Report: Newspapers Balking at iPad Deal Over Revenue Sharing, Customer Info

| Analysis

Newspaper publishers are balking on bringing their publications to Apple's iPad over concern about revenue sharing with Apple and the loss of control over subscriber information, according to a report from The Financial Times of London. Citing both named and unnamed sources, The Times reported that talks remain ongoing, and characterized them as being friendly, but at least one source said the lack of access to subscriber information was "close" to a deal-breaker.

Apple's business model for its new, but not yet open, iBooks Store for books and magazines follows the same model the company uses at the App Store: Publishers and app developers would receive 70% of the revenue from a book sale or a subscription, and Apple retains control over the relationship to the customer, including his information, which takes place entirely through iTunes, and now iBooks.

When Apple first announced the iPad on January 27th, CEO Steve Jobs said his company had deals with five major book publishers. Said publishers have reportedly been pleased with Apple's deal as it contrasted very favorably with Amazon's Kindle program, which until shortly before the iPad was unveiled paid publishers only 35% of the revenues from Kindle sales.

Newspapers, however, are wrestling with the notion of forever giving up 30% of their digital subscription fees through Apple's iBooks Store, according to The Times, and the idea appears to scare them.

"Thirty per cent forever changes the economics," an unnamed media executive in discussions with Apple told the paper. "You can imagine we feel less good about it. Should (subscriptions) be treated differently than single item sales?"

Which suggests that newspapers may be just as myopic about their failing old media business model as the major labels have been with iTunes. Newspapers have faced falling subscriber bases as more and more readers shift to consuming news through the Internet, where ad revenues do not pay the bills for the industry's extensive costs.

Amazon's Kindle was the first major breakthrough in offering books, newspapers, and magazines in a digital format where readers actually paid for what they consumed, but the iBooks Store for the iPad, iPhone, and iPod touch could radically accelerate a shift to paid digital consumption the same way the iTunes Store shifted consumers to paying for digital downloads of music.

Part of Apple's reasoning for taking a 30% cut from App Store sales is that it maintains the App Store itself, handles distribution, and covers the transaction fees associated with the sale, as well as all download costs, even for free apps. It's a model that book publishers are so far seeming to embrace, and an issue that newspapers may not have much wiggle room on in the face of the economic reality that has beset the industry.

The issue of customer information, however, is different for newspapers and magazines than it is for music of apps. Demographic information often helps shape, or even dictate the nature of the content of such a publication. Without that information, publishers and editors could be flying blind, or forced to invent a new approach to their business.

On the other hand, Apple is not likely to be willing to give up control over its relationship to its iBooks customer, especially considering the fact that transactions are likely to be conducted through one's iTunes account, as is the case with the App Store. In addition to the company's penchant for control, in this case it also has to protect the integrity of the iTunes process.

Accordingly, how this issue gets resolved will warrant a close watch.

In the case of the music labels, their shortsightedness and thirst for unearned profits lead them to blackmail Apple into raising prices even while distribution costs and production costs continued to decline, which has only hurt their profits from digital downloads, according to one executive.

At the same time, they have been resentful of Apple's power and control over the digital download market, a market that wouldn't exist were it not for Apple having created it. It's possible that we're seeing the same sorts of attitudes and denying of reality in the newspaper industry if The Time's sources are representative of the industry as whole.

What they are doing now isn't working, and Apple is in the process of building something that could work, and judging from the company's track record, will work. With Apple continuing to manage the infrastructure that supports the customer through the life of a subscription and on into the next subscription, a cut for the lifetime of that subscription seems reasonable.

And I should repeat that what the newspapers are doing on their own isn't working.

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19 Comments Leave Your Own

Bosco (Brad Hutchings)

Don’t forget the DRM angle. In retrospect, that was what propped up the iTunes/iPod tying and let Apple dominate the market. If users can take the content to any device or platform, Apple won’t dominate that market. It will be surprising if the magazine people figure this out before they make the biggest long-term mistake of all.

More fundamental than customer data though may be the “feel” of different magazines. It could be an obscure font choice, kerning, the brightness or thickness of the paper, lots of things that might not translate well in digital distribution formats but are key to the character of these publications. You don’t really have those issues with music or e-books.

Nemo

I know a lot of smart lawyers, and though I have been called a lot of other things, I think that I am a smart lawyer.  I could compromise this dispute between Apple and the newspaper publishers (Publishers) in a way the protects iTunes’ customers privacy and prevents the misuse of their information, while permitting both Apple and the Publishers to use customers’ information in ways that serve their legitimate business interests.  And yes, Bryan, the Publishers do have some legitimate interests that require some information about their customers.  However, this dispute will require compromise in the spirit of goodwill, where both Apple and the Publishers recognize that they will have to give something but will gain in a fair compromise far more than they lose.

