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June 25, 2011
Who Owns the Relationship with Digital Subscribers—Publishers, or Apple?
Note: Originally posted on Xconomy San Francisco - June 13, 2011. Updates at the end.
The ascent of smartphones and tablets is causing a seismic shift in the way media companies reach consumers. As an iPad and iPhone owner, I now consume the bulk of my media online. Whether it’s the Kindle App, Netflix, HBO Go, or Hulu, media companies have rapidly realized that they can use the new platforms to increase engagement with their existing audiences while also reaching new consumers who have grown up with Internet-based media as the norm rather than the exception.
Yet the advent of these new platforms and the services around them also raise the challenge of disintermediation. To be specific, look at the subscription initiatives recently launched by Apple, and to a lesser extent Google, governing how media companies can sell their digital wares via mobile app stores. In the iTunes App Store, media companies can now sell subscriptions, with Apple taking a 30 percent fee. Additionally, the original set of rules stipulated that a media company using the App Store could not sell that same digital subscription at a different price on their own or on any other store—though very recent reports suggest that Apple is backing down from that provision.
As the founder and CEO of both eMusic and Vindicia, which provides subscription billing services, I’ve learned a lot about subscription business models and how best to compete against free (especially when free is illegal). For me, this experience reaffirmed the central role that relationship management plays in the relative success of media companies.
As a backdrop for this discussion, it’s useful to understand a couple of basic media business concepts. First, media companies succeed not just because of great content, but because of the compelling experience they provide consumers. Netflix, for example, has set out to make the task of being entertained with video content dramatically easier. The Netflix Prize, designed to encourage the creation of better recommendation algorithms, was just the beginning of Netflix’s effort to solve the “I have access to everything—now what?” problem. In the newspaper and magazine world, publishers are realizing that they must make the experience of consuming their content more enjoyable if they want to compete with services like Twitter, Facebook, Flipboard, Instapaper, and Google Reader that intermix their stories with those from other sources. The positive experience is what creates long-term customer stickiness.
Second, owning the customer relationship is critical to a media company’s long-term success. Engaging directly with customers can shape and improve the overall experience (see the point above), but it also provides media companies with the means to cross-sell and up-sell as appropriate.
So, while there is plenty to like about Apple and Google’s subscription initiatives, not least the rapid and broad market penetration of iOS (and Android) devices with compelling and convenient single-click payment options, it’s not hard to understand why media companies would have questions about the role Apple and Google are assuming as self-appointed middlemen.
Media and content companies realize that successful consumption of their content and services via these devices is partially driven by the platform itself—whether a byproduct of the curation capabilities of the storefront/device or the pricing policies of the platform. Media companies need to explicitly take these factors into account as they build their acquisition strategy on these different devices.
And whenever a third party enters the scene, it raises the question of who owns the customer relationship. Independent of whether the publishers believe that a 30 percent fee is appropriate or whether forced price parity violates the notion of true competition, the question is whether Apple’s terms are detrimental to media companies seeking to own that business relationship. According to reports confirmed by Apple executives, about 50 percent of App Store subscribers choose to share their information with publishers. The collective wisdom is that publishers should be excited about this number, since it’s far greater than any other Internet-based opt-in rate. My take is that a number of larger publishers believe that they normally would obtain a much higher rate if they had a direct relationships with these subscribers.
The reaction among media companies to the Apple’s subscription requirements has been predictably varied. Companies like Next Issue Media, the joint venture formed by Hearst, Conde Nast, Time, Meredith, and News Corporation, have explicitly decided to start with the Android platform to sidestep a confrontation with Apple. But other companies like Bonnier, the publisher of Popular Science, and even some of Next Issue Media’s parents have gone full bore with subscriptions on the Apple platform. Finally, the Financial Times, which has an extremely successful digital model, has been very explicit about their desire to own the customer relationship, and remains “in negotiations” with Apple to sort out this critical issue.
While the focus of the App Store subscription plan has been very specific to media and content companies, the same issues and challenges around subscription and content control exist within other areas in our new cloud-centric world—especially when it comes to cloud services delivered via and to mobile devices. We’ve already seen Steve Jobs apparently claim that the most onerous parts of his attempted remediation wouldn’t affect SaaS companies. In this case it remains particularly hard for Apple to remain a middleman. The value of the iPad is heavily based on the content and services that I can access. If content companies choose not to support the iPad because of the underlying subscription terms, then as a consumer I have to wonder about the value of the device itself. One of the major value propositions of the iPad for me, for example, is not having to also own an e-book reader. If I have to move to Android to continue to enjoy my excellent relationship with Amazon (Prime is brilliant!) then all of a sudden the Galaxy Tab 10.1 begins to look very compelling indeed.
My prediction is that these economies will move closer to the world we’ve seen in pay for performance advertising. Media companies will happily write a check to Apple for even 30 percent of the first year net value of the subscriber that Apple sends the companies’ way, but those subscribers will have their primary relationship with the service.
This story has many chapters left, but the central theme around customer ownership will continue to influence and drive the relationship between the media and content markets and the platform companies. In the second half of 2011, more light will be shed on how these relationships evolve to the mutual benefit of consumers, media companies and the platform players.
While this piece was being edited and posted at Xconomy, Apple changed track to allow Apps to be available to subscribers via iTunes without the "must carry iTunes account" rule. It remains to be seen how the Facebook Credits story plays out.
Posted by hoffmang | June 25, 2011 07:15 PM