed in apps running on their hardware. This is where you whistle at the audacity and size of the bet, because you know they have cards and are not bluffing.
In poker, the sizing of bets is everything. A perfectly sized bet makes the bettor indifferent to whether his opponent calls, raises, or folds based on the probabilities involved. Apple’s bet size today is 30%. That is a very very large number in the scheme of things because it is greater than the profit margin for most types of content. If you are a content middle man like Netflix or Amazon you have a very tough decision to make. Call with a weak hand, or fold and pull your products out of the App Store. If you stay in the hand you need to raise your prices, so you probably need to set up a two tiered pricing model which is difficult.
My initial intuition here was that the 30% number is a skosh too high, and that for certain content types they would need to negotiate new deals, which they don’t want to have to do because a one-size fits all model is operationally so much more efficient. But upon further reflection their bet feels about right, because their aim is to wipe out the middle men outside of niche content types that can survive under the 30% royalty.
The reason Apple has put its ecosystem partners to the test with this audacious move is that they want to really stress out content middlemen (other than themselves). The 30% surcharge is going to make aggregation and curation a much harder business, and force the content owners to deal with Apple directly. If Apple gets 30% from the purchase of your movie either way, you are going to have a harder time keeping your film out of the Apple Store. Basically content aggregators who want to offer content on Apple devices can never offer a better revenue split than 70-30. If Apple turns around and offers 70-30 revenue split deals to all of the studios, they need to say yes to be maximizing revenue on Apple devices.
Opening for Android
Apple has really thrown down the gauntlet vs. Android today, and in doing so placed an enormous amount of pressure on itself to continue to offer the best media consumption devices across all of its form factors. The obvious move for Google now is to NOT charge any kind of content surcharge towards aggregators in the Android app store, and hope the ecosystem collectively puts more resources against the Google platform and slowly narrows the quality gap between Android and iOS devices. Apple is betting that their more tightly integrated products, bolstered and funded by the massive margins they will create through content licensing, allows them to deliver a better user experience that justifies their higher content prices and maintains or grows their market share.
Personally I love Apple’s strategy here. It is very innovative and shrewd, and nobody in the market can imitate it. It is disruption-proofed, because unlike Microsoft’s PC OS hegemony it applies across all screens and popular form factors. And maybe most importantly, it creates an internal imperative to innovate and create the best user experiences, or it all comes apart hard. If it works, Apple will have an unassailable market position for a long time to come.
UPDATE: Apparently, Apple was overplaying their hand a little bit. They have relaxed their requirements and are allowing apps to play content purchased outside the app store, with the condition that the content can’t be offered for sale from inside the app. This seems like a rational move, and a nice compromise. Apple is still betting that apps that don’t provide in-app purchasing will suffer in the long term.