The issue of letting each publication present it unique appearance is a trivial issues.  Apple can easily accomodate that by letting each Publisher set up its own store in iTunes.  Things like fonts, kerning, brightness, etc. aren’t holding up this deal, or at least trivial issues like that shouldn’t be blocking a deal.

I hope that the parties can find that compromise.  I know that I certainly have some ideas on how they could get to a deal.

And dear Bosco.  The idea that DRM is what supported the success of iTunes was discredited, when Apple eliminated DRM on the sale of music, and that had no material effect on diminishing the market share of iTunes.  Moreover, it is not Apple that requires DRM; it is always the media companies that insist on DRM as a condition of licensing their copyrighted works and who hold Apple responsible for any breach of that DRM, which leads to any unauthorized copying of their works.  Thus, where Apple uses DRM, it is required to do so by those who provide copyrighted works to its iTunes store and who make the effectiveness of that DRM a condition of their licenses. 

Apple’s lock on the market, Bosco, is that its devices are superior, its iTunes software is superior, it enjoys a first mover advantage, its iTunes Store is superior, and Apple continues to innovate in ways that maintain its superiority in all the foregoing areas.

Nom

In fairness, Nemo, there are possibly some areas where Apple is merely comparable to the competition, but when you enjoy a massive first mover advantage and unified ecosystem that can be more than enough.

That said, Apple is notable in another area that the newspaper business might want to consider: it has no qualms about obsoleting its own technology.  Rather than struggle to maintain something whose time has past, Apple has shown a willingness to say “the future is ready now, so let’s move”, even while the previous incarnation is selling well.

Nemo

Well, Nom, if you are aware of any material way where Apple isn’t demonstrably superior to its competitors in its mobile devices, iTunes software, iTunes store, and the pace and quality of its innovation, you have the advantage of me.  Just today, the USPTO granted Apple a patent in multitouch technology for a capacitive touch screen that not only senses multiple points of touch, that is, any number of contacts, but that also senses pressure.  What I found amazing about the filing was that Apple filed it in Q2 of 2004.  The only other patent that describes a multitouch screen that can sense pressure that I am aware of was filed in 2007. 

That is amazing in several ways.  It means that Apple was working on multitouch and tablets for at least seven years ago.  And what is even more amazing is Apple’s patience in bringing out the iPad and iPhone.  I can tell you from experience that there isn’t one CEO in a million, who, with a technical advantage like that, would have held bringing the iPhone and iPad to market until he flet they were ready.  Jobs sending the iPhone and iPad back again and again for years must have driven those young engineers at Apple crazy, for the young have little patience.  But those young engineers have learned a valuable lesson about not compromising on quality and the user’s experience, at least when you have the luxury of time. 

Given the foregoing, I’d say that Apple has demonstrated a knack for producing superior technology well ahead of its competitors

As for Apple’s well documented practice of moving forward as fast as practical, I cite two observation which should allay the Publishers’ concerns, if they have any.  First, though Apple moves forward, restrained only by practicalities, it has always supported existing technology for at least ten years.  Second, in this context, the technology is web-based in the cloud, so advances in technology shouldn’t have anything other than a beneficial effect on the Publishers, while Apple will have the burden of making the future happen. 

And I will add another reasons why the Publishers should be happy that Apple chases the sun and more than occasionally catches it.  With a partner like Apple, the Publisher are less likely—to the extent that their present plight is entirely their fault—to once again be caught unprepared for the future.  Now, that is something of great value that would be rarely found in any other partner.

Newspaper Lover

No one here has addressed the issue of advertising on the iPad. My understanding is the iPad is Flash intolerant. Given much of today’s newspaper website advertising employs the use of Flash, the publishers’ argument over subscription revenue is rational. It’s the only revenue stream they’ll be able to avail themselves of on the iPad (same holds true for Kindle).

Like Kindle, Apple is treating newspapers like books. A big mistake. I’d walk away from the stink of this one too. Especially given the low percentage penetration the iPad will see in the near-term (and imho, the long-term).

