ComiXology and the App Store

I'm late to the party on this, but what the heck . . . 

I liked Merlin Mann's comments on Back to Work #169 about the ComiXology/Amazon hubbub.  Essentially, "simmer down, people, no one is evil here, let's see how it plays out, but yes, it sucks".  All the early coverage was a bit hysterical.  

Monteiro and Gruber made the critical, unassailable data point about this situation on The Talk Show #80, which is that before it was ridiculously, crazily, amazingly easy to spend money on ComiXology, and now it's not.  It was the definition of frictionless.  That's the one thing we know for sure.  And it's an incredibly important point that is inarguable, whoever you might think the "bad guy" is in all this.  What that means going forward, we don't yet know.  Will the change in revenue be enough to make Amazon change their minds?  Probably not, as for them I think this is policy for them across all their businesses.  Will the change be enough to make Apple change their minds?  Not immediately, but it's an important datapoint for their decision-making over time.

70/30 in the App Store works, for the most part, for content owners.  But not for aggregators or resellers.  There's just not enough margin to go around to have three parties be financially healthy (IP owner, reseller, and Apple).  And that's been Apple's policy so far.  IP owners welcome, but we're not going to make special accommodations for aggregators or resellers.  Apple is the aggregator by virtue of having the store in the first place.  So Marvel can sell their titles and at 70/30 it makes sense for everyone.  But ComiXology, whether bought by Amazon or not, was going to have trouble building a valuable business at 70/30 on Apple.  Keep that in mind . . . we don't know how healthy ComiXology was prior to the acquisition.  I suspect it was not wildly profitable.  And that part of the value Amazon saw that it could create was to improve profitability by eliminating the "Apple tax".  At some unknown hit to revenue, which now they're going to learn.

Apple has every right to set a hard policy of 70/30 and squeeze out aggregators, by virtue of having built such a valuable ecosystem.  The question is whether that's the smart long term policy for them or not.  I think it's not.  I think it was the right conservative place to start.  But I think it's not in Apple's interests to hold the line on that, because I don't think it serves users well.

Apple has not stepped into the aggregator role in the way that users want to buy.  They haven't created subscription video services like Netflix or Hulu, yet Netflix and Hulu can't afford to pay 30%.  Sure, they could just mark up their pricing, but then (if I understand Apple's rules correctly--someone please tell me if this is incorrect), then can't have lower pricing on other platforms, like their own website.  So suddenly you've had to raise prices everywhere to allow Apple to have their 30%.  So instead they have "viewer only" apps on iOS, with no links to subscribe, and they acquire subscribers elsewhere.  That works (barely) well enough for Netflix and Hulu, because they just need a user to buy once and sign onto the service.  But for ComiXology, with streams of transactions, that won't work very well and the results already I'm sure are stark in terms of reduced revenue.  [Interesting side note: A really cool move for Amazon to have made, if it was feasible, was to eliminate buying on iOS as they did, but at the same time lower prices for ComiXology on every other platform.  Even if prices dropped only slightly, that would have been a bold move that made Apple the bad guy in all this.  Not that I think they are the bad guy in this at all, but from a PR perspective, it would have been a cool ninja move for Amazon.]

Apple has three choices to satisfy their customers better than they do today:

1)  They can step in to provide Apple-branded services to fill all the holes in aggregation that customers want.

2)  They can institute an additional category of seller on the App Store with a rev share lower than 30%.   Somewhere between a 10% and 15% share would work, even for the Netflix's of the world.  Or rather than having a formal second tier, just have 70/30 be the baseline and then have non-public negotiated agreements for selected significant partners, which is John Siracusa's suggestion from ATP #

3)  They could loosen the restriction on pricing off iOS, so that aggregators have the option of having slightly higher pricing on iOS than elsewhere, to cover the additional margin needed for Apple.

I don't think #1 is ever going to happen, and even if they tried, Apple wouldn't do as good a job as hundreds of other companies out there experimenting all at once.  #3 isn't going to feel right to users, and it lets things out of Pandora's Box in other ways that aren't good for the App Store as an ecosystem.  That leaves #2.

Apple has always been smart to keep things dead simple.  And "70/30, no exceptions" is dead simple.  Augmenting that with Siracusa's behind-the-scense negotiated agreements works, but I think effectively Apple would want to establish a second tier and have two categories, hard stop.  Otherwise sellers would be forced to try to engineer stand-offs with Apple and employ theatrical negotiating tactics to try to get to the very best rate possible, including holding out for extended period of time to see what they can get.  That's good for nobody.  Better to have a quiet, behind the scenes but widely known second tier at, say, 15%.

That's where I think Apple needs to go.  Not because "they have to", a phrase pundits are far too inclined to apply mindlessly to Apple.  But because it's in the interests of Apple long term, and it makes a far better experience for their users.