February 24, 2011 at 4:54 pm

Music Services Express Frustration at Apple’s Subscription Power Play

Digital Music Forum East Panel - Hey, Hey, Get Off of My Cloud

Panelists at Digital Music Forum East expressed frustration about Apple's apparently plan to grab 30 percent of their subscription revenue while forcing them to raise their prices on other platforms as well (photo: Eliot Van Buskirk).

Industry insiders and digital music fans alike have been abuzz ever since Apple boldly announced that it would claim 30 percent of revenue on an ongoing basis from apps that sell subscriptions to content within the iTunes — everything from magazines and newspapers, to, apparently, digital music, movies, and other forms of content.

Unless Apple reverses its position, which still appears possible, cloud-based music subscriptions — Microsoft, MOG, Napster, Rdio, Rhapsody, Spotify, etc. — could see profitability recede into the horizon, and with it, the idea that music fans can pay a fair monthly price to access music anywhere they want on any device. Not only would they owe Apple 30 percent of subscriptions sold or renewed within iTunes, but if that fee forces them to raise their prices within iTunes, they would be required by Apple to raise their price on other app stores as well — even on their own websites.

As one might imagine, those services are none too pleased by the prospect of paying Apple 30 percent, especially because they’re already widely understood to be losing plenty of money as things stand now. They made their feelings known, when asked by Digital Media Wire CEO, who moderated the “Hey, Hey… Get Off Of My Cloud!” panel at Digital Music Forum East on Thursday.

“The big news last week was that Apple announced this 30 percent effective tax on publishers, which directly affects some of you on the panel, Anu [Kirk, vice president of mobile for MOG] and Carter [Adamson, COO of Rdio] in particular,” said Sherman. “What’s your stance on this? Rhapsody has come out very firmly, saying that if the policy doesn’t change, they’re stepping out [of iTunes]. Do you feel the same way?”

“We’re still sifting through what this actually means,” said MOG’s Anu Kirk. “In typical Apple fashion, it’s a little bit vague, and it’s very difficult to get specific straight answers out of Cupertino about what this may or may not mean for our business. I am reluctant to comment on specific details, but I think it’s safe for me to say without perhaps losing my job that one likely outcome for us and most of the other players who offer something in our space is that in-app sign-up will be disabled, and we will basically require you to go and sign up outside the application.”

“I would note parenthetically that while it is fair for Apple to charge whatever they want for the value of their platform, it is reasonable for someone like me to argue that Apple does not add more value to MOG than MOG adds to MOG,” added Kirk. “For Apple to basically claim a greater share of revenue than MOG or, say, Rdio, or Rhapsody, or any of these folks are actually getting from their own products is not a sustainable position for us in the space.”

Rdio seconds that emotion, for the most part, although its position is that Apple intended this policy mainly to go after cable television providers.

“For me, the dust is still settling, and I think Jobs extended an olive branch earlier this week” said Rdio COO Carter Adamson. “I think we will be able to work it out. The main takeaway for me is, if anyone ever had any doubt about the access model of [music] subscriptions, here is Apple endorsing it in a big way. And I think the music impact was simply fortuitous and lateral damage. I don’t think there’s anything concerted about their effort. If I had that market cap and that amount of cash, I would be playing a much bigger game than just trying to take out the handful of cottage music subscription services.”

“To me, the interesting story here is, ‘What happens to Comcast, Time-Warner, and Charter once you start getting all these services [on] your iPad, iPhone, and the certainly-soon-to-be-new-and-improved Apple TV, Google TV and others,” said Adamson.

7digital vice president of North America Vickie Nauman added that it simply doesn’t make any business sense for Apple to hobble music services with this 30 percent “tax” on music subscriptions, as Sherman put it.

“For any of these services in the digital music space, in order for them to be successful and sustainable, there has to be a three-way win,” said Nauman. “There has to be a win for the end consumer — that it is at a price they’re willing to pay and an experience they’re willing to have. The service provider who’s doing the licensing and sitting in between the content owners has to win; there has to be some sort of margin in it for them to run a sustainable business. And the content owners have to be paid.”

“You add a 30 percent cut out of that very, very slim equation, and suddenly, it’s no longer a three-way win,” she concluded. “I figure it’s fair for Apple to take a cut — but it has to be sustainable and relevant to the margins, and what we have to work with in this very challenging industry.”