Simply put, Apple is insisting that any subscription service, like Netflix for instance, that generates cash from IOS4 apps must give Apple a 30% cut. Users can certainly subscribe directly from Netflix and download the Netflix app without having to cut Apple in, but there’s no question that the ease of signing up new users within the app is significant.
Major newspapers and magazine publishers have margins that they can play with since they don’t have any fixed licensing fees to pay. But services like Hulu or Netflix operate on thin margins to begin with, and giving Apple a 30% cut would mean that they would actually lose money on every new subscriber.
And, of course, there are the streaming music services. There is absolutely no way on earth that any of the existing services can pay the Apple toll. Rhapsody has already started screaming saying “We will be collaborating with our market peers in determining an appropriate legal and business response to this latest development.”
Apple, I’m sure, is shaking in their boots. There is only one service that they’re afraid of and it ain’t Rhapsody. Or Mog or Rdio. In fact, they’ve gone out of their way to keep this service out of the US. A great story that’s been going around is that Steve Jobs went so far as to tell one (now former) CEO that Apple would shut down iTunes if his label did business with this particular service. The funny thing is that this exec is so stupid that he actually believed Jobs would do it! That’s how tight a grip Apple has on the testicles of these idiots.
One music service exec said “If you’re Apple, what’s the purpose of having all of that power if you don’t fuck with people. It would be wasted.” Well said. He added, “The fact that they are pulling this move is evidence that they know they have the power to do whatever they want.”
My sources say that the labels are absolutely beside themselves over this. They have finally connected the dots and realize that they need these competing services and that by extracting such a heavy toll Apple would not only be hurting their revenues but also increasing and extending their power over the industry.
Furthermore, should Apple decide to launch their own streaming music service, which will happen, they would have a huge price advantage over all of the competition since they wouldn’t have to pay their own imposed 30% fee.
Execs at some music services tell me that they don’t mind paying a 5-6% fee. That would be a fair cut and would cover the costs of transaction processing. Google announced the other day that they would only charge a 10% fee but they’re not making it mandatory. They want to encourage services to use their platform.
So what will the labels do about it? My sources tell me that label execs are making a lot of noise that leads one to believe that they may be bold enough to send a secretary to a pay phone at JFK to drop a dime to the Justice Department. The regulators in Brussels certainly may offer some resistance. And if they get enough pushback Apple can always just pull back, making this whole gambit one big trial balloon.
But in the end the labels are afraid of their own shadows. It’s the perfect time for UMG’s Lucien Grainge to stand up to Steve Jobs and from what I hear he has the chutzpah to do it. He’s also got the best digital department in the business, headed by Rob Wells, who’s bold, smart and doesn’t suffer fools lightly.
But the conventional wisdom is summarized by another music service exec. “In the end they’ll do nothing because they’re all pussies.”