Music Industry: Apple’s New App Subscription Terms Won’t Work

SAN FRANCISCO, February 16, 2011 — Jon Irwin, music subscription service Rhapsody’s president, said Tuesday that Apple’s new plan to partake of almost a third of app companies’ subscription revenues is “economically untenable.”

Irwin wasn’t the only person who voiced his concerns Tuesday. An editorial in Billboard said that the move could potentially devastate the online music subscription music business, and an online digital music veteran called the approach flat out “wrong.”

Apple unveiled a new service Tuesday that will allow consumers to subscribe to digital media services, rather than simply to pay once for an app.

The catch: Apple wants 30% of subscription app developers’ revenues. App developers would also not be allowed to charge more for subscriptions on Apple’s platform than for subscriptions sold elsewhere on the web. And they wouldn’t be allowed to provide a link on their Apple Apps to enable subscribers to buy access on the web.

Irwin responded to Apple’s new policy in a press statement:

“An Apple-imposed arrangement that requires us to pay 30 percent of our revenue to Apple, in addition to content fees that we pay to the music labels, publishers and artists, is economically untenable.

The bottom line is we would not be able to offer our service through the iTunes store if subjected to Apple’s 30 percent monthly fee vs. a typical 2.5 percent credit card fee.

We will continue to allow consumers to sign up atwww.rhapsody.com from a smartphone or any other Internet access point, including the Safari browser on the iPhone and iPad.

In the meantime, we will be collaborating with our market peers in determining an appropriate legal and business response to this latest development.”

Businesses already struggle to make money — or even to get up and running at all — on the web with music services because of the onerous and complicated licensing process.

A 30% cut of revenues would just make the business unsustainable, many industry insiders noted Tuesday. Music prices are just going to have to rise across the board, or app makers are going to have to migrate to other platforms.

“Rhapsody, which charges $10 a month for unlimited access to a library of $10 million songs, already pays 60% f its revenue to license the music from record labels and publishers,” Alex Pham reported in the Los Angeles Times.

“If you take away 30% of that, it leaves them with 10% to pay for the bandwidth, employees, marketing, everything,” digital music industry veteran  and former EMI VP of New Media Ted Cohen told Pham. “Apple is taking a business that’s already operating on thin margins and driving it deep into the red. It’s wrong.”

And Antony Bruno, music industry trade paper Billboard’s executive director of digital content and mobile programming, wrote that Apple’s move “could have a devastating affect on the fledgling music subscription market.”

Though subscribers are free to subscribe through their computers and on the web, he notes that mobile music app providers say that up to half of their subscribers sign up through their iPhone apps.

And he quotes an anonymous music executive who says that the music labels are going to have to absorb the costs, or there won’t be any music apps at all.

“Otherwise nobody is going to be able to have an app. The margins that all of us make are smaller than 30%. We can’t lose money every time somebody signs up. It’s impossible. Everyone’s going to have to raise their prices,” said the insider.

Bruno wonders whether the move is a deliberately anti-competitive one from Apple, which is planning more extensive music offerings of its own in coming months.

“This seems like just the beginning of the debate,” he concludes. “It’s likely at least one lawsuit will come from a publisher (either in print or from a music service) contesting Apple’s right to dictate how they price their subscription. Or perhaps a regulatory agency either here or in Europe will step in. But it’s certainly going to be an issue to watch closely in the months ahead.”