iPad is a devil's deal for publishers

Apple's approach to magazine and newspaper subscriptions and third-party e-book sales stink of the kind of practices that got Microsoft into trouble with trustbusters on two continents during the late 1990s and early 2000s. A year ago, publishers embraced iPad as the savior of their industry. Now iPad looks like a devil's deal instead.

Trouble started three days ago, when Sony said that Apple rejected its Reader software from the App Store in a policy change. Apple responded that there is no policy change. Oh? Well, if there is no overt policy change, it is effectively one of enforcement. Either way, the demands Apple is placing on publishers is too much, and arguably being made from a monopoly position. Essentially, the company wants sales to go through the App Store, which would compel the likes of Amazon and Sony to sell e-books indirectly through Apple and would prohibit magazine and newspaper publishers from offering existing subscribers the benefits of iPad editions without paying more.

Policy Change by Another Name

Let's start by identifying what is or is not a policy change. Yesterday, during News Corp.'s The Daily Launch, Eddy Cue, Apple's vice president of Internet Services, said that "You'll hear an announcement from us very soon for other news publications." That suggests the policy for subscriptions, at least, isn't clear -- if Apple still has something to announce. Regarding content sales, Sony surely seemed surprised about its Reader rejection and the reasons for it. Today, various reports surfaced indicating there in fact is a policy/enforcement change, and publishers don't like it.

In a Bloomberg story, reporters Stephanie Bodoni and Aoife White reveal there are changes coming, despite Apple's assertions to the contrary: "NRC Handelsblad's digital publisher Han-Menno Depeweg said in an e-mail today that Apple told the paper last month that it must route purchases via iTunes starting from April 1. According to Depeweg, Apple told the paper that offering paid subscriptions to its online version and including the iPad version in the price was no longer an acceptable business model in the App Store environment."

The headline to a Wall Street Journal story by reporters Yukari Iwatani and Jessica Vascellaro is explicit: "Apple to tighten control on content." They write: "Apple is tightening enforcement of a rule governing how some apps for the iPad must handle sales, a shift that affects online books as well as other electronic publications."

Yesterday, Cue touted Apple's great relationship with publishers. "We think subscriptions is only going to help them get more customers." Oh yeah? What about retaining existing customers. Should Apple be able to dictate to publishers how they sell their newspapers or magazines? From a publisher's perspective, iPad is but another content delivery channel, like retail stores or websites, where the publisher controls the price and customer relationship.

Before I sold my iPad during the Christmas holidays, The Economist provided a great benefit: Free iPad subscription as an existing print subscriber. That's a benefit Apple is looking to take away starting April 1. Who is the April Fool then, but the publisher cowing before Apple's rigid, and money-grubbing policies? Apple collects a cut of sales or subscriptions through App Store, something it doesn't get when, say, Amazon sells an e-book outside the Kindle app in mobile Safari or when the Wall Street Journal uses its independent billing system to manage iPad, online and print subscriptions.

Monopoly Power: Microsoft's Past, Apple's Present

Microsoft got into heaps of trouble for doing much less. The company's antitrust problems started in the early 1990s, for requiring PC manufacturers to pay a licensing fee on every computer even if it sold with a competing operating system. Microsoft settled the case months before Windows 95 shipped. The next US antitrust case, filed in May 1998, had multiple facets. Among them: The constraints Microsoft placed on its PC maker partners, such as controlling apps on the desktop or limiting what could appear on the splash screen when Windows booted. The case lead to Microsoft ceding more control to PC OEMs.

Apple has the leading App Store, with 300,000 applications and more than 10 billion downloads. According to IDC, iPad had 87.4 percent share of the global media tablet market in third calendar quarter 2010. That by most measures is a monopoly position. By comparison, Amazon had 41.5 percent e-reader market share in Q3, based on 1.14 million units shipped. Apple shipped 4.2 million iPads in the same quarter and 7.331 million in the one following.

For Apple, there are two areas that could, and frankly should, be investigated by antitrust authorities. Firstly, the control Apple is trying to take away from publishers so that it can charge them more money, from a monopoly position. Secondly, Apple's apparent attempts to extend iPad into the nascent e-reader market. The subscription requirement is bad business for most publishers because they have to charge existing customers more so that Apple gets its cut. But it is Apple's overtures against competing e-bookstores that's more troubling.

I encourage anyone to compare the number of titles available from Apple's iBookstore to Amazon's, Barnes & Noble's or Sony's. For whatever reason, Apple has much less content. The question is "Why?" Is Apple unable to cut the deals necessary to populate iBookstore? If so, one could argue that compelling competing bookstores to sell in-app, thus giving Apple a cut, leverages from a monopoly position what the company can't get through competition. If Apple can't profit from selling books directly, it will do so by charging competitors. The maneuver could allow Apple to crush the emerging e-reader market for devices like Kindle and Nook. A similar charge, Microsoft leveraging Windows to dominate the nascent browser market, stuck hard.

No one should underestimate control-freak Apple's willingness to bleed potential publisher partners and others. The time to fight back is now. Not after April 1. Microsoft executives have called the price difference between Macs and Windows PCs an "Apple Tax." There's a new Apple Tax, what the company wants to collect from partners and their customers for using its market dominating App Store and iPad. E-books? Magazine and newspaper subscriptions? There's a tax for that.