The price of the iPad needs to drop dramatically and quickly if it’s to be a player in the news space. I am not about to pay $499 for the luxury of buying a newspaper. Book lovers may want/like it, but access to newspapers is not why they bought the device. Heck, Kindle has been around for a while and enjoys a whopping 3-4% market penetration. Too small. Period.

cb50dc

The price of the iPad needs to drop dramatically and quickly if it?s to be a player in the news space. I am not about to pay $499 for the luxury of buying a newspaper…. Heck, Kindle has been around for a while and enjoys a whopping 3-4% market penetration. Too small. Period.

All seems likely. The first run is the most expensive. Subsequent models either add function or reduce price. Recall anything about a $100 drop in iPhone prices?

As for why Kindle slogs along at 3-4%, well, that’s because it’s Kindle ? an ordinary, adequate device for a VERY limited purpose, and it basically gets that job done. If you want merely to read the paper and mags, sure, Kindle’s fine. No need to go any further.

The iPad begins as an elegant, so sleek device. Not only will it outdo the Kindle like a laser compared to a butter knife, but it does so much far beyond Kindle ? music, iWork trio, video, and who freakin’ KNOWS what will happen with the App Store.

I suspect that the days of 3-4% for Kindle will soon be looked back upon as its peak.

Bryan Chaffin

Newspaper Lover, I think you are be approaching this in a way that doesn’t make sense to me.

1.) There is no comparing what you get with a Kindle to what you get to the iPad. 

2.) The price of the iPad is likely to remain steady (you’ll get more for the same price point for a good long while), and you simply can’t get the same hardware anywhere else for less, and that’s leaving out the intangible of iPhone OS.

3.) Few would buy the iPad solely for a newspaper subscription - doing so makes no sense. The iPad will do much and more, and that is why people will buy it. Many of those people will also get newspaper and magazine subscriptions, as well as books. Some will not. Also, see points 1 and 2 above.

4.) Kindle’s market penetration is due in part to the limitations of its form factor, limitations the iPad doesn’t share. See point 2 above.

I hope that helps. smile

Newspaper Lover

>>Recall anything about a $100 drop in iPhone prices?

That won’t get it to a price point the average household can afford. The $499 is for the entry level iPad. It’s got to get a lot better than that… like almost free. (Recall the HP netbooks being given away by Verizon?)

>> The iPad begins as an elegant, so sleek device.

You are obviously an Apple afficionado with money to spare. Not the typical consumer by a long shot. What company is the leader in smartphone devices? Not Apple. iPhone is still too expensive for most.

Sleek, maybe. Functionality beyond a laptop or other similar devices? Nope. I concede it may get there, but why not out the gate? Why not cut through the crap and differentiate the product from other similar products? Heck, even get to parity.

>> Kindle ? an ordinary, adequate device for a VERY limited purpose

I agree, but it does have a purpose. Please inform me and everyone else what the differentiating purpose of the iPad is today, not down the road. What exactly, beyond elegant and sleek, is the reason I should buy it?

.. Not only will it outdo the Kindle like a laser

No kidding. Anything coming to the market today better outdo the Kindle. It is a piece of you know what… However, there’s not enough on the iPad, imho, to get Kindle owners to switch. And yes, that’s one of the goals of iPad given its price point.

>> music, iWork trio, video, and who freakin? KNOWS what will happen with the App Store.

So, I am expected to plunk down $499 for music, iWork trio, video and, most importantly, “who freakin’ KNOWS…”? You’ve got to be kidding. My blackberry Storm will suffice. It’s got a camera, plays music, plays video and handles all my MS Office apps. Most importantly, I am confident it will eventually handle “who freakin’ KNOWS….”

Bryan Chaffin

Two more points, mate:

1.) Apple targeted “average households” with the iPod, but has not and is not likely to do so with the iPhone, Mac, or iPad.

2.) This is partly because Apple likes to make an actual profit on its hardware.

3.) In that vein, Apple is not intending the iPad to be for everyone. If your BlackBerry is all you need, that’s great. Some people will find that the iPad fits into their life nicely.

Newspaper Lover

>> There is no comparing what you get with a Kindle to what you get to the iPad.

I agree. My point is devices like these, regardless of brand (e.g. Apple, Sony, Amazon), have a hard time getting consumers to buy because they don’t differentiate themselves well enough from similar products that are “good enough”.

>> Few would buy the iPad solely for a newspaper subscription - doing so makes no sense.

I agree wholeheartedly. What would be the reason to buy an iPad? Not just buy it, but switch from something else. If the iPhone OS is the “be all and end all”, why is it not the leader in smart phones?

My point is to not get caught up in Apple craze. The reality is Apple has a great product in the mobile and computer sectors, but they’re not good enough to be leaders. Others seem to have mastered “good enough” better than Apple.

