Apple Risks Dominant Position in Tablets With New Digital Publishing Model

The battle between Apple and Google intensified this week with both companies unveiling long awaited business models for publishers eager to develop recurring revenue sources through sale of tablet based subscriptions.

Apple’s service imposes more onerous terms on publishers compared to Google’s “One Pass” service and severely restricts the information publishers are likely to collect from customers.  For Apple and Google, the stakes in this battle are far higher than developing incremental revenue sources from these digital publications.  The winner is likely to gain dominance in tablet operating systems for the foreseeable future.

Very Different Terms

Apple plans to charge publishers 30 percent of revenue from all sales processed through the App Store which is consistent with the revenue share Apple receives from application developers.  Publishers will be permitted to sell subscriptions to customers through other channels such as the publisher’s website but will be prohibited from offering any discounts to customers who bypass the App Store.  In addition, Apple will not provide any customer data to publishers unless the customer specifically opts in.

Google will take a 10 percent cut of revenues for subscriptions purchased through the “One Pass” service and claims that this revenue is essentially covering its costs for managing the process and not intended to be a profit generator.  Google will also provide customer information to the publisher unless the customer opts out. There is no information to indicate that Google plans to prohibit publishers from offering discounted subscriptions for customers who bypass the One Pass service.

Subscriber Data is Critical for Publishers

While the revenue share is the most obvious difference in terms, the more important restriction imposed by Apple involves the customer data.  There has always been a major distinction between “single copy” sales and subscription sales from a publisher’s perspective.  The customer who picks up a physical copy of The Economist at a news stand is entirely anonymous.  The subscriber to The Economist is always known to the publisher.

Most publishers allow customers to opt out of solicitations for products or services, but the key point is that all publishers use subscriber lists to directly solicit renewals.  By depriving publishers of the customer data, Apple seeks to keep the customer anonymous and increases the probability that future renewals will be processed through the App Store rather than through a direct transaction between the publisher and the subscriber.

Essentially, Apple seeks not only a “finder’s fee” for bringing the subscriber to the publisher in the first place, as is typical with many agency relationships, but aims to develop a recurring revenue stream in which renewals are processed through the App Store.  It is far more likely that this goal is behind Apple’s “opt-in” model for providing customer data to publishers than any idealistic notion of customer privacy.

Window of Opportunity Closing Fast

Apple’s iPad is currently the market leader in terms of market share as well as capabilities but a flood of Android based tablets will appear on the market over the next six months.  If Apple’s current dominance in tablets convinces publishers that they must go along with Apple’s terms, and if Apple can release a competitive iPad 2 this spring, it is very likely that Apple’s dominance can continue.  The main reason is that customers are attracted to the iPad not only because of the hardware and operating system capabilities but because of the content offered by third parties.

Apple must be hoping that enough publishers will agree to make subscription content available within the next few months due to the iPad’s current dominant market share.  When the iPad 2 is released and must compete with newly competitive Android tablets, Apple’s goal should be to not only have the best hardware and software but also the most comprehensive array of publications on the  market.  If this goal is met, Apple’s market share should hold up well because customers will gravitate toward the content.

On the other hand, if Apple has overreached, publishers may decide that it is worth moving forward with Android based tablets in anticipation of much more competitive products coming to market in the near future.  If a larger array of publications are available on Android devices, Apple’s market share will be pressured even if the iPad 2 retains a technological lead over the new generation of Android based tablets.

High Stakes Gamble

Apple may have been better served by offering less onerous terms to publishers particularly related to customer data.  Doing so would virtually guarantee that publishers would gravitate toward the Apple ecosystem due to its current market dominance and would result in the widest possible selection for users.  Apple would still have to retain its technological lead with the iPad 2 given the advances in Android based devices, but it would likely be secure in having a lead in content availability.

The decision to impose harsh business terms on publishers has increased the uncertainty regarding how the tablet wars will play out over the course of 2011 and may help Android based devices gain additional traction.

Disclosure:  No position in Apple or Google.

Google’s Inflation Measure May Keep Government Statistics Honest

There are no perfect solutions when it comes to protecting assets from the ravages of inflation.  While the United States Federal Reserve does not have an official inflation target, government officials are known to favor an inflation rate of at least 2 percent and define such a level as “price stability”.  As a result, the minimum realistic assumption for inflation causes a doubling of the price level over thirty-five years.  The reality could be far worse given the desire of the Fed to flood the system with liquidity through additional quantitative easing which, stripped of technical jargon, basically involves printing currency to purchase government bonds and other securities.

