Apple (AAPL) took a lot of heat last week over their decision to set at 30% the platform fee for in-app purchases. Google (GOOG) responded with a plan under which they would receive 10% for similar transactions. Publishers seemed shocked, SHOCKED that Apple would want a piece of in-app sales. So, should Apple get a piece and, if so, what’s the right percentage?
I’ve spent half my career negotiating partnerships and distribution deals. It’s not a difficult process – it’s just a case of understanding and placing a value on what each partner brings to the table. The challenge, as in any negotiation, is that each side has a tendency to overvalue their value.
In a typical software or content reseller deal, the biggest value is based upon reaching markets that you otherwise would not reach. Depending upon the strength of the partner’s brand, sales & marketing organization and their position in the market, that alone can be worth 25-50% of a deal. On the flipside of that is the uniqueness of the content or technology owner’s product. If they have a unique product and strong brand, then they can give the reseller a smaller slice of the pie. Other factors, such as who services the customer and who handles implementation, account of the remainder of the split. These factors can move it 5-10% in either direction.
So, in a typical deal, the reseller keeps anywhere from 25-60% of the revenue, with the content or IP owner getting between 40-75%.
So, how would we apply that to Apple and the iPad?
First, it’s clear that Apple has both the dominant brand and the platform. Most content providers need Apple a lot more than Apple needs them. Would it hurt Apple if the WSJ didn’t publish an iPad app? Yes, but not as much as it would hurt News Corp/WSJ to ignore the iOS platform. Until Android shows itself to be a serious competitor in the tablet space, Apple is unlikely to lose any sales due to lack of content.
What’s less clear is what percent of content app sales will be driven by the platform. Will sales of the WSJ app be driven more by Apple or by the Wall Street Journal? Apple has proven that the platform can take a previously unknown brand and drive downloads (paid or free). Examples of that include Pulse News, Flipboard and, of course, Rovio’s Angry Birds game. But there are a limited number of apps that will get the Apple push or viral support. Instead, most app publishers will have to aggressively market their apps directly.
With that in mind, it would seem that the right percentage for Apple to keep would be lower than that of a software licensing deal. In most cases, they will not be actively selling or marketing the service. Instead, publishers will have to do the marketing, with Apple simply providing the platform. What’s more, Apple seems unlikely to provide the type of marketing assistance, such as access to its users, that traditionally can make reseller deals most fruitful.
I’d say that the right percentage for Apple is probably in the 15-20% range.
But, Apple clearly has the upper hand right now and is using that leverage to carve out terms more attractive to them. The key for them is to not overplay their hand. While they have a commanding lead today, it’s likely that Android will close that gap in the next 12 months.
Perhaps the ironic thing is how many publishers were touting the iPad as the way to fix everything that was wrong about online publishing. It was to be the cure-all for all the bad decisions they had made on the web until now. While I’ve felt all along that the publishers were overhyping the likelihood of massive paid content revenues on mobile, it’s funny to see those same publishers acting shocked that Apple would want a piece of those transactions.
At 30%, to the extent that it’s new revenue to the publisher, it’s still a pretty sweet deal. Where it becomes less attractive is when existing subscribers (in either print or online) move to the iPad and Apple suddenly gets a cut. For example, if I am a print subscriber to the NY Times, then drop my print sub to get it through the iPad, the Times potentially loses 30% just because I’ve switched platforms. Clearly, in that case, the value of the platform is modest and certainly should not command 30%. But, my assumption is that for most publishers, the revenue share for those subscriptions will be more than offset by new business they pick up which they otherwise would not have gotten.
I wouldn’t be surprised to see Apple revisit this program in 8-12 months, perhaps creating a tiered model that recognizes those issues. But for now, while the iPad is the only game in town, publishers will have to pony up.