Newspaper Lover

A point of note for everyone - I own both Macs and PCs and have since the 1980s. I personally believe Mac has a better product, but the price point puts it out of reach for the typical consumer. The iPad, imho, follows the same path as Macs… expensive niche product not targeted to the masses.

Bryan Chaffin

Your last point is definitely the most salient, NL. iPads, Macs, and iPhones are (more) expensive, (somewhat) niche products (please pardon my caveats!!).

What so many people miss is that this is part of why Apple makes a profit on its hardware sales. Even more importantly, these profits are large enough to sustain the company’s R&D (including its industrial designers), and it’s what pays for developing Mac OS X and iPhone OS.

But even while that’s so, Apple’s Mac sales - sales of those more expensive, somewhat niche computers - is on the rise and has been for several years. Apple owns the digital media device market in its entirety, though cheap, good enough choices abound, and Apple has taken the lead in the smartphone market with its more-expensive-than-most-other-smartphones device called the iPhone.

I believe it will finally push the tablet market into legitimacy with the iPad, and that the company will be a market leader, too.

I can’t find any reason to argue with the company’s pricing models in light of all that success.

Newspaper Lover

Apple has taken the lead in the smartphone market with its more-expensive-than-most-other-smartphones device called the iPhone.

Wishful thinking. RIM leads the Smartphone marketplace. Read this - http://www.businessinsider.com/chart-of-the-day-windows-mobile-apple-blackberry-share-2010-2

Or for a simple view, check out this chart - http://static.businessinsider.com/image/4b7af3990000000000f386fe/smartphone-platform-share.gif

So, while Apple is on the rise, it’s got a long way to go to catch and eclipse RIM. It’s closer to Microsoft than RIM.

Sorry to bring the bad news.

Bryan Chaffin

My apologies: I didn’t mean “lead” as in “most market share,” but rather Apple is controlling the direction of the market.

Though it has done so for decades with the Mac, in the case of the iPhone the leadership position is accompanied by a significant marketshare, and not just a profitable marketshare.

In any event, that was the least important of my points.

RonMacGuy

You are so funny Newspaper Lover. A long way to go to catch RIM?!?!?  From a 28% gap in 2006 to a 16% gap in 2009. Pretty significant for just 3 years. The only thing supporting the lame RIM technology is the fact that the corporate world is so slow to change to better technology in general. Sure, RIM gets the job done, but Apple adds elegance and improved user interface, which more and more people are willing to pay extra for nowadays.

I love your comment about the iPhone being too expensive for most. The only thing keeping Apple down is the stupid AT&T agreement. Open iPhone up to Verizon and other wireless providers and they will quickly pass RIM in market share. I have seen people who from their appearance can barely afford to feed themselves with iPhones. Not that I support this, but like it or not, the masses who can barely afford to live still have big screen TVs and iPhones. People spend outside their means all the time. Again, take away AT&T exclusivity and watch RIM market share crumble.

RonMacGuy

Newspaper Lover, too bad, look at this link:

http://www.macobserver.com/tmo/article/steve_jobs_wins_mobile_world_congress_award/

The nominees that lost out to Mr. Jobs included Google CEO Eric Schmidt, RIM co-CEO Mike Lazaridis, and HTC CEO Pete Chou.

If RIM is so good, why didn’t Lazaridis win the award?

grin

RonMacGuy

Newspaper Lover’s link to the RIM/Apple/Microsoft chart made me wonder something: When Apple sells 5 million 3G iPads with wireless coverage, will that count toward U.S. Smartphone Platform Share? Technically, the iPad is not a smartphone, but technically it is using the wireless networking for data just like a smartphone. I am sure by the end of 2010 we will have the ability to do skype calls or some other 3G phone service on the iPad. But alas, Apple probably won’t get credit for this as far as U.S. Smartphone Platform Share is concerned. That’s OK, Apple will have to be happy with their $25B cash in the bank.

Bryan Chaffin

RonMacGuy: The iPad will not count as a smartphone the same way that the Kindle doesn’t.  Smartphones use both voice and data.

Lancashire-Witch

Regardless of the relative merits and costs of the Blackberry, Kindle, iPad etc., the newspaper industry is in trouble and I don’t see any of this new technology as a lifeline.
Mr Murdoch, for example,  has every reason to be worried about the future of his newspapers and I don’t think it’s because of his outdated attitude or being in denial. More likely, it’s down to a reluctance to pay for news; no matter what medium it’s delivered on.

I really enjoy your News stories, Bryan, and the Rumors! - but don’t ask me to pay for them.

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