Monday, February 21st, 2011

Some Thoughts on Apple’s Subscription-Gate

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Let’s assume, for a moment, that Apple is not evil and doesn’t believe it has a right to your company’s income, in perpetuity. In a world where Apple makes business decisions based on good judgment – but perhaps rolls them out a bit carelessly – then what is the motivation behind its move to take 30% of subscriptions bought through the app store? Apple is looking to remove the barrier to customers paying for subscription apps on its marketplace, as well as create even more stickiness and dependency on the iTunes store model.

Okay, so what? Well, friction is everything in a subscription economy; once potential customers hit your signup page, dropoff can be as high as 70-80%. Why? Not everyone sits at their computer with a wallet, and that moment of scavenging often deters purchase, whether out of laziness or better judgment. This problem is only magnified when you’re on a phone, where entering credit card details is even more tedious. But what if gaining access to a new service were as easy as clicking a single button? How many (more) of us would have Hulu Plus, Netflix, Pandora Premium, LinkedIn Pro, and more on our credit cards… Notwithstanding the personal finance implications of such a move, Apple must believe that by reducing friction, apps will see an increase in revenue more than proportional to the fees they’re collecting.

Furthermore, Apple is just doing to subscription services what has already been worked out (successfully) with record labels, game developers, movie studios, and other apps. There’s nothing economically exceptional about the subscription business model that makes our services exempt from similar tactics, beyond the fact that we’ve so far had an unwritten peace treaty with Apple’s marketplace.

That said, Apple rolled this out the wrong way. Apple has been unclear, as far as I can tell, about the who, what, when, and why of this move. I don’t believe that Box has been contacted by anyone at Apple about changing our app. This could have a dramatic effect on our development process, the next rev of our product, and more. Apple has certainly learned that adding new terms of service aren’t a sufficient mechanism for announcing such significant changes. If I were in Apple’s place, and bear in mind we’re drinking the same water in Palo Alto, this should have been rolled out as something “cool” and exclusive rather than enforced, and you would have seen a lot more support because of it. The hip thing to do – as in, making more money – would have been to support IAP in your app, and there would have been no fuss from the ecosystem. 20% or so of apps wouldn’t have supported it out of neglect or business economics, and the world would be fine. Of course this new policy gets us there faster, but with a lot more noise. And to save face, Apple might even issue a policy reverse.

Given the developer outrage, it appears to be Apple’s move next. Box will survive in, and support, the App Store regardless. We have bigger fish to fry, like dethroning SharePoint.

Post by Aaron Levie, co-founder and CEO

  • Ben

    Will Box even be impacted by this anymore? Steve Jobs offered a so-called clarification that Apple,”created subscriptions for publishing apps, not SaaS apps.” Regardless, the problem lies in how the change was introduced and more broadly how Apple manages its partner network. A lot can be found wanting with a clarification offered in a single line over email.

    What made the iPod, iPhone, and iPad killer products were the ecosystems that evolved around them. Apple took the classic marketing concept of a “whole product” one step further and turned the product into the platform. Taking a cut of subscriptions is an understandable attempt to monetize its platform (and possibly pave the way for an Apple music subscription service), but Apple has gone about it in a way that does not respect the value network supporting its platform.

    Android now has a larger install base than Apple. How long is it until the walled garden tactics at Apple start to drive developers and customers alike into the open arms of the Googles and HTC’s of the world (or the maker of the next big thing who hasn’t emerged yet)? The classic example of disruptive innovation is a good enough, better fit solution at an improved price point creating an insurgency from down below.

    Apple has fallen from greatness before, brought back from the brink. If it does not foster more collaborative relationships with its external partners, creating win-win product and service strategies together, a short position in AAPL might be a good hedge against 30% cut of subscription revenues.

  • http://www.depicus.com Brian

    @Ben Don’t worry about Android, the sales of apps are not anywhere near iOS yet, Android users do not want to pay for software.

    Publishers will swallow and pay much like the big food manufacturers pay to be on supermarket shelves (and higher that 30%) and will add huge numbers not possible elsewhere.

    Of course I could be wrong, I thought the iPad was a bad idea, but these “storms” come and go and will in a few weeks be google history.