Financial instruments such as I-Bonds and Treasury Inflation Protected Securities (TIPS) are intended to provide inflation protection but the government is in charge of coming up with the official Consumer Price Index (CPI) that supposedly measures the overall price level.  Many skeptics note that governments that allow high rates of inflation often manipulate official measures of inflation.  However, the amount of data available today may make it more difficult for the government to manipulate statistics in the future.

According to the Financial Times, Google is planning to construct a price index that could eventually serve as an alternative to official government statistics.  While the Google Price Index (GPI) is still a work in progress and only tracks web-traded goods, the potential for expansion into other sectors of the economy could provide a more complete picture of inflation in the future.  As the range of goods sold over the internet expands over time to better mirror the overall economy, the GPI should more closely track to the actual inflation experienced by consumers.

For now, the GPI is showing a “very clear deflationary trend” for web traded goods this year and most economists do not see any widespread inflation on the immediate horizon.   However, with Japan as a notable exception, there are few cases where a government in charge of a fiat currency wishes to create inflation and is unable to deliver.

E-Books Receive Mixed Reviews in the Classroom

One year is a relatively short period of time but represents an eternity when evaluating the products offered in the nascent market for electronic reading devices.  One year ago, there was much excitement regarding the potential for the Kindle DX to revolutionize the market for textbooks.  The Kindle DX is a larger version of’s popular Kindle device which is more suitable for larger formats such as textbooks.  Several business schools aggressively rolled out materials specifically designed for the Kindle DX.  The results of the experiment are now in and according to the Financial Times, the device has received very mixed reviews.

Lack of Flexibility Cited as Main Limitation

The University of Virginia’s Darden School of Business converted many case studies used in first year classes and selected 62 students and 10 faculty members for a pilot program.  Although students approved of the large screen and ability to reduce the need to carry large amounts of paper, the Kindle did not offer sufficient flexibility in a classroom environment.  Difficulty annotating cases and quickly accessing different documents were cited as major limitations of the device and some students eventually abandoned the Kindle in favor of laptops or paper.  75 to 80 percent of Darden students would not recommend the Kindle DX to incoming students although 90 to 95 percent of respondents did approve of the Kindle as a general purpose personal reading device.

Will iPad Address the Flaws?

This year, the iPad is competing with the Kindle DX for market share among students and others who require a larger reading display.  The smaller Kindle is now aggressively priced at $139 for a Wi-Fi version or $189 for a 3G version.  While the iPad is a more expensive product starting at $499, it also may appeal to students who are attracted by a color display, the availability of thousands of applications, and the many entertainment options that are included with the device. (Students seeking to justify the iPad to parents will no doubt omit reference to the entertainment features of the “must have” iPad device.)

While the iPad is certain to have a major presence on college campuses this fall, it is unclear whether the limitations cited by the Darden students will be addressed.  The attraction of being able to carry large amounts of material in electronic format is the obvious benefit along with better multimedia capabilities.  However, the flexibility of paper for taking notes and quickly referencing information may still have an advantage over the iPad just as it did in comparison with the Kindle DX.

iPad As Laptop Replacement?  Seems Doubtful...

A more interesting question is whether students will be able to use the iPad as a primary computing device and replace laptop systems that have become mainstays of college campus life.  It seems highly unlikely that the iPad will replace the laptop on campus given the need to produce large amounts of written material.  iPad keyboard and docking accessories are available and could allow students to write papers using the device, but the traditional laptop’s form factor and proven capabilities are still superior.  For affluent students, the iPad is more likely to supplement the traditional laptop rather than to replace it.

A year is a very long time in the quickly changing market for tablet style devices.  The fall of 2011 will no doubt have many additional tablet choices for students including products running Google’s Android and Microsoft’s Windows operating systems.  Amazon will continue to move forward as a provider of purpose built reading devices rather than general purpose tablets.  The day may come when students are liberated from dragging textbooks and laptops from class to class but it does not appear that the day has arrived just yet.

Disclosure:  Long Microsoft, No Position in Apple, Google and