Sunday, April 15, 2012

The worm turns

I love apples. Both the kind you eat and those you click.

In the spirit of full disclosure, I’m keyboarding this blog on a MacBook Pro. And we own five other Apple products including an iPad my wife, Ellen, rarely puts down. We also have an AppleCare contract and have received prompt, friendly and consistently excellent service from technical support.

Although I enjoy these devices and how they work, I’m not crazy these days about the way the technology company is behaving. And I’m not just talking about the exploitation of workers in foreign countries.

The most valuable company in the world is also allegedly continuing to set new standards for greed right here at home.

This week, the U.S. Department of Justice launched a lawsuit against the Cupertino, California company alleging collusion with five book publishers. Apparently, Apple set prices for e-books at its iTunes store and required the publishing companies to pay a 30% commission on every virtual volume sold there. Plus, they demanded the book business not sell e-books at lower prices through other Web retailers.

In fairness to Apple, the alleged price-setting efforts were in response to Amazon’s parasitic relationship with the publishing business. Amazon has been slashing book prices. According to a Bloomberg News interview, Amazon is allegedly selling books at a loss in hopes of driving bookstores, competitors and eventually publishers out of business. If book prices get low enough, publishing print versions won’t be a viable business model. Authors will be forced to deal directly with the likes of Amazon and sell only e-books.

Publishers allegedly crafted the Apple arrangement to fight back against price deflation. The Feds and 15 state attorneys general say consumers have paid millions of extra dollars for popular books. Three of the five publishers settled and two agreed to pay $51 million in restitution to book lovers.

All of these twisted tactics spell trouble for the creative minds that generate the content for books, newspapers, magazines, movies and other media.  As the value is artificially deflated and middlemen divert profits to their pockets, there’s less revenue for those who actually invest in media. The media companies and their creatives are being bled.

Apple’s 30% commission is based on an agency model. In other words, rather than buying the books wholesale like other retailers, or even selling them on consignment, they insist on nearly one-third of the price paid at the Apple store. And they’ve extended this to all sales generated at their App store, including subscriptions, as well and all sales made from within a company’s App bought at the App store.

In that sense, they’re setting prices by imposing a mandatory 30% premium rather than allowing the market to decide the value and price of a product. On the other hand, a bookstore would typically buy merchandise at the wholesale price and then sell them for whatever the market would bear. That way, a great book would bring the top asking price and a bore might sell at rock bottom.  The market rules. But at Apple, in every case, they get 30 pounds of flesh.

You can’t really blame Apple though. They saw the gap in the thinking of media companies and are simply exploiting it.

Consider this. In most cases we pay extra for convenience. Whether it’s the high-priced groceries at the gas station; the surcharge on carryout food orders; handling fees for sports and theater tickets or the shipping costs for mail order or Web purchases. Shopping the easy way has a price and it’s often steep.

Why is it that so many media companies gave away online access to newspapers and magazines for free? Think about it. In most cases, the new media version of a publication or creative asset is more robust and valuable than the old school version. For example, newspapers offer video and galleries of photos online. You can also easily search and e-mail articles and assets to friends and family. Yet, many publishers allow you to enjoy online media with all its extra perks for free. Makes no business sense.

Now, after giving away first-class journalism online, publishers like the New York Times are trying to train readers to pay for it. As they should. And advertising is more measurable online than in any other medium. It’s worth more.

In the 20th century, radio and television began under free access business models. But advertisers paid top dollar in the golden age of radio and TV to buy share of mind of consumers who invested in radios and TV sets. However, over time, both have evolved into pay models, with satellite radio offering broad programming and excellent reception wherever we go. And cable TV provides hundreds of channels plus on-demand access to first run movies that cost less than theater tickets. But you pay at least the $29.99 monthly teaser rate for satellite or cable TV. And those current box office offerings are extra.

Simply put, you get what you pay for and if it’s convenient, you typically pay more. Getting your favorite journal or show delivered to your desktop no mater where you are in the world, anytime day or night is the ultimate convenience. And it should not be free. Giving away journalism and entertainment is costing jobs and may eventually destroy the media industry as we know it.

All the recent legal haggling with Apple and others couldn’t have come at a better time.

In early April, a consortium of leading magazine publishers announced they would batch 32 major titles for online subscriptions. You get all the monthly magazines at the all-you-can-read price of $9.99 per month. For $14.99 you receive both weekly and monthly titles. An unbelievable deal.

The consortium, called Next Issue Media, includes publishers like Condé Nast, Hearst, Meredith, Time Inc. and News Corporation. Some of the popular titles in the bundle are The New Yorker, Time, Vanity Fair, Better Homes and Gardens, Elle, Esquire, Wired, Fortune, People, Real Simple and Sports Illustrated.

You might say magazines are going cable, except this subscription model requires no extra fees for the premium content. It would be like getting HBO and Showtime thrown in with your local channels, ESPN, AMC and The Big Ten Network.

The Next Issue Media magazine App will reportedly work with the iPad, Android tablets, Kindle Fire and Nook. It will take about 12 months before the publishers officially make the offer.

Will they have to pay Apple 30% of every subscription they sell through the iTunes store? How will that impact their operations and business plan?

Imagine what would have happened to radio and TV if broadcasters had to pay RCA Victor, Motorola and Philco a 30% fee so the technology tuned into their programming. Even credit cards charge just a few percentage points commission for financing retail sales. The late Steve Jobs must have consulted the ghost of Hammurabi when developing his 30% taste of the business that passes his processors. I’m not talking about a commission on Apps, I’m criticizing the commission on subscriptions.

Apple and Google have created a double tax on the toll roads of the information highway. Consumers already pay fat fees through monthly charges for Internet access. Without the content that media companies create, iPads and other tablets are roads to nowhere, sleek looking launching pads with limited destinations.

My suggestion is that publishers prevent the technology giant, Apple, and others like Amazon or Google from worming in on their valuable content. How? Some technology writers are encouraging media companies to invest in developing Web-based Apps instead of those designed to run on Macs.

That way, they can advertise their amazing offer on the Web and have consumers connect there. Consequently, publishers would then be able to take a bigger bite of the apple for themselves — and the talented people who develop the content for their award winning media. 

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