Sowing the seeds of Apple's downfall

Apple's decision to take a hefty cut of subscriptions for digital news media content threatens its dominance in the global apps market, providing a rare opportunity for eager rivals.

His desirable devices get more attention, but Steve Jobs has had as transformative an impact on content as on hardware. No one has done more than Apple's chief to persuade consumers to part with their cash for media content in digital forms. Yet in the past week Apple has begun to look like the bad guy of digital content.

Since Apple’s iTunes store launched in 2003 as a simple, legal download option for a music industry ravaged by consumers’ idea that online content must be free, it has sold more than 10 billion songs, shifted 10 billion app downloads, moved into films, TV and books, and accumulated the credit card details of 160 million people.

Media executives spent much of that period reassuring themselves with the clich that, however much they struggled to work out their digital futures, they had at least learnt the lessons of the music business. Apple’s latest proposal for content, however, raises the question of whether they are making the same errors.

Media companies have been entranced by Apple’s iPad. They were reassured when Jobs showcased how good the New York Times looked on its big screen; signed up five of the six biggest book publishers on better terms than Amazon was offering on its Kindle e-reader; and championed Rupert Murdoch’s tablet-tailored The Daily. (Full disclosure: The Financial Times, and its owner, Pearson, have an interest in this issue).

Last week, Apple said it would enable subscriptions to magazines, news apps, and streaming media services for iPads, iPhones and iPods, seemingly addressing one of content owners’ few qualms.

Yet at the same time it said it would take 30 per cent of subscriptions it processed. For good measure it dispelled media companies’ hopes that it might share meaningful data on apps customers’ identities and behaviour.

The prospect has alarmed content owners. Big conglomerates, with fragile but still profitable old business models, may decide they can live with this fee if Apple’s devices expand their markets rather than cannibalising them. But start-ups currently making little or no profit could be crushed by such a toll.

Apple needs to tread carefully. If it uses the data it withholds from content owners to favour its iAda advertising platform, for example, media companies would – and should – seize on the chance to have regulators rein it in. Competition authorities move slowly, though, especially in such fast-changing markets.

Apple may also yet win the argument that 30 per cent is a fair toll given the phenomenal success its risk-taking has created and the fact that this is already the standard rate in music, books and games (although Google's announcement of a subscription service for its Android store which would take a 10 per cent cut has set up a tough debate on that point).

The bigger risk is that Apple forces media owners into rivals’ hands, filling their devices with more attractive content. "These are the formative and critical moments in the development of the app internet market – the winners could become dominant for decades. And Apple is blowing it,” George Colony of Forrester Research argued last week. If it is not "reasonable and accommodating” now, he said, "we’ll look back at this moment and call it the top for Apple."

Apple has given rivals – notably Google, which has spent years trying to persuade content owners that it is more friend than enemy – a rare opportunity. They and media owners must now seize it.

Record labels tried in vain to create a counterweight to Apple with MySpaceMusic, Amazon and the like, but left it too late to challenge iTunes’ dominance. Media groups have a better chance now, as the tablet market and subscription apps are at an earlier stage and competitively priced rival devices flood on to the market.

Apple’s acting chief executive, Tim Cook, dismissed such concerns last month, citing Apple’s "huge first-mover advantage”. It is evidence of Apple’s market power that it would be a brave media chief executive who turned his back altogether on 160 million iTunes customers.

Media owners are getting used to being the junior partners to technology groups such as Apple, Google and Amazon. "It’s their world and we’re just living in it,” one publisher said last week. Yet they should remember what happened in music. Apple’s pricing upset labels from the start, but it took them years to extract even small concessions and iTunes did not stop music revenues from halving.

Content owners may not get a second chance to improve their digital economics. Cracks are already showing in Apple’s resolve, as it seems to have exempted some popular apps such as Netflix from its new rules. Others with must-have content should now push for their own carve-outs.

Having spent a year infatuated with the iPad, holding back from accepting Apple’s terms and backing Android instead for a while looks like a risk worth taking.

Copyright The Financial Times Limited 2010